Islamic banks poised for expansion - Moody's

KUALA LUMPUR – The Islamic banks in the Gulf states, Malaysia, and Indonesia are expected to grow, based on a report by Moody’s Investors Service.

According to the recent report, the expansion is due to the increase of key exports which includes hydrocarbons and palm oil with the easing of pandemic restrictions at the same time.

Furthermore, Moody’s also said that government subsidies and policy rate hikes in each of the countries will keep the inflation rate at a reasonable level.

Badis Shubailat, an analyst at Moody’s, predicted that the economic resurgence will not affect the asset quality of Islamic banks while simultaneously increasing their profitability.

Shubailat stated that because of that, Islamic banks will be able to maintain enough capital and liquidity buffers, which enables them to capitalise on the growing Shariah-compliant financial services demands.

Moody’s report further notes that these banks’ focus on retail financing will have a positive effect on asset quality due to the secured and diversified nature as well as the prudent underwriting practices of the banks, although they face the tightening of regulatory forbearance within their countries.

The report also said that financing to public-sector employees makes up the largest share of retail financing in the Gulf Cooperation Council (GCC) region. It added that these employees were kept with stable employment during the pandemic period.

Apart from that, the report said that the strong provisioning buffers that were built up during the pandemic is also an asset-risk mitigation measure.

The profitability of Islamic banks will increase due to their adequate loss reserves, while at the same time, efficiency gains from digitalisation are expected to offset their higher spending on technology, the report added.

“Additionally, an increase in interest rates will lead to a rise in margins, particularly in the Gulf states, where the local currencies are tied to the value of the US dollar,” Moody’s said.

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