RAM Ratings: Malaysia’s Islamic Banking Sector Must Remain Resilient

KUALA LUMPUR (March 29): RAM Ratings expects Malaysia’s Islamic banking sector to remain resilient despite continuing risks from the Covid-19 pandemic.

In a statement issued on Tuesday (March 29), the rating agency maintained its stable outlook on the industry in line with its outlook on the whole national banking system.

He said his key expectations for the industry in 2022, as outlined in his latest commentary “Islamic Banking Insight: Keeping the Course”, include the following:

  • Islamic finance growth will remain healthy at 10% in 2022 (2021: +8.2%), thanks to better economic conditions.
  • Delinquencies are expected to increase over the coming months as funding relief measures expire in the first half of 2022 (1H22). The industry’s gross impaired funding ratio could reach 2% by the end of 2022 (end-December 2021: 1.2%), which would still be manageable.
  • Profitability is expected to be stable this year after a sharp rebound in 2021. Islamic banks’ net funding margin may remain broadly stable, while provisioning is expected to moderate but remain above pre-pandemic levels. The unique Cukai Makmur (welfare tax) will, however, weigh on the net profits of Islamic banks for 2022.
  • Funding and liquidity positions will remain healthy.
  • Capitalization should remain strong, providing sufficient buffers for absorbing losses.

According to RAM Ratings, Islamic banks continued to lead growth in banking system funding with credit expansion of 8.2% in 2021 (2020: +8.1%), which outpaced the increase in conventional lending ( 2021: +2.5%). Islamic financing (including that from development finance institutions) now constitutes 41% of total banking sector lending.

According to RAM Ratings, amid the economic recovery, Islamic financing is expected to increase by 10% this year.

His co-head of financial institution ratings, Sophia Lee, said that as the bulk of government aid programs expire in 1H22, writedowns will start to show, but credit weakening will be manageable.

“The sector’s expanded provisioning buffers and strong capitalization (a Common Equity Tier 1 capital ratio of 14.3% at end-December 2021) will give it sufficient headroom to withstand continued credit uncertainties” , she said.

According to RAM Ratings, the industry is poised to continue its push for wider adoption of value-based intermediation (VBI). The increased focus on sustainable Islamic finance has created new opportunities, allowing banks to build on their existing value-based practices and solutions to enhance the impact of VBI.

He said this puts Islamic banks in a good position to meet Bank Negara Malaysia’s climate risk management and scenario analysis requirements from June 1, 2022.

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