Islamic banks still anchoring growth of Malaysian banking sector

Published on 26 Mar 2019.

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The latest edition of RAM Ratings’ annual publication, Islamic Banking Insight, reveals that Islamic financing is still anchoring the growth of the overall Malaysian banking sector. Islamic banking continued to expand at a much faster pace than conventional loans in 2018, coming in at 11.0% (2017: 10.3%), in contrast to the latter’s 3.3% growth. As at end-January 2019, Islamic financing comprised some 32% of the overall system’s loans. 

RAM’s expects the financing growth of the Islamic banking sector to stand at around 10-11% in 2019. Given so, Islamic financing may take longer to achieve Bank Negara Malaysia’s 40% target for it as a proportion of the overall system’s loans by 2020. “While it may require more time to attain the targeted 40%, the Islamic banking industry has come a long way in terms of maturity and breadth,” highlights Wong Yin Ching, RAM’s co-head of Financial Institution Ratings. 

Meanwhile, RAM maintains a stable outlook on the Malaysian Islamic banking sector, in line with our view on the overall domestic banking system. Our main expectations for the Islamic banking sector in 2019 include the following: 
•    Islamic financing growth will hover around the low teens. 
•    Asset-quality indicators should remain resilient. 
•    Strengthening funding profile in the lead-up to the implementation of the net stable funding ratio (NSFR) requirement. 
•    Stable outlook on profitability despite slight margin compression. 
•    Strong capitalisation. 

The asset-quality indicators of Islamic banks have remained relatively benign, with a gross impaired financing (GIF) ratio of 1.2% as at end-January 2019 and an annualised credit cost ratio of 27 bps in 9M 2018. That said, we note an uptrend in the absolute GIF of Islamic banks, which increased 13% in 2018. On the other hand, the implementation of Malaysian Financial Reporting Standards 9 (MFRS 9) has bolstered loss-absorption buffers; the Islamic system’s GIF coverage ratio had improved to 103% as at end-January 2019 (end-December 2017: 89%). While the moderation in economic growth may affect borrowers’ repayment capabilities and thus lead to an uptick in impairments, the asset quality of the Islamic banking industry is unlikely to deteriorate significantly.

In 2018, the Islamic banking system’s deposits continued expanding at a healthy 12.4%, following its commendable 14.2% growth the preceding year. The bulk of the expansion stemmed from fixed deposits as banks are bracing for the implementation of the NSFR requirement. “Despite the deferred adoption of the NSFR, margin pressure is unlikely to ease amid the ongoing keen competition for retail and SME deposits, as banks keep building up their funding bases. However, the overall outlook on profitability remains stable as banks keep a tight rein on operating expenses,” explains Sophia Lee, RAM’s co-head of Financial Institution Ratings. Liquidity stayed healthy as at end-January 2019, with the industry’s liquidity coverage ratio standing at 143%. The Islamic banking system also remained well capitalised, with respective common equity tier-1 and total capital ratios of 13.3% and 17.6% as at the same date. 

RAM’s Islamic Banking Insight  is available for download at www.ram.com.my.


Analytical contacts
Liang Huey Jean, CFA
(603) 3385 2495

Wong Yin Ching, CFA
(603) 3385 2555

Sophia Lee
(603) 3385 2619

Media contact
Padthma Subbiah
(603) 3385 2577


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Publication Date Published Category
Islamic Banking Insight 2019 26-Mar-2019 Banking Insight View PDF