Relief measures cushion credit profile of Islamic banks

Published on 30 Mar 2020.

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The rapid spread of the COVID-19 pandemic and its far-reaching effects on the domestic and global economy, are anticipated to dampen credit demand and affect the performance of Islamic banks this year. RAM maintains a stable outlook on the Malaysian Islamic banking sector on account of the industry’s sturdy fundamentals, although we caution that Islamic banks will face heightened uncertainties and challenges in the still-evolving economic landscape. “Taking into account our expectation of a steep moderation of economic growth, the financing growth of Islamic banks is expected to decline to below 5% in fiscal 2020, from 8.3% in 2019,” explains Sophia Lee, RAM Ratings’ Co-Head of Financial Institution Ratings. 

Key expectations for the industry in 2020, as discussed in our annual publication, Islamic Banking Insight, include the following:

  • Islamic financing growth to decelerate to below 5% (2019: +8.3%)
  • Asset-quality indicators may weaken after financial relief measures end 
  • Comfortable liquidity
  • Headwind to profitability due to margin compression and higher impairment charges
  • Capitalisation to stay healthy

Islamic banks’ asset quality remains healthy although its gross impaired financing (GIF) ratio edged up to 1.4% as at end-December 2019 (end-December 2018: 1.3%) due to a couple of lumpy corporate accounts. The system’s credit cost ratio declined to an annualised 17 bps in 9M 2019 (2018: 22 bps), aided by non-recurring items of a few banks. Excluding the affected banks, credit cost ratio would stand at a higher 27 bps. “The reported asset quality indicators of Islamic banks should stay manageable in 2020, chiefly supported by the recent financial relief measures initiated by Bank Negara Malaysia (BNM) in response to the outbreak. That said, these indicators may not be reflective of the actual credit quality of the Islamic banking system. We are mindful that default incidences and provisioning needs may rise next year if borrowers’ weaknesses stretch beyond the six-month moratorium,” said Wong Yin Ching, RAM’s Co-Head of Financial Institution Ratings. 

In light of BNM’s announcement, Malaysian banks will be granting an automatic moratorium on all financing repayments (except credit card balances) by individuals and SMEs for six months, with effect from 1 April 2020, benefitting around 70% of the Islamic banking industry’s total financing. Banks will also convert credit card balances into term loans for cardholders who have failed to meet minimum repayments consecutively for the last three months while facilitating requests from corporates for deferments or restructuring. 

Meanwhile, liquidity of Islamic banks is still comfortable, with the industry’s liquidity coverage ratio (LCR) clocking in at 151% as at end-January 2020. As part of the regulatory relief measures, banks are allowed to operate below the minimum LCR threshold of 100% given the reduction in cashflow during the moratorium period. BNM will also continue to supply daily ringgit liquidity to banks via various tools under its open market operations. Growth of customer funding (deposits and investment accounts, +8.5%) kept pace with overall financing growth in 2019, although parental funding and liquidity support in the form of restricted profit-sharing investment accounts and interbank funding remained important for Islamic banks.  

We foresee headwinds to earnings, given further margin pressure subsequent to the twin OPR cuts in early 2020 and higher credit costs expected going forward. Islamic banks continued to boast healthy financing-loss buffers, as reflected in the system’s strong common equity tier-1 capital ratio of 13.6% as at end-January 2020. In addition, the GIF coverage ratio (including regulatory reserves) of the sector was a sturdy 116% as at end-September 2019.

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


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

Media contact
Padthma Subbiah
(603) 3385 2577


About RAM Rating Services Berhad (RAM Ratings)

Established in 1990, RAM Ratings is a leading credit rating agency registered under the Securities Commission’s Guidelines on Registration of Credit Rating Agencies, 2011. In addition to the provision of credit ratings for corporate bonds and sukuk and their issuers, RAM Ratings also provides research and publications on Islamic finance, fixed income and macro-economic and industry analysis as well as data analytics relating to credit risk, counterparty assessments and other related domains. 


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Publication Date Published Category
Islamic Banking Insight 2020 30-Mar-2020 Banking Insight View PDF