Islamic banks resilient: steady 8% financing growth in 2025 despite global headwinds

Published on 26 Mar 2025.

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RAM Ratings retains a stable outlook on the Malaysian Islamic banking industry. Despite ongoing global headwinds and uncertainties, the industry’s fundamentals are underpinned by its solid capital base, strong asset quality and domestic economic growth that we expect will stay healthy this year. Our key expectations for the industry in 2025, as highlighted in our latest commentary, Banking Insight 2025 – Maintaining Momentum, include the following: 

• Islamic financing growth to hold steady at around 8% (2024: 8.1%)
• Industry gross impaired financing (GIF) ratio to stay resilient at 1.3% (end-2024: 1.3%) 
• Moderate profit growth
• Capitalisation, funding and liquidity position to remain healthy

Islamic financing made up a sizeable 43% (end-2023: 42%) of banking system loans as at end-2024. “RAM expects Islamic financing to expand at a steady 8% in 2025. The influence and importance of the Islamic banking industry will remain in view of the ‘Islamic First’ policy adopted by major banking players and regulatory support,” says Wong Yin Ching, RAM’s Co-head of Financial Institution Ratings. 

As in previous years, Islamic financing continued to outpace conventional banking loan growth (2024: 3.7%; 2023: 3.5%) in 2024 at 8.1% (2023: 7.9%), contributing an average of 72% to loan growth in the past five years. The upcoming retargeting of subsidies in 2H 2025 and global uncertainties may pose challenges to credit demand, but we remain optimistic that financing growth will stay healthy, fuelled by strong domestic demand and ongoing investments.  

On the asset quality front, the Islamic banking industry’s GIF ratio eased to 1.3% as at end-2024 (end-2023: 1.5%; banking system: 1.4%) on account of rapid financing growth, alongside write-offs and recoveries. The average credit cost ratio, while edging up to an annualised 27 bps in 9M 2024 (9M 2023: annualised 21 bps), is still deemed sound while GIF coverage (including regulatory reserves) improved slightly to 122% as at end-September 2024 (end-December 2023: 119%). We expect the asset quality of Islamic banks to stay resilient in 2025, bolstered by prudent underwriting and a strong labour market which should help cushion any adverse impacts from subsidy rationalisation. The industry’s strong common equity tier-1 capital ratio of 14.0% as at end-2024 also provides a solid buffer against potential credit deterioration. 

Islamic industry deposit growth, despite increasing to 5.9% in 2024 from 5.2% the previous year, still lagged credit expansion. Islamic term deposits were still the primary driver of deposit growth, accelerating by 7.4% (2023: 4.4%). Current and savings account (CASA) deposits grew at a slower 8.5% from 10.0% in 2023. Customer investment accounts (IAs) expanded by almost double (2024: 17.5%; 2023: 9.4%) and accounted for 8% of the Islamic banking industry’s total funding as at end-2024 (end-2023: 7%). IAs continue to be an attractive funding source for some banks because they provide capital relief as assets funded by IAs do not attract any capital charge.

Most Islamic banks reported improved margins in 2024, in contrast to the wider banking sector. This was mainly attributable to a higher financing to deposit ratio, reduced deposit competition, disciplined pricing strategies and targeted efforts to increase CASA deposits. The Islamic banking industry’s net financing margin was up at an annualised 1.93% for 9M 2024 (9M 2023: annualised 1.84%). This, coupled with higher non-financing income and healthy financing growth, propelled the industry’s pre-tax return on risk-weighted assets to an annualised 2.22% (9M 2023: annualised 2.12%). “We anticipate moderate profit growth for Islamic banks in 2025 as trading and investment income normalise,” said Sophia Lee, RAM’s Co-head of Financial Institution Ratings. 

Effective 1 January 2025, Bank Negara Malaysia’s revised policy on Islamic banking windows (IBWs) will require specific prudential requirements – including minimum capital and liquidity requirements – to ensure the financial resilience of IBWs to support Islamic finance activities independently of conventional banking functions and expands its scope to include development financial institutions, commercial, and investment banks. While IBWs constituted only approximately 2% of the Islamic banking industry’s total assets as at end-2024, we view the policy enhancement positively, ensuring IBWs continued relevance in the current operating environment and enhancing the robustness of Malaysia's Islamic finance sector. 

The changes introduced may require some of the institutions with IBWs to reassess their strategies in response to evolving regulatory landscapes. As of 1 December 2024, there were seven foreign commercial banks and four domestic DFIs operating IBWs.

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

 

Analytical contacts
Jeremy Noel Paul
(603) 3385 2556
jeremynp@ram.com.my

Wong Yin Ching, CFA
(603) 3385 2555
yinching@ram.com.my

Sophia Lee
(603) 3385 2619
sophia@ram.com.my

Media contact
Sakinah Arifin
(603) 3385 2500
sakinah@ram.com.my 

 

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 Credit Rating Agencies, 2023. 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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