Malaysia’s Islamic Banking Sector On The Rise Despite Pandemic

Despite the economic challenges posed by the COVID-19 pandemic, Malaysia’s Islamic banking sector has demonstrated resilience and continued growth, according to Fitch Ratings.

Growth Despite the Pandemic By the end of 2020, Islamic financing accounted for 37% of the banking system, up from 35% at the end of 2019. This growth was largely driven by household financing and banks that promoted Islamic products as part of the “Islamic First” strategy in the country.

IThe Outlook for 2021 In 2021, Fitch anticipates that the Islamic banking sector’s credit profile will remain stable, with sufficient loss-absorption buffers, despite near-term pressure on asset quality and profitability. The rating agency expects credit impairments to accelerate and credit provisions to remain high, following a moratorium and other loan repayment relief provided to vulnerable borrowers, which have masked banks’ underlying asset quality from 2020.

The Future of Islamic Finance in Malaysia Over the medium term, the penetration of Islamic finance is likely to continue to rise due to economic recovery (with a forecasted GDP growth of 6.7% in 2021), a supportive regulatory environment, and banks that continue to promote Islamic products.

Unique Features of Malaysia’s Islamic Banking Industry Unique features of Malaysia’s Islamic banking industry include risk-sharing investment accounts (mudaraba and musharaka) which, among other areas, are not guaranteed under the deposit insurance scheme (DIS). Investment accounts in other jurisdictions are typically covered by DIS or government guarantee. Although these accounts are contractually loss-absorbing, we have not seen cases of depositors bearing losses.

The Transition Away from Libor The need to comply with Sharia principles makes the banks’ transition away from London Interbank Offered Rate (Libor) more complex than for conventional products. Legacy Islamic contracts will need to be individually renegotiated, but Islamic banks’ exposures to Libor are manageable.

Malaysia’s Position in the ASEAN Region Malaysia continues to be the largest Islamic banking, Sukuk, and takaful market in ASEAN. The agency expects the upward trend in the growth of the Islamic banking industry in the country to continue in 2021 and beyond.

Conclusion Despite the challenges posed by the pandemic, Malaysia’s Islamic banking sector has shown resilience and growth, demonstrating the strength and potential of Islamic finance in the country. With supportive regulatory environments and continued promotion of Islamic products, the sector is expected to continue its upward trend in the coming years.