Malaysia’s Islamic banks headed for more growth: Moody’s

Government support pushes the sector to an upward trajectory.

Malaysia’s Islamic banking sector still has abundant room for growth, according to a report by Moody’s, thanks to their strong balance sheets, supportive government policies, and a yet-to-tap portion of the overall banking system.

Malaysia has one of the most advanced Islamic banking systems among Muslim-majority countries, according to Tengfu Li, Moody’s assistant vice president and analyst. 

“Islamic banks constitute a significant part of its banking sector, thanks to supportive government policies and the 'Islamic first' strategies that major banking groups have adopted to back state efforts," Li said.

However, the sector still accounts for less than half of the overall banking system, giving it abundant room for further growth, added Li.

Islamic banks’ strong profitability will enable them to remain well-capitalized, whilst their large deposit bases will provide sufficient liquidity for expansion. 

And whilst government programs to support borrowers during the pandemic will expire by June 2022, increases in impaired financing will be limited because of Malaysia's economic recovery, Moody’s added.

Government initiatives to advance the sector will also help Islamic banks grow faster than their conventional peers. 

The Malaysian government and the central bank have laid out plans for the coming years, including strengthening Malaysia's position as an international gateway for Islamic finance, among others. 

On the downside, increasing cross-border Islamic financing could remain challenging because of the opportunistic nature of such transactions and the complexity of Islamic financial instruments compared with conventional ones, the report noted.