PETALING JAYA: According to Moody’s Investors Service, Malaysia’s Islamic banking system has plenty of room to grow despite the sector having reached a relatively mature stage.
The international rating agency noted in its new report that strong balance sheets, underpinned by prudent underwriting and a focus on less risky retail funding, would continue to allow the country’s Islamic banks to grow as the government is taking steps to further develop syariah- compliant banking.
“Malaysia has one of the most advanced Islamic banking systems among Muslim-majority countries, with room for further growth. Islamic banking forms an important part of the country’s banking system due to government policies aimed at developing the sector and the “Islamic-first” strategies that major banking groups have adopted to support state efforts.
“Yet Syariah-compliant banks still make up far less than half of the overall banking system, giving the sector plenty of room for growth,” he said.
After weathering the pandemic on solid foundations, Islamic banks have maintained strong balance sheets necessary for growth.
“Although the government program that allows debt repayment deferral will expire by June 2022 for most borrowers, the increase in impaired Islamic finance will be limited due to the economic recovery, and Islamic banks have built up ‘significant reserves against potential losses over the past two years,’ explained Moody’s.
“The focus of Islamic banks on the less risky consumer segment will also support the quality of their assets. Strong profitability will allow Islamic banks to remain well capitalized, while large deposit bases will continue to provide them with ample liquidity for expansion,” he added.
Islamic banks in Malaysia will continue to benefit from the government’s efforts to develop the sector.