Islamic banking set to expand across South, Southeast Asia post-pandemic — Moody’s

KUALA LUMPUR: Islamic banks in South and Southeast Asia have sufficient capital and liquidity to meet increased demand for financing as economies recover from the pandemic, according to Moody’s Investors Service.

The credit rating agency said young, growing populations and government efforts to develop the sector would support longterm growth.

In the report titled “Islamic banks - South and Southeast Asia: Sector is well positioned for continued growth as economies recover”, Moody’s analyst Tengfu Li said although Islamic banks’ profitability in these regions weakened in 2020, their capital buffers remained mostly robust, supported by government measures to soften the impact of the Covid-19 outbreak.

He said strong capitalisation would in turn enable Islamic banks to meet increased demand for financing as economies recovered.

“Liquidity has also eased or remained stable because of strong growth in low-cost deposits as consumers and businesses cut spending, and as central banks relaxed reserve requirements and carried out open market operations,” Li said.

Meanwhile, Moody’s expects Islamic financing will continue to expand faster than conventional loans across South and Southeast Asia, increasing the share of Islamic financing in total financing.

It said prime-age populations, or people aged 25-54 years, will boost the long-term expansion of Islamic banking, especially given these countries’ large untapped market.

“Key to the growth of Islamic banking are efforts by governments of major Islamic banking markets in South and Southeast Asia to develop the sector, given its role in increasing financial inclusion and inherent alignment with environmental, social and governance (ESG) principles, which are growing in relevance amid the pandemic.