RAM Ratings: Islamic banks to grow faster than conventional peers

KUCHING: The expansion of domestic Islamic financing surpassed that of conventional banking loans in 2016, despite weaker economic conditions.

RAM Ratings said the growth of Islamic financing clocked in at RM45 billion against the RM32 billion achieved by the conventional banking sector.

“We anticipate rapid advancement for the Islamic banking sphere as major banking groups in Malaysia are prioritising the growth of Shariah- compliant assets,” explained Sophia Lee, RAM’s co-head of Financial Institution Ratings.

Bank Negara Malaysia (BNM) has targeted Islamic financing to constitute 40 per cent of the domestic banking system’s loans by 2020 from the current 29 per cent. Strong regulatory backing and industry innovation have led to considerable traction for Islamic banking in recent years.

Malaysia’s commitment to maintaining its position as a significant Islamic finance hub is likely to propel the industry towards meeting BNM’s 40 per cent goal.

Meanwhile, RAM has maintained a stable outlook on the Malaysian Islamic banking sector. Having emerged from the challenging operating environment of slower growth and weaker sentiment in 2016, the sector has held steady with sturdy assetquality indicators and healthy capital reserves.

The 11 Islamic banks in RAM’s rating portfolio, which account for more than 90 per cent of the system’s Islamic assets, have remained resilient to date; we anticipate the same for the current fiscal year.

Owing to the rapid growth of its financing base, the gross impaired-financing (GIF) ratio of the domestic Islamic banking system has been kept low through the last decade.

Having said that, we observe some weakness in the finance, insurance and construction sectors, which had led to a higher GIF ratio of 1.3 per cent as at end-December 2016.

“Some seasoning effects from earlier periods of prolific growth are also expected to come into play. However, we do not expect any significant deterioration given the prudent underwriting standards of banks in Malaysia. On the household-financing front, asset- quality indicators have stayed strong,” highlighted Lee.

The liquidity of Malaysian Islamic banks have remained healthy, although funding conditions have tightened. The liquidity coverage ratio (LCR) of the sector stood at 125% as at end-December 2016.

Keen competition for deposits is likely to persist as banks emphasise stronger liquidity buffers. The financing-to-deposits (including investment accounts) ratio of the Islamic sector was further lifted to 87.6 per cent as at the same date, as financing growth continued to outpace that of deposits and investment accounts.