Malaysia’s Islamic banking industry to stay resilient — RAM Ratings
KUCHING: RAM Ratings Services Bhd (RAM Ratings) expects Malaysia’s Islamic banking industry to stay resilient despite lingering risks from the pandemic.
“As the bulk of government-led relief schemes expire in the first half of 2022 (1H22), impairments will begin to surface but credit weakening will be manageable.
“The industry’s enlarged provisioning reserves and strong capitalisation (common equity tier-1 capital ratio of 14.3 per cent as at end-December 2021) will give it sufficient headroom to withstand lingering credit uncertainties,” highlighted RAM Ratings co-head of Financial Institution Ratings Sophia Lee, in a press statement.
The ratings agency maintained a stable outlook on the industry in line with its outlook on the overall domestic banking system.
It explained that Malaysia’s Islamic financing growth is expected to stay healthy at 10 per cent in 2022 (2021: up 8.2 per cent), riding on better economic conditions.
It also noted that delinquencies are likely to creep up in the months ahead when financing relief measures expire in the first half of 2022 (1H22).
“The industry’s gross impaired financing (GIF) ratio could reach two per cent by end-2022 (endDecember 2021: 1.2 per cent), which is still manageable,” it pointed out.
Aside from that, RAM Ratings highlighted that the industry’s profitability is seen to be flat this year after a sharp rebound in 2021.
However, Islamic banks’ net financing margin (NFM) could stay broadly stable while provisioning is expected to moderate but remain higher than pre-pandemic levels.
“The one-off Cukai Makmur (prosperity tax) however will weigh on Islamic banks’ net earnings for 222,” it cautioned.
Funding and liquidity positions are expected to stay sound while capitalisation is anticipated to remain sturdy, providing sufficient buffers for loss absorption, RAM Ratings said.
“Islamic banks continued to lead financing growth of the banking system with credit expansion of 8.2 per cent in 2021 (2020: 8.1 per cent) which outpaced the increase in conventional loans (2021: 2.5 per cent).
“Islamic financing (including that of development financial institutions) now constitutes 41 per cent of total banking sector’s loans. Amid economic recovery, Islamic financing is projected to rise by a higher 10 per cent this year.
“The Islamic banking industry ended 2021 with a still-benign GIF ratio of 1.2 per cent (threeyear average: 1.4 per cent), thanks to forbearance measures and proactive collection efforts,” it said.
“We believe the industry is poised to continue leading efforts towards a wider adoption of value-based intermediation (VBI). An increased focus on Islamic sustainable finance has created new opportunities, enabling banks to build on their existing value-based practices and solutions to strengthen the impact of VBI.
“This puts Islamic banks in a good position to meet the requirements of Bank Negara Malaysia’s (BNM) Climate Risk Management and Scenario Analysis – effective June 1, 2022,” RAM Ratings opined.
Meanwhile, BNM will likely award at least one digital bank licence to an applicant with strong Islamic finance value proposition, affirming Malaysia’s role as an established global Islamic finance leader.
“We do not however see digital banks posing a significant threat to domestic Islamic banking or the banking sector in general in the near to medium term,” it commented.