Malaysia’s Islamic banking continues expanding: Fitch

KUALA LUMPUR: Malaysia’s Islamic banking sector has continued to expand amid economic challenges from the Covid-19 pandemic, sad Fitch Ratings.

The share of Islamic financing in the local banking system reached 37 per cent by end-2020 (end-2019: 35 per cent), with Islamic financing contributing nearly all of the banking sector’s growth in 2020.

This was driven by household financing and banks that promoted Islamic products as part of the “Islamic First” strategy, Fitch said in a report today.

The firm expects the Islamic banking sector’s credit profile to remain stable with adequate loss-absorption buffers this year, despite near-term pressure on asset quality and profitability.

“We expect credit impairments to accelerate and credit provisions to remain high, following a moratorium and other loan repayment relief provided to vulnerable borrowers, which have masked banks’ underlying asset quality from 2020.”

In the medium term, penetration of Islamic finance is likely to continue to rise due to an economic recovery, a supportive regulatory environment and banks that continue to promote Islamic products.

“Unique features of Malaysia’s Islamic banking industry include risk-sharing investment accounts (mudaraba and musharaka) which, among other areas, are not guaranteed under the deposit insurance scheme (DIS).

“Investment accounts in other jurisdictions are typically covered by DIS or government guarantee. Although these accounts are contractually loss absorbing, we have not seen cases of depositors bearing losses,” Fitch said.

The firm said the need to comply with sharia principles makes the banks’ transition away from London Interbank Offered Rate (Libor) more complex than for conventional products.

Legacy Islamic contracts will need to be individually renegotiated, but Islamic banks’ exposures to Libor were

Source: NST