KUALA LUMPUR (March 29): RAM Ratings expects Malaysia’s Islamic banking industry to stay resilient despite lingering risks from the Covid-19 pandemic.
In a statement on Tuesday (March 29), the rating agency maintained its stable outlook on the industry in line with its outlook on the overall domestic banking system.
It said its main expectations for the industry in 2022, as outlined in its latest commentary "Islamic Banking Insight: Staying the Course", include the following:
- Islamic financing growth will stay healthy at 10% in 2022 (2021: +8.2%), riding on better economic conditions.
- 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 ratio could reach 2% by end-2022 (end-December 2021: 1.2%), which would still be manageable.
- Profitability is seen to be flat this year after a sharp rebound in 2021. Islamic banks’ net financing margin 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 2022.
- Funding and liquidity positions will stay sound.
- 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% in 2021 (2020: +8.1%), which outpaced the increase in conventional loans (2021: +2.5%). Islamic financing (including that of development financial institutions) now constitutes 41% of total banking sector loans.
RAM Ratings said amid the economic recovery, Islamic financing is projected to rise by a higher 10% this year.
Its co-head of financial institution ratings Sophia Lee said as the bulk of government-led relief schemes expire in 1H22, impairments will begin to surface but credit weakening will be manageable.
“The industry’s enlarged provisioning reserves and strong capitalisation (a common equity Tier 1 capital ratio of 14.3% as at end-December 2021) will give it sufficient headroom to withstand lingering credit uncertainties,” she said.
RAM Ratings said the industry is poised to continue leading efforts towards 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.
It said this puts Islamic banks in a good position to meet the requirements of Bank Negara Malaysia’s climate risk management and scenario analysis effective June 1, 2022.