KUALA LUMPUR (Feb 7): Fitch Ratings expects growth of Malaysian Islamic banks to continue to outpace that of conventional banks in the medium term, after financing reached US$190 billion (RM905.4 billion) in 2023, cementing the country’s Islamic banking market as the third-largest globally.

In a statement on Tuesday, the rating agency said the share of shariah financing inched up to 42% of domestic banking system loans, from 41% at end-2022, as banks continued to champion an 'Islamic First' strategy.

Fitch said the sector's financial performance was relatively steady in 2023, despite the higher rate environment, and expects the trend to be sustained in the near-term on a stable local policy rate and an economy that it forecasts will expand by more than 3% in 2024.

“Malaysia will see the entrance of its first Islamic digital bank in 1H24, which will cater to the country’s underserved banking population.

“The new entrant is likely to compete aggressively for deposits as it builds its franchise, but we do not expect this to change the industry's competitive dynamics in the near- to medium-term,” it said.