KUALA LUMPUR (Feb 4): Malaysian Islamic banks are under pressure to boost their deposits and other funding sources amid strong financing growth, Fitch Ratings flagged.

With financing size matching total deposit, liquidity profiles of Islamic banks are generally weaker than their conventional counterparts, the ratings agency said in a sector note. Rapid financing growth is driving Islamic banks to fight for deposits and accounts to fund asset expansion, it noted.

“These factors have increased pressure on banks’ financing margins relative to conventional banks, affecting overall profitability in recent years,” Fitch said.

Malaysia is one of the largest Islamic banking markets globally, with assets expanding by 7% to US$312 billion by end-2025 and faster than the 4% growth in conventional banking assets. About two-thirds of Islamic financing is extended to consumers, higher than conventional banks’ 57%.

However, competition is intense as more than three dozen local and foreign lenders, both conventional and Islamic, jostle for business. At the same time, banks have to maintain comfortable levels of deposits and other buffers to support loan growth.

“Still, Islamic banks’ profitability remains adequate and banks’ efforts to diversify funding sources should help to sustain business volumes and profitability,” Fitch said.

Islamic lenders are also likely to sustain asset and financing growth in 2026 as shariah-compliant lending expands further from rising household demand, the ratings agency said.

The growing share of Islamic financing has been sustained by the needs for housing loans and banks’ "Islamic First" strategy over the years, according to the Malaysian Islamic Banks Monitor report.

Impairments, meanwhile, have generally been low, backed by steady job conditions and the property market, the agency noted. “We expect asset-quality metrics to remain sound in the near term despite high household system leverage, which has been stable,” Fitch added.