Malaysia to remain region's top Islamic banking market over next 2 years - S&P Global

KUALA LUMPUR - Malaysia continues to be the largest Islamic banking market in Asia-Pacific with 62.7 per cent of the region’s total Islamic banking assets and the country is likely to maintain its strong position in the next two years, according to S&P Global Ratings.

The rating agency said Islamic financing in Southeast Asia are expected to grow by eight per cent over the next two years, with Malaysia retaining its dominant market position.

"Islamic banks in core markets of Malaysia and Indonesia have healthy capitalisation and stable retail deposit bases,” it said in a report on Asia-Pacific Islamic banking sector.

Based on S&P Global’s estimates, Asia-Pacific holds a 20.7 per cent share of global Islamic banking assets (Iran is excluded due to the extreme volatility of the country’s currency) and Southeast Asia accounts for 80 per cent of Asia-Pacific’s Islamic banking assets.

On growth drivers for the region, it said they include the proposed merger of Malaysia Building Society Bhd and Malaysian Industrial Development Finance Bhd, which will create a full-service Islamic bank in Malaysia, as well as increasing digitalisation of banking services in the region.

Another growth driver is the robust demand and significant untapped market potential in Indonesia, Bangladesh and Pakistan, the agency said.

S&P Global forecast that Malaysian Islamic banks’ share of Islamic financing in Southeast Asia will increase to 45 per cent by 2026.

On profitability trend, it said profitability for Malaysian Islamic banks is expected to stay flattish in 2023.

"A decline in margins amid higher funding costs will be balanced by the normalisation of tax rate,” it said.

S&P Global said some small Islamic banks saw sharp rebound in profits due to lower provisions.

"(However,) over the next two years, large Malaysian banks will continue to outperform smaller ones due to diversified business profiles and operating efficiencies,” it added.

The rating firm also said Malaysia’s Islamic banks are leading the way on environmental, social and governance (ESG) practice.

It said 18 per cent of total financing goes to priority sectors, with small and medium enterprises being the largest recipient of responsible financing (61.8 per cent).

S&P Global reported that regulatory incentives will facilitate an increase in issuance of sustainability sukuk, and these include tax deductions until 2025 and grants to cover external review costs.

"Meanwhile, the issuance of international sustainability sukuk will diversify investor base and broaden the awareness of Islamic finance,” it added. - BERNAMA