Fitch Ratings: Malaysian Islamic banks' growing contribution to continue

Fitch Ratings-Singapore-04 March 2020: The contribution of Islamic financing to Malaysian banking system loans is likely to rise further, supported by the regulatory backdrop that provides a level playing field and banks that continue to promote Islamic products, says Fitch Ratings. The COVID-19 outbreak poses some downside risk to growth and asset quality, including those of Islamic banks. Nevertheless, we view Islamic banks' loss-absorption buffers as providing adequate support to withstand the near-term challenges.

Malaysian Islamic banks' financing grew by 8.3% in 2019, outpacing conventional banks' loans growth of 1.6%, bringing the share of Islamic financing to total system loans to 35% (2015: 27%).

We expect the impact on Islamic banks' asset quality from COVID-19 to be similar to the conventional banks, given a comparable financing mix. However, banks' and government's relief packages should help to mitigate near-term consequences. Banks' profitability is likely to face added pressure from Bank Negara Malaysia's (BNM) recent policy rate cut, along with monetary policy easing in many APAC markets, in addition to existing domestic market competition.

Fitch feels that Islamic financing is likely to grow above conventional loans in the medium term, notwithstanding that BNM may fall short of its target of 40% Islamic financing mix by 2020. Islamic banks' credit profiles should remain broadly steady in the near term, though we see risks to asset quality and profitability should the COVID-19 outbreak be prolonged.
 

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