Malaysia Islamic financing growth to be high single digit despite lowest growth in 5 years in 2019 - RAM Ratings

RAM Rating Services expects Malaysia’s Islamic financing growth to be in the “high single digit territory” this year despite the sector in 2019 posting its lowest growth in the last five years.

Malaysia’s Islamic banks’ financing growth was 8.3% in 2019, down from 11% in 2018, according to RAM Ratings. This data excludes the development financial institutions, and 2018 figures were adjusted to exclude MBSB Bank that was only included in the banking system's statistics from April 2018.

The 8.3% growth was still higher than the conventional banking sector’s 3.9%, and was achieved amid the challenging and uncertain external environment, Sophia Lee, Co-Head, Financial Institutions at the rating agency told Salaam Gateway.

“RAM expects financing growth to remain in the high single digit territory in 2020, anchored by the expansion of household financing,” she said.

Bank Negara Malaysia (BNM), the central bank, in 2011 set the target for Islamic financing to account for 40% of the total banking system’s loans.

Islamic financing reached 611 billion ringgit ($149 billion) at the end of 2019, accounting for 35% of the banking system’s loans, excluding the development financial institutions, said Lee. This is up from 33% in 2018. 

“While it may take a longer time to achieve BNM’s 40% target for Islamic financing as a proportion of the overall system’s loans by 2020, the Islamic banking industry has broadened in terms of maturity and breadth,” she said, giving the example of several big players prioritising Islamic over conventional loans.

“Government and government-linked entities have also been strongly encouraged to utilise Islamic financing as a funding tool, in addition to the requirement for all Shariah-compliant stocks to possess more than two thirds of debt to total assets in Islamic financing or sukuk,” she added.

Malaysia’s Islamic banks held 835.19 billion ringgit ($202 billion) in assets in 2019, accounting for 29.5% of the banking system. This was up from 28.2% the year before, according to Salaam Gateway calculation of data from the central bank.

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