RAM Rating Services Bhd (RAM) expects the financing growth of the Malaysian Islamic banking sector to stand at between 10 to 11 per cent in 2019.
Despite the projected growth, the ratings agency forecasts that it may take longer for Islamic financing to achieve Bank Negara Malaysia’s 40 per cent target from the overall system’s loans by 2020.
“While it may require more time to attain the targeted 40 per cent, the Islamic banking industry has come a long way in terms of maturity and breadth,” said RAM’s co-head of Financial Institution Ratings Wong Yin Ching in a statement in tandem with the launch of RAM Ratings’ annual publication, Islamic Banking Insight.
As at end-January 2019, Islamic financing comprised some 32 per cent of the overall system’s loans, while Islamic banking overall continued to expand at a much faster pace than conventional loans in 2018, coming in at 11 per cent (2017: 10.3 per cent), in contrast to the latter’s 3.3 per cent growth.
Liquidity within the Islamic banking industry stayed healthy as at end-January 2019, with the industry’s liquidity coverage ratio standing at 143 per cent.
The Islamic banking system also remained well capitalised, with respective common equity tier-1 and total capital ratios of 13.3 per cent and 17.6 per cent as at the same date.
Deposits also continued expanding at a healthy 12.4 per cent in 2018, following its commendable 14.2 per cent growth the preceding year. The bulk of the expansion stemmed from fixed deposits as banks are bracing for the implementation of the Net Stable Funding Ratio (NSFR).
“Despite the deferred adoption of the NSFR, margin pressure is unlikely to ease amid the ongoing keen competition for retail and small and medium (SME) deposits, as banks keep building up their funding bases,” said RAM’s co-head of Financial Institution Ratings Sophia Lee. “However, the overall outlook on profitability remains stable as banks keep a tight rein on operating expenses.”
Moderation in economic growth may affect borrowers’ repayment capabilities in the future and therefore lead to an uptick in impairments. However, the asset quality of the Islamic banking industry is unlikely to deteriorate significantly because of this.
Source New Straits Times