The liquidity crunch faced by the banks in the Gulf Cooperation Council (GCC) countries due to the financial crisis fuelled by the Covid-19 pandemic is expected to lead to a consolidation of Islamic banks in the region, according to Bahrain Islamic Bank CEO Hassan Amin Jarrar.
He said liquidity will be a pressing concern for financial institutions in the region as the regulators have imposed a six month mandatory postponement of repayments for all individual, small and medium enterprises (SMEs) and corporate financing.
“For the next six months, financial institutions in Bahrain and many parts of the region will have virtually zero cash inflows,” Hassan said in a webinar on the Impact of the Coronavirus Pandemic on the Global Islamic Finance Industry. “Subsequently, the big four accounting firms stated that the banks that do so may have to take a day one loss which equals to the net present value of each bank’s financing portfolio. This is a massive loss that the regulators did not think about.”
The CEO projected that the increase in expected credit loss staging under IRFS 9 will cause an increase in net promoter, which translates into provisions going up.
The increased provision, coupled with a curtailed appetite risk, will see most banks affected by the crisis to stop lending to new customers and lead to drop in profitability, erosion of capital and ultimately to a consolidation of financial institutions in this region.
He stated that the deterioration of profitability, equity and capital returns will motivate shareholders of the institutions to divest, which in turn will serve as a catalyst for consolidation.
Earlier this month, Fitch Ratings said it expects the impact on Malaysian Islamic banks’ asset quality from Covid-19 to be similar to the conventional banks, given a comparable financing mix.
“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. Nevertheless, we view Islamic banks’ loss-absorption buffers as providing adequate support to withstand the near-term challenges,” it said.
Meanwhile, Permata Bank & Asbisindo director and committee chief of non-regulator affairs Herwin Bustaman painted a different picture for the Islamic banking sector in Indonesia, as it primarily serves micro entrepreneurs, SMEs and retail customers.
He said liquidity is less of a concern in the archipelago as despite a foreign currency liquidity being squeezed by capital outflow and currency depreciation.
“However, the foreign currency portfolio in Islamic banks is less than 15% in Indonesia, which is mostly for financing government projects or related to hajj,” Herwin said.
However, he stated that the move by Indonesia’s central bank to reduce the benchmark interest rate by 25 basis points and the flexibility afforded by the financial services regulators to restructure existing loans have helped with the domestic liquidity.
“Instead, our biggest concern right now is asset quality which will affect the profitability of Islamic and conventional banks alike,” he said.
Given the challenges from the pandemic, Herwin suggested that Indonesia’s Islamic banks take the opportunity to promote trade among the member countries of Organisation of Islamic Cooperation.
Source The Sun Daily