Fitch said the higher interest-rate environment continues to cast a pall on demand for financing after a robust growth of 13% in 2022. — Reuters
PETALING JAYA: While Malaysia’s Islamic financing growth rate is expected to ease in 2023, it is projected to surpass that of conventional banks on the back of the country’s supportive Islamic finance ecosystem and inclination towards syariah-compliant services, says Fitch Ratings.
The international ratings agency said the higher interest-rate environment continues to cast a pall on demand for financing after a robust growth of 13% in 2022.
Islamic banks’ asset quality could potentially be weakened as rising financing rates weigh on borrowers’ debt servicing capacity.
“A decelerating economy and the absence of Covid-19 pandemic-era consumer relief are also likely to contribute to an increase in delinquencies.
“Nevertheless, we expect asset-quality deterioration to be manageable, with banks adequately provisioned for impairments and as we project the economy to expand by 3.5% this year,” said Fitch in a report.
Malaysia is the third-largest Islamic banking market and a growing one. At the end of 2022, 41% of local banking system loans were made up of Islamic financing, up from 38% in 2021.
Fitch said the country’s Islamic banking system’s capital buffers are still registering a healthy 14.2% despite having seen a decline last year, from 15% in 2021.
Nevertheless, Fitch expects liquidity conditions in the Islamic banking system to stabilise this year, underpinned by the levelling off on monetary tightening by Bank Negara and moderating financing growth.
“Buffers were weighed down by higher mark-to-market losses on banks’ bond holdings and faster risk-weighted asset growth. We expect capital levels to remain steady in 2023, as earnings growth should keep pace with credit expansion,” said Fitch.
Tighter funding conditions did not deter financing growth rate as banks’ financing-to-deposit ratio, including investment accounts, increased to 95% by the end of 2022 from 93% in 2021.
“Risk-sharing investment accounts, which are not guaranteed under the deposit insurance scheme, grew at a slower rate of 6% in 2022, against term deposit growth of 13%, as risk premia between the two products narrowed,” said Fitch.
At the end of November 2022, the local sukuk market took up a 64% stake in the country’s outstanding issuances.
Sovereign issuances, which grew by 18%, offset corporate issuances, which were down by 3% in the first 11 months of 2022 to about RM250bil. Fitch opined that corporate sukuk activity will recover once market volatility dissipates.
Going forward, the domestic Islamic-finance sector will be further supported by the government’s plans to enlarge the contribution of the halal industry to 11% of gross domestic product by 2030.
