Growth in the major Islamic finance markets such as the Gulf states, Malaysia and Indonesia is rising on the back of a surge in key exports like hydrocarbons and palm oil as well as easing pandemic restrictions, according to Moody’s Investors Service in a new report.
The report released today, stated that inflation in these countries would also remain moderate because of government subsidies and policy rate hikes.
Moody’s analyst Badis Shubailat said the economic rebound would keep the asset quality of Islamic banks stable while pushing up profitability, Bernama cited.
Islamic banks can therefore maintain ample capital and liquidity buffers, enabling them to capitalise on the growing demand for Shariah-compliant financial services, he said.
The report said Islamic banks focus on retail financing would support asset quality because of its secured and diversified nature as well as the banks prudent underwriting despite the unwinding of regulatory forbearance in these countries.
Moreover, financing to public-sector employees, who enjoyed stable employment during the pandemic, constitutes the lion’s share of retail financing in the Gulf Cooperation Council (GCC) region, it said.
It said strong provisioning buffers built up during the pandemic would also mitigate asset risks.
Islamic banks profitability will rise given their sufficient loss reserves while efficiency gains from digitalisation will offset their higher technology spending.
Increasing interest rates will lift margins, particularly in the Gulf states where domestic currencies are pegged to the US dollar, it added.