Fitch Ratings expects the growth of Malaysia’s Islamic financing to continue to outperform that of conventional banks, due to the country’s supportive regulatory environment and Islamic finance ecosystem, as well as the shift towards shariah-compliant services.
The growth is likely to moderate in 2023, as higher financing rates claim demand.
The rating agency said a strong economic rebound propelled Islamic financing growth to a five-year high of 13% in 2022, driven by a sustained pickup in working-capital loans and a resilient household sector, in a recent statement, adding, this increased the share of Islamic financing to 41% of total banking system loans at end-2022, from about 38% at end-2021, further cementing Malaysia as the world’s third-largest Islamic banking market.
Fitch added Malaysia also had an established and world-leading sukuk market, with sukuk making up about 64% of local outstanding issuances as at end-November 2022 while the higher-rate environment and a moderation in economic growth, nevertheless, are likely to temper momentum and weigh on Islamic banks’ financing quality in 2023.
Fitch expects any asset-quality deterioration to be manageable, given adequate provisioning levels and a still-expanding economy, with gross domestic product forecast to expand by 3.5% during the year.
It said Islamic banks’ capital levels remain healthy, as indicated by a system common equity Tier 1 ratio of 14.2% as at end-2022 and funding conditions may further ease this year, with the Malaysian central bank levelling off on monetary tightening and as financing growth moderates.
