Economic slowdowns and higher rates will weigh on Islamic financing growth in Asia and asset quality, similar to challenges facing conventional banks.
S&P Global Ratings, Singapore cited that according to a chartbook-style report published today (May 22), entitled, ‘Asia-Pacific Islamic Banking: Higher Rates Could Present Asset Quality Hurdles,’ The Islamic banking market in Asia-Pacific will stay concentrated, with Malaysia forming the lion’s share.
S&P Global Ratings credit analyst Nikita Anand said: “Even as growth moderates at the sector level, financing growth of Islamic banks will continue to outshine conventional banks’ credit growth, facilitating market share gains.”
Asset quality could deteriorate for both Islamic and conventional banks. This is because low-income households and small businesses are vulnerable to higher rates.
Profitability trends for Islamic banks will vary across the region depending on the pace of policy rate hikes, pass through to financing rate and funding costs.
“Indonesian banks are likely to benefit from widening margins,” said Anand. “Malaysian banks’ profitability should stay flat as rising funding costs should be balanced by normalizing tax rates.”
Large Islamic banks in the region have healthy capitalisation and stable retail deposit bases.
This report does not constitute a rating action.
