Asia-Pacific Islamic banks can expect steady expansion and broadly stable asset quality for the next few years, at least. That’s according to an article that S&P Global Ratings published today, titled “Asia-Pacific Is Ripe For Islamic Banking Development.”
“We expect financing growth to remain favorable for Islamic banks in Asia-Pacific over the next few years,” said S&P Global Ratings credit analyst Nikita Anand. “That’s thanks to stable economic conditions in the core Islamic banking markets of Malaysia and Indonesia.”
The ratings agency said Malaysia will remain the biggest Islamic banking market in Asia-Pacific, with about two-thirds of the sector’s total assets of about US$400 billion. But some large Islamic banks in the country could find it difficult to maintain their overall high growth if their retail deposit growth doesn’t keep pace. Banks will have to diversify into other funding sources such as investment accounts or rely on wholesale deposits, which are generally more expensive.
“The launch of new Islamic banks in Malaysia and other Asia-Pacific markets this year could improve access to financial services for underserved regions and segments, such as small businesses,” said Ms. Anand.
Indonesia is likely to be a growth hotspot, given its significant untapped potential. Bangladesh also has potential, but a liquidity shortage and weak external demand there are likely to weigh on financing growth over the next one to two years.
“Risks for Asia-Pacific Islamic banks are tilted toward the downside, due to higher-for-longer rates and rising geopolitical tensions,” said Ms. Anand.
Small businesses and low-income households are vulnerable to sustained higher costs of living and rates. In such a scenario, we would expect both financing demand and asset quality to falter it said however S&P added banks’ ample capital and provisions provide a buffer against rising stress.
