Islamic banks’ assets up 9.3% in May

Household spending is the highest contributor at RM336b, up 12.2% compared to last year

by NG MIN SHEN / pic by TMR FILE

THE prospects of Islamic banking lenders sustaining double-digit growth in financing this year remain within reach on continued household spending despite projections of a slightly weaker economy.

Bank Negara Malaysia’s (BNM) recent statistics — which classifies both Islamic banks and Islamic banking schemes under the Islamic banking systems — noted that total assets of the Islamic banking system stood at RM747.98 billion at the end of May this year, 9.3% higher year-on-year (YoY).

As at end-2018, the figure stood at RM733.19 billion, up 12.2% from RM653.32 billion registered at the end of 2017.

For comparison, total assets of the entire banking system grew 5% YoY to RM2.73 billion in May.

Though it may seem like the Islamic banking system’s assets only make up under a quarter of the total financial system’s assets, it’s worth noting there are only a handful of standalone Islamic financial institutions such as BIMB Holdings Bhd, MBSB Bank Bhd and Bank Muamalat Malaysia Bhd.

Bank Islam Malaysia Bhd, whose parent is BIMB Holdings, had assets of RM63.9 billion as at end-2018, while MBSB Bank had RM45.43 billion.

Bank Muamalat, which is not publicly listed, said in an official statement that its assets amounted to RM23.94 billion as at end-March last year.

By sector, Islamic financing to the household sector (which includes financing sold to Cagamas Bhd) was the highest in May at RM336.11 billion, up 12.2% from RM299.58 billion in May 2018.

This was followed by financing for insurance, finance and business activities, which fell 7.6% YoY to RM31.47 billion in May.

By purpose, Islamic financing for the purchase of residential property had the largest portion at RM165.92 billion in May 2019, 15.8% stronger versus RM143.28 billion in May last year.

The double-digit jump is not entirely surprising, considering the government kicked off its Home Ownership Campaign (HOC) 2019 aimed at clearing the severe property overhang in the country and getting more Malaysians to own homes.

The administration also recently announced it would be extending the HOC from its original end-date of June 2019 to December 2019, in response to requests from developers and buyers.

Financing for working capital purposes was the second-most popular during the month in focus, rising 4.6% YoY to RM129.66 billion.

This could be a result of reported increases in business confidence. The Nikkei Malaysia Purchasing Managers’ Index for May noted manufacturers reported the highest confidence about future output since October 2013, driven by planned new product launches and expansion.

Going forward, optimism in the construction sector has also risen following the revival of mega infrastructure projects such as the East Coast Rail Link and Bandar Malaysia.

On the topic of housing loans, however, non-performing or impaired loans (NPLs) for the purchase of residential property — at both commercial and Islamic banks — breached the RM6 billion mark for the first time in the first quarter of 2019 (1Q19), totalling RM6.03 billion — up 7.3% YoY from RM5.62 billion the year prior.

This also includes the NPLs of conventional banks, which typically would see a larger catchment than Islamic lenders.

Meanwhile, NPLs for working capital were the highest by purpose at commercial and Islamic banks, standing at RM6.99 billion in 1Q19, down 16.7% YoY from RM8.39 billion last year.

Impaired financing of the overall Islamic banking system stood at RM7.69 billion in May, 10.8% higher compared to RM6.94 billion in December 2018.

While the growth of impaired financing may seem worrying, one should recall the larger banking system posted a less than inspiring performance in the first half of 2019 on a softer economic climate, a cut in the Overnight Policy Rate, ongoing global trade tensions that continue to dampen business sentiment and the news that FTSE Russell may drop Malaysian bonds from its World Government Bond Index.

As most Islamic players operate under the parent conventional banks, one’s mind might be eased by Kenanga Investment Bank Bhd’s move to upgraded the local banking sector to ‘Outperform’, citing under valuation of the industry and expectations for bank earnings to improve going forward as impairment allowances reduce.