by ASILA JALIL / pic by TMR FILE
ISLAMIC banking is expected to remain resilient in 2022 and record growth in financing on the back of an improved economic environment and substantial public demand for Islamic products.
Fitch Ratings associate director for banks Priscilla Tjitra and Global head of Islamic Finance Bashar Al Natoor stated the sector’s growth will pick up modestly in 2022 as the economic recovery accelerates and asset quality becomes clearer after Covid-19 pandemic relief is unwound.
“Adequate loss-absorption buffers supported by further profitability recovery should keep Islamic banks’ credit profiles stable.
“Substantial public demand for Islamic products and longstanding government and regulatory support will also continue to support the sector in 2022,” they said in a note yesterday.
Financing in Islamic banking continued to underpin the local banking sector’s growth in 2021 and saw expansion at a faster pace than conventional loans at 8.3% versus 2.3%.
Growth in financing was driven primarily by mortgages and other household financing, while demand for working-capital financing across sectors have shown improvement in light of the reopening of the economy which is a trend that the firm expects to continue throughout the year.
Islamic banks’ share of sector financing rose by about one percentage point in 2021. “We estimated its share of assets to reach around 35% when development financial institutions are included, bringing it closer to the Association of Islamic Banking and Financial Institutions’ aim of 50% by 2030,” they said.
They added that household borrowers have been the primary beneficiaries of moratoriums and other financing relief offered by banks during the pandemic.
Islamic banks’ higher household sector exposure explains the lower non-performing financing (NFP) ratio they reported which was at 1.2% compared to that of conventional banks at 1.6%.
“We believe NPFs are likely to rise in 2022 as relief programmes rollback, but a spike is unlikely as we expect varying forms of targeted relief to continue.”
Rising NPFs are likely to keep credit costs high in 2022 for the Islamic banking sector but a year-on-year decline in impairment charges is expected to support earnings recovery and buttress near-term capital levels.
They noted that Bank Negara Malaysia’s Financial Sector Blueprint 2022-2026 had stated its aim for wider adoption of sustainable financing, which is also referred to as value-based intermediation (VBI) financing in Malaysia.
Islamic banks are known to have led this space, with VBI-aligned financing accounting for 26% of Islamic financing approved throughout 2017 up until 2020.
“We expect the proportion to increase in line with growing public attention on VBI. The blueprint also highlights Malaysia’s aim to enhance its position as a global Islamic hub.
“The nation continues to be the home of the world’s largest outstanding sukuk market, and Asean’s largest Islamic banking, Islamic fund and takaful markets. Sukuk issuance in Malaysia recovered modestly in 2021, propelled mainly by corporate sukuk issuance,” they said.