Islamic banks to account for 25% of Malaysian banking sector by 2017, says RAM

KUALA LUMPUR: RAM Ratings said the Malaysian Islamic banking industry’s assets have almost doubled in the last five years, expanding to RM423bil as at end-February 2014 and accounting for 21% of the banking system’s assets.

In a report on Wednesday, RAM said gross financing continued to outpace deposits last year.

“Financing for the purchase of vehicles constituted the largest portion (23%), trailed by housing (22%) and working capital (22%). The Islamic banking system’s financing-to-deposits ratio rose to 82% as at end-February 2014, which may signal greater competition for Islamic deposits in the future,” it said.

In terms of asset quality, RAM said the the Islamic banking system’s gross impaired-financing (GIF) ratio stood low at 1.4% as at end-February 2014.

“Given the phenomenal growth experienced by Islamic banks over the last few years, there may be some uptick in the GIF ratio as these financing portfolios become seasoned.

“That said, the risk-management frameworks of financial institutions in Malaysia have come a long way since the Asian financial crisis; we believe asset quality indicators will remain resilient,” it said.

RAM noted Islamic banks in Malaysia are well capitalised, with common-equity tier-1, tier-1 and total capital ratios of 12.5%, 12.5% and 14.7%, respectively, as at end-February 2014.

In February, AmIslamic Bank Berhad became the first Islamic bank in Malaysia to debut a Basel III-compliant facility, i.e. its Proposed RM3bil Subordinated Sukuk Murabahah Programme.

This is followed closely by Maybank Islamic Berhad’s Proposed Subordinated Sukuk Murabahah Programme of up to RM10bil and RHB Islamic Bank Berhad’s Proposed Subordinated Sukuk Murabahah Programme of up to RM1bil.

“These capital securities carry a loss-absorption feature linked to a non-viability event as Malaysia had transitioned to the Basel III capital framework on Jan 1, 2013.

“These Basel III-compliant papers have been well-received and reflect investors’ confidence in Malaysian banks overall,” it said.

RAM said the gradual derecognition of Basel II securities as qualifying capital, besides being an alternative source of long-term funding, will support the issuance of Basel III-compliant capital instruments for Islamic banks in Malaysia.