Local Islamic financing market still on growth path


Its expansion will continue to outpace conventional banking

PETALING JAYA: The domestic Islamic financing growth will continue to outpace the conventional banking loan growth, driven by the regulatory push to fortify domestic Islamic banking entities to enhance global competitiveness.

“To that end, we envisage Islamic financing growth to reach a four-year cumulative average growth rate (CAGR) of 12% from 2016 to 2020, as opposed to 2% for conventional banking loan growth.

“This is underpinned by the assumption that system loan growth stands at a four-year CAGR of 5% and the proportion of Islamic financing to the total system grows from 29% currently to 37% in 2020 (note that Bank Negara’s target is 40%),” said AllianceDBS Research in its latest report.

Seven out of the eight major banks in Malaysia have yet to reach Bank Negara’s targeted Islamic financing to total loan proportion of 40%. Hence, AllianceDBS believes there is still room for Islamic financing growth to continue outpacing conventional loan growth.

“However, we feel that an increase in financial inclusion would have to materialise for further boost in growth.

“Additionally, we view Islamic product offerings as complementary to the product suite of a bank, especially in Muslim-majority countries such as Malaysia,” it said.

The research house said banks without Islamic product offerings risk forfeiting the portion of the market with a natural bias towards Islamic products.

“Malaysian banks appear to be well aware of the said risk, as evidenced by the availability of Islamic product offerings across all banks,” it said.

Going forward, AllianceDBS reckoned that product innovation would be the game changer for the Islamic banking industry as currently, Islamic products largely mirror their conventional equivalents, rendering minimal product differentiation between the two models.

“However, since the implementation of Islamic Financial Services Act 2013, which encouraged a move towards a risk-sharing model (from risk-transfer model), we have seen some developments on the product innovation aspect.

“For example, a new guideline on distinguishing Islamic deposits and investment accounts was introduced in early 2013, with the aim of improving the alignment of the salient features of syariah contracts to its legal recognition,” it said.

Consequently, AllianceDBS said Islamic banks now offered investment accounts as an additional alternative on top of the typical current account, savings account and term deposit products.

Nevertheless, it said in the case of investment accounts, despite higher returns to compensate for the higher risk assigned, differences such as the absence of principal guarantee, loss of insurance deposit coverage and the additional disclosure requirements and terminologies pose a risk of a customer exodus back to more familiar conventional products.

“In our view, it is crucial for Islamic banks to take this risk in order to enable differentiation from banks operating under the conventional model.

“Hence, the ability of Islamic banks in executing this is the critical success factor of the industry,” it said.

In terms of players, AllianceDBS said BIMB Holdings Bhd is the main Islamic banking proxy in Malaysia.

“We like BIMB, which is the holding company of Bank Islam, for its deep-rooted expertise in the industry, which we believe forms a strong competitive advantage as it positions them as a likely leader in product innovation.

“Maybank Islamic complements the Islamic banking scene for its size and established regional presence which will work to its advantage in competing on the global front,” it said.

AllianceDBS also pointed out that a new wave of merger and acquisition (M&A) activities in the Islamic banking space is plausible although the timing remains the key risk.

“Potential M&A candidates include Malaysia Building Society Bhd, whose appeal lies in its lucrative personal financing business and sizeable Islamic banking asset, and unlisted Bank Muamalat,” it said.

AllianceDBS said Bursa Malaysia is an indirect proxy as transactions on its commodity trading platform are expected to increase in conjunction with Islamic financing growth.

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