KUALA LUMPUR: Despite RAM Rating Services Bhd (RAM Ratings) maintaining a stable outlook on Malaysian Islamic banking sector, it expects the spread of Covid-19 pandemic to dampen credit demand and affect the performance of Islamic banks this year due to heightened uncertainies in the economic landscape.
The rating agency has maintained a stable outlook on Malaysian Islamic banking sector due to the industry’s robust fundamentals.
However, RAM Ratings co-head of financial institutional ratings Sophia Lee expected the financing growth of islamic banks to fall below 5% in 2020 from 8.3% in 2019.
Meanwhile, the rating agency noted that the asset quality indicators for the Islamic banks may weaken after financial relief measures initiated by Bank Negara end in six months.
Although Islamic bank’s asset quality remains healthy, RAM’s co-head of financial institution ratings Wong Yin Ching said defaultss and provisioning needs may rise next year if borrowers’ weaknesses stretch beyond the six-month moratorium.
“The reported asset quality indicators of Islamic banks should stay manageable in 2020, chiefly supported by the recent financial relief measures in response to the outbreak. That said, these indicators may not be reflective of the actual credit quality of the Islamic banking system, ” he pointed out. Islamic banks’ asset quality remains healthy although its gross impaired financing ratio edged up to 1.4% as at end-2019 from 1.3% in 2018 due to a couple of lumpy corporate accounts.
To mitigate the impact of Covid-19, the government has granted Malaysian banks moratorium on all financing repayments except credit card balances by individuals and SMEs for six months, with effect from 1 April 2020, benefitting around 70% of the Islamic banking industry’s total financing.
Meanwhile, RAM Ratings pointed out that liquidity of Islamic banks is still comfortable as the industry’s liquidity coverage ratio stands at 151% as at end-January 2020.
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