Moody's: Islamic banks' retail finance focus helps weather pandemic

Bank Islam headquarters. Moody’s pointed out Islamic banks' regulatory capital remains well above minimum requirements.

KUALA LUMPUR: Islamic banks in Gulf Cooperation Council (GCC) countries and South and Southeast Asia’s focus on low-risk retail finance, which will help protect their asset quality.

Moody's Investors Service said on Monday this was amid an uneven economic recovery across these regions.

Badis Shubailat, an analyst at Moody's, said regulatory forbearance has masked the deterioration in the banks' loan books, and high provisioning costs will continue to weigh on profitability, “but their capital and liquidity buffers should comfortably absorb unexpected losses".

“Consolidation within fragmented Islamic banking markets presents opportunities."

The report showed return on assets will remain on average below pre-pandemic levels this year because of low interest rates, a still-subdued operating environment, and high provisioning costs.

However, strong demand for Islamic finance, which is growing faster than conventional banking, will partially offset these strains.

Moody’s pointed out Islamic banks' regulatory capital remains well above minimum requirements.

“Their liquidity is also strong, reflecting deposit growth as customers cut spending amid economic uncertainty. Central banks in most countries have relaxed reserve requirements and continue to provide banks with liquidity support,” it said.

Moody’s said the main Islamic banking markets have consolidated in recent years as the sector seeks to improve revenue generation and cut costs.

“We expect more Islamic banks to pursue mergers, particularly smaller players crowded out by large competitors. In the GCC region, Islamic banks have in some cases merged with conventional peers.

“In Indonesia, the government merged its state-owned Islamic banks in 2020 to help them compete with larger conventional banks,” it said.

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