KUALA LUMPUR: S&P Global Ratings has forecast Malaysian Islamic banks to grow at a compound annual growth rate of 6% to 8% from 2022 to 2026.
The local Islamic banks could account for close to 45% of the overall commercial banking loan book by the end of 2026, up from 37.5% in January 2022, S&P said in its report en titled Growing belief in South-East Asia’s US$290bil (RM1.27 trillion) Islamic banking market published yesterday.
“The sector’s potential for long-term growth is promising, and the country’s Islamic banks, in particular, are likely to benefit from the issuance of international sustainable sukuk.
“That said, short-term headwinds may hinder the recovery in loan growth, because of Islamic banks’ retail and small and medium enterprise (SME)-focused portfolios, which will recover gradually from the pandemic following the economic trends,” the report said
Like their conventional peers, the portfolio of Islamic banks is tilted more toward mass consumer banking and SMEs and less toward large corporates, which fulfil a large part of their financing needs through capital market borrowings, according to the rating agency.
“This skew could mean a slower rebound of loan growth in 2022 and a need to maintain elevated credit costs for longer,” it said.
On gross non-performing loans (NPLs), Malaysia’s Islamic banking sector could see its ratio increase by 100 basis points in the next 12 to 24 months – up from 1.3% as of February – once the various moratorium and relief programmes expire in mid-2022, said S&P.
Meanwhile, on environmental, social and governance (ESG), the rating agency expected Malaysian regulators and local Islamic finance players to focus more on integrating ESG considerations into syariah banking.
“Steps taken by regulatory bodies have facilitated higher lending to priority sectors and issuance of green and sustainability bonds in the domestic market,” it noted. — Bernama