KUALA LUMPUR: Malaysia's Islamic financing will account for nearly half of the banking sector’s total financing by 2030 versus 42 per cent as of the end of 2024, S&P Global Ratings said.
In its report "Asia-Pacific Islamic Banking Outlook 2026: Rebound Masks Regional Divergence”, the ratings agency said this is due to steady growth, supported by a comprehensive regulatory framework, a deep local sukuk market, and strong retail acceptance.
"Consumers and small businesses will continue to drive financing growth, in line with growth trends at the country's conventional banks," S&P Global Ratings said.
It added that the growth in Islamic financing remains primarily driven by domestic operations, with overseas business gaining traction in some markets.
"Keen competition in Malaysia's mature market has prompted some of the largest Islamic banks to examine overseas growth opportunities in Southeast Asia, including Islamic wealth management.
"Malayan Banking Bhd
, which owns the largest Islamic bank in Malaysia, has started operations in the Philippines through an Islamic window," it said.
The ratings agency expects financing growth for Asia-Pacific’s Islamic banks to edge up toward the higher end of its forecast range of 8-10 per cent over the next three years after a 2025 slowdown.
Total assets are likely to surpass US$550 billion by end-2028 against US$430 billion at end-2024, constituting about 20 per cent of the global Islamic banking market.
Additionally, Malaysian Islamic banks continue to play a key role in advancing inclusive financing, in line with the central bank's value-based intermediation (VBI) principles, the ratings agency said.
It said Malaysia and Brunei’s Islamic banks will maintain superior asset quality, with both countries’ non-performing financing ratios projected to remain below 2.0 per cent, reflecting lower economic risks and higher wealth per capita.
"In Malaysia, asset quality is supported by banks' prudent underwriting, diversified portfolio and conservative provisioning. Banks' stage 2 financing, a measure of potential rise in risk, is manageable at about 7.0 per cent as of end-September 2025 and has stayed broadly stable over the last two years," it said.
On financing‑to‑deposit ratios (FDR), the ratings agency said FDR in Malaysia is already elevated because of structural features in banking systems, such as higher reliance on costly wholesale deposits.
"We project that over the next two years, banks will prioritise retail deposit growth by enhancing digital capabilities to attract younger customers and by diversifying funding sources," it said.
In a separate report, "Sukuk Market: Strong Growth to Continue”, the ratings agency said global sukuk issuance rose by 12.7 per cent in 2025 to US$264.8 billion versus US$234.9 billion a year ago, driven by solid economic growth in core Islamic finance countries, high financing needs and supportive financing conditions due to globally declining interest rates.
Malaysia, Saudi Arabia, Türkiye, the United Arab Emirates (UAE) and Bahrain underpinned this strong performance.
Malaysia was the largest contributor to issuance growth last year. The government and local corporations increased ringgit issuance - leveraging its broad and deep local capital market - and foreign currency issuance from the International Islamic Liquidity Management (IILM) Corporation.
Meanwhile, total sustainable sukuk issuance rose 38 per cent to US$21.5 billion in 2025 against US$15.6 billion a year ago, Refinitiv Workspace data said.
"Banks, including the Islamic Development Bank, accounted for nearly 50 per cent of this increase, followed by some Gulf Cooperation Council countries and Malaysian corporates.
"Saudi Arabian issuers led sustainable sukuk issuance in 2025, representing over 40 per cent, followed by the UAE and Malaysia," it noted. - Bernama
