KUALA LUMPUR: Malaysian Islamic banks are relatively well positioned to withstand the economic fallout from the Middle East conflict, although higher funding costs and tight liquidity remain key risks, Moody’s Ratings said.
In a sector report, Moody’s said Islamic banks in Malaysia, Indonesia, Bangladesh and Pakistan are generally more exposed to second-order effects from the conflict than conventional banks because of their greater exposure to retail and small and medium-sized enterprise borrowers, as well as the interest-rate sensitivity of their balance sheets.
“Malaysia is better positioned than other South and Southeast Asian economies because despite being a net oil importer, it is a net energy exporter due to liquefied natural gas (LNG),” Moody’s said.
“We also do not expect significant oil supply disruption because of diversification in sourcing and onshore refining capacity. While fuel subsidies help contain inflation pass-through to households, inflation has edged higher and the economy is not fully insulated from higher food, transport and input costs.
“Robust domestic demand will partly offset these pressures and support the central bank’s steady monetary policy stance,” it added.
Islamic banks in Bangladesh, Indonesia and Malaysia rely more on time deposits than lower-cost current and savings account deposits.
Moody’s said Islamic time deposits accounted for 61% of Malaysian Islamic banks’ total deposits at end-2025, while Tawarruq financing made up 65% of total Islamic financing.
It noted that shorter deposit tenors and Malaysia’s ceiling-rate and Ibra, or rebate, framework provide banks with greater flexibility to reprice funding and financing as rates change.
Liquidity remains tighter than at conventional banks, with Islamic banks recording a financing-to-deposit ratio of 113% at end-2025 compared with 92% for conventional banks.
However, Moody’s expects liquidity pressure to ease as financing growth moderates, while investment accounts provide an additional funding source.
Capital buffers remain broadly adequate and comparable with conventional peers.
Regionally, Moody’s said Bangladesh and Pakistan are the most exposed to the spillover effects of the Middle East conflict, while Indonesia faces higher funding and asset-quality risks from elevated rates and weaker investor confidence.
