Malaysia’s Islamic banking sector continues to expand despite pandemic

Kuala Lumpur

Malaysia’s Islamic banking sector continued to expand amid economic challenges from the coronavirus pandemic, says Fitch Ratings.

The share of Islamic financing in the banking system reached 37% by end-2020 (end-2019: 35%), with Islamic financing contributing nearly all of the banking sector’s growth in 2020, driven by household financing and banks that promoted Islamic products as part of the “Islamic First” strategy.

In 2021, Fitch expects the Islamic banking sector’s credit profile to remain stable with adequate loss-absorption buffers, despite near-term pressure on asset quality and profitability.

We expect credit impairments to accelerate and credit provisions to remain high, following a moratorium and other loan repayment relief provided to vulnerable borrowers, which have masked banks’ underlying asset quality from 2020.

In the medium term, penetration of Islamic finance is likely to continue to rise due to an economic recovery (2021F GDP growth: 6.7%), a supportive regulatory environment, and banks that continue to promote Islamic products.

Unique features of Malaysia’s Islamic banking industry include risk-sharing investment accounts (mudaraba and musharaka) which, among other areas, are not guaranteed under the deposit insurance scheme (DIS). —Agencies

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