ISLAMIC BANKING | Staff Reporter, Malaysia

Sharia-compliant investment accounts at Malaysian banks hit US$16.7b in February

Growth will remain strong over the next 3-5 years.

An emerging trend among Malaysian banks is the strong growth of Sharia-compliant investment accounts, report Moody's.

This began in July 2015 following the implementation of the Islamic Financial Services Act 2013, and has since taken off. Sharia-compliant investment accounts (“investment accounts”) are defined in the Act as accounts under which money is paid and accepted for investment in accordance with Sharia principles and on terms that state there is no express or implied obligation to repay the money in full.

By February 2017, investment accounts had grown to MYR74.2 billion (US$16.7b), or 13% of total Islamic banking system liabilities.

Here's more from Moody's:

We expect growth in investment accounts in Malaysia to remain strong over the next 3-5 years as a result of the active promotion by the regulator and banks. Malaysian banks have strong incentives to promote investment account growth because it provides capital benefits and an additional source of funding to grow their assets.

Concerns over untested loss-sharing mechanisms in investment accounts. Banks could suffer deterioration in their credit profiles if the loss-sharing mechanism in these investment account products turn out to be less robust than currently assumed. At the present development stage of Malaysia’s investment accounts, a key issue is whether, and to what extent, the loss-sharing mechanism between banks and investors will be honored in case of actual losses.

Similar products in other regions have led banks to bear the entirety of the asset risks. Our concern is underpinned by our observation that Islamic banks in other Islamic jurisdictions, notably some Gulf Cooperation Council (GCC) countries, in practice do not exercise the contractual loss-absorbing nature of investment accounts, and as a result, bear much, or all, of asset risk on behalf of investment account holders. This is perhaps because of customer expectations and out of fear of reputational damage.

Safeguards are present to protect banks. A mitigating feature for Malaysia is that regulators have put in safeguards to protect banks. In Malaysia, the regulatory framework
(1) identifies and differentiates the risk profile of investment accounts from traditional principal-guaranteed deposits; (2) emphasizes the disclosure of the risk-sharing mechanism in investment account products to investors; and (3) obliges the investment account holders to share risks with the banks.

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