Photo by CK Yeo via Unsplash.

APAC Islamic banks continue upward trajectory with lift from new players

The launch of new Islamic players will improve access to financial services, says S&P.

Islamic banks in the Asia Pacific will enjoy steady expansion and a broadly stable asset quality, with Malaysia retaining the top spot, reports S&P Global Ratings.

Financing growth remains favorable for Islamic banks in the region, noted S&P credit analyst Nikita Anand. This is thanks to “stable economic conditions” in core Islamic banking markets of Malaysia and Indonesia. 

"The launch of new Islamic banks in Malaysia and other Asia-Pacific markets this year could improve access to financial services for underserved regions and segments, such as small businesses," Anand added.

Malaysia is expected to remain the biggest Islamic banking market in the region, accounting for two thirds of the sector’s total assets of about $400b, S&P said.

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It’s not all rosy on the horizon, however. Some large Islamic banks in Malaysia could find it difficult to maintain their overall high growth if their retail deposit growth doesn't keep pace, Anand warned. 

Banks are advised to diversify into other funding sources such as investment accounts or rely on wholesale deposits, which are generally more expensive, she added.

Indonesia, meanwhile, is likely to be a growth hotspot given its untapped potential, S&P said.

Apart from these two markets, Bangladesh is also named as having potential. However, a liquidity shortage and weak external demand will weigh on financing growth over the next one to two years, S&P warned.

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"Risks for Asia-Pacific Islamic banks are tilted toward the downside, due to higher-for-longer rates and rising geopolitical tensions," said Anand.

“Small businesses and low-income households are vulnerable to sustained higher costs of living and rates. In such a scenario, we would expect both financing demand and asset quality to falter. Banks' ample capital and provisions provide a buffer against rising stress,” she said.

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