Rapid asset growth partly drove Malaysian banks' record sukuk issuance: Moody's

Leading to significant funding and capital needs.

Moody's Investors Service has noted that the record MYR3.25 billion ($1 billion) of ringgit-denominated sukuk issued by Malaysian Islamic banks in the first half of 2014 is driven by rapid asset growth.

According to a release by Moody's, this has, in turn, led to significant funding and capital
needs.

Khalid Howladar, Moody's Global Head for Islamic Finance, said that they expect Malaysia's strong growth trends to continue, driven by strong demand from the predominantly Muslim population coupled with the government's comprehensive and coherent strategy to increase the proportion of Islamic financing to 40% of total domestic financing by 2020 from 24% at the end of May 2014.

Here's more from Moody's:

"As a result of rapid asset growth, Islamic Banks are expected to become an increasing contributor to sukuk volumes" adds Howladar.

"Islamic banking assets in Malaysia totaled MYR434 billion at the end of May 2014, representing 21% of total banking-system assets versus 16% at end-2009," says Simon Chen, a Moody's Assistant Vice President and Analyst.

"In addition, the 20% compound annual growth in Islamic financings since 2009 has steadily outpaced the 16% growth in Islamic deposits, creating a funding gap," adds Chen.

"And, when combined with the fact that over 95% of the banks' funding mix is composed of short-term deposit funding, the banks are in need of increasing amounts of stable long-term funding - sukuk issuances can provide such funding."

Moody's analysis is contained in its just-released report titled "Malaysian Islamic Banks: Asset Growth, Funding and Basel III Capital Needs Drive Increasing Sukuk Volumes," and is co-authored by Chen and Shaoyong Beh, an Associate Analyst.