Retail financing to anchor Malaysian Islamic banks amidst downturn

Financial growth will drop but will remain higher due to Islamic banking expansion.

A heavy focus on retail financing will prop up Malaysian Islamic banks’ asset quality, says a Moody’s Investors Service report, as it is less vulnerable to an economic slowdown.

Malaysian banks in general also have a stringent underwriting process for retail financing brought about by regulatory guidelines for “responsible” financing.

Islamic lenders will experience limited impairment losses as their asset quality holds up, the report said. Financial growth will drop but remain higher than conventional banks due to efforts to expand Islamic banking and rising acceptance from customers.

A downturn in capital consumption offsets profit decay, which will allow Islamic banks to keep their capitalisation at current levels in the next 12 to 18 months. For provision coverage, the local accounting board has temporarily eased requirements to cushion the effect of the pandemic, but banks are still likely to allot enough provisions of their own.

Funding and liquidity will be stable, underpinned by retail deposit growth amidst weak financing demand. Retail current account savings account (CASA) deposits will spur overall deposit growth as consumers save funds, whilst financing demand will remain weak.

Deposits at Islamic banks will still grow faster than conventional deposits due to the popularity of Sharia-compliant financial products and the Islamic drive by financial groups. Islamic banks will still have higher financing-to-deposit ratios than their conventional peers, but continued support from the government and their parents will mitigate funding risks, the report concluded.