Photo by Thilipen Rave Kumar.

Southeast Asia’s $290b Islamic bank market poised for growth: S&P

 In Malaysia, Islamic banks may account as much as 45% of the commercial loan book.

Southeast Asia’s US$290b Islamic banking market is expected to grow at a compound annual growth rate of about 8% through 2026, with Malaysia and Indonesia to hard-carry the sector, according to a report by S&P Global Ratings.
"In the major markets of Malaysia and Indonesia, we believe Islamic banks will grow faster than conventional banks, riding on the robust demand," said S&P Global Ratings credit analyst Nikita Anand, in the report  "Growing Belief In Southeast Asia's US$290 Billion Islamic Banking Market."
Southeast Asia is the world's third-largest Islamic banking market, making up over 17% of the US$1.7t in global Islamic banking assets.
In Malaysia, local Islamic banks could account for about 45% of the overall commercial banking loan book by the end of 2026, S&P finds.
“On the environmental, social, and governance (ESG) front, we believe top-tier Malaysian Islamic banks will benefit from the issuance of international sustainability sukuk,” S&P wrote.
Such benchmark issuances will widen the investor base and facilitate broader awareness of Islamic finance and its intrinsic ESG connection in the international debt capital markets, according to S&P Global Ratings credit analyst Rujun Duan.
In Indonesia, the sector's market share could improve to about 10% by the end of the same year.
Islamic banks in both Malaysia and Indonesia are notedly making greater efforts at digital transformation to narrow the wide technology gap with conventional peers, S&P said.
Islamic banks in other SEA countries could also look forward to robust growth. In Brunei, Islamic financial institutions constitute about half of the total financial system assets, and growth should mirror that of the broader banking system. 
In the Philippines, the sector is small but there is an untapped market, according to S&P. Regulators are reportedly striving to increase transparency in a bid to encourage local and foreign investment.
This trajectory will face inevitable hurdles, however. 
“The region's recovery from COVID-19 has been uneven. Pandemic-related loan relief has distorted the true health of asset quality. Meanwhile, geopolitical shockwaves have pushed up energy and commodity prices, which could affect domestic demand,” S&P warned.

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