What could boost growth of the Malaysian Islamic banking sector?

The country has US$150b in Islamic financial assets.

BMI Research believes that the merger between Malaysia's RHB Bank and AMMB Holdings (AmBank) would enable Malaysia to continue building on its strengths as a leading Islamic finance centre and expand its product offerings across the region.

The country has substantial expertise in sukuk issuance and boasts US$150b in Islamic financial assets, which make up roughly 8.0% of the US$2t global Islamic finance market, and account for the lion's share of Islamic financial assets in Asia.

Furthermore, the Islamic banking industry has grown significantly since 2007, with total Islamic banking assets accounting for almost 30% of total banking assets in April 2017, compared with 7.8% in 2007.

Here's more from BMI Research:

We expect the Islamic banking sector to continue growing on the back of strong government support and increasing demand for Islamic banking services. The government continues to take steps to ensure Malaysia's primacy in the Islamic banking sphere in Southeast Asia, having implemented the Educator's Manual on Shariah Standard Murabahah by the country's central bank in tandem with the nation's universities.

The move is likely to provide a clearer framework for investors, and improve the accessibility of Islamic banking . Islamic banking loans have also started to recover from the lows of 7.5% y-o-y recorded in October 2016, expanding by 10.0% y-o-y in April 2017.

In addition, the size of the merged bank provides additional opportunities for the development of the regional Islamic financial market in ASEAN. Although financial integration under the AEC will be gradual, we continue to see opportunities for growth within the sizable commercial banking sector of the ASEAN region as a result of ongoing attempts to integrate and liberalise financial services as part of the AEC integration.

However, we also note that banks with scale will benefit disproportionately given their ability to provide a wider array of financial services at a lower cost.