SE Asia Islamic banking market set to see strong growth in next 3 years: S&P Global
Tan Nai Lun
THE Islamic banking market in South-east Asia is set to post a compound annual growth rate of 8 per cent over the next 3 years, said S&P Global Ratings.
In a report on Wednesday (May 11), the research team said there is potential for the sector’s long-term growth particularly in Malaysia and Indonesia, which together hold 96 per cent of the region’s Islamic banking assets.
The US$290 billion South-east Asia Islamic banking market currently forms 17 per cent of global Islamic banking assets, behind the 2 largest markets in the Gulf Cooperation Council and the Middle East.
In Malaysia, the sector likely sees support from a favourable policy environment, a vigorous and innovative industry landscape, as well as local banking groups' "Islamic first" business strategy.
The research team expects Malaysian Islamic banks will post a compound annual growth rate of 6 to 8 per cent over a period from 2022 to 2026, and account for close to 45 per cent of the overall commercial banking loan book by the end of the period.
Meanwhile, Indonesian Islamic banks can likely gain from ample growth opportunities and low penetration, and post credit growth of 12 to 14 per cent, driven by its consumer portfolio.
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S&P noted that while Islamic banks and business units account for just 7 per cent of total loans in Indonesia, market share is likely boosted by higher credit growth and as some conventional lenders convert into Sharia banks.
Additionally, the research team expects Islamic banks will catch up with top-tier conventional players as they accelerate their digital transformation amid the pandemic.
It also expects Malaysian regulators and local Islamic players will focus more on integrating environmental, social, and corporate governance (ESG) considerations into Sharia banking, and lead the way for ESG financing in the sector.
The research team warned, however, that the sector may be hit when current loan reliefs to cushion the impact of the pandemic are lifted, especially in Malaysia due to the sector’s retail-focused business profile and inflexibility to adjust interest rates for relief loans.
Malaysia’s Islamic banking sector may also see a slower rebound in loan growth in 2022 as the retail sector and small and medium enterprises may take longer to recover from the pandemic. Recovery from Covid-19 may also remain uneven across banks, with the progress of small lenders continuing to pale against those affiliated with large local banking groups.
As for Brunei, Islamic financial institutions – constituting about half of its total financial system assets – will likely mirror the performance of the broader banking system, with the bulk of the expansion likely from wholesale customers as the government looks to boost the economy and support local firms.
Meanwhile, S&P expects market share of Islamic banks in the Philippines will remain insignificant despite a regulatory push, as around 5 to 6 per cent of its population is Muslim and live in highly underbanked regions.
There is little interest from major commercial banks in serving the Islamic banking market likely due to the high cost of setting up branches in the region and higher credit risk due to the low-income profile of borrowers.
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