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Islamic banking faces growth challenge in Asean, but regulatory efforts can spur its development: Moody's

ECONOMIES within the Association of Southeast Asian Nations (Asean) have "ripe foundations" for the Islamic banking sector to grow, but government commitment is needed for it to really take off.

Within Asean, populations are growing fast and economic environments are robust. With solid fundamentals, banks are also capable of pursuing the expansion of Syariah-compliant services, said Moody's vice-president and senior analyst Simon Chen.

"However, translating these favourable conditions into actual growth requires government commitment to developing the Islamic banking sector," he said.

In the bloc, current levels of Islamic financing penetration are generally low because most governments have not yet actively sought to develop the sector, resulting in low levels of public awareness of Islamic banking services and a lack of incentive for banks to devote resources to develop them, Moody's wrote in a report titled Islamic Banking - Asean: Regulatory push will drive sector growth, building on sound foundation.

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Mr Chen noted that the authorities - especially those in Malaysia and Indonesia - are stepping up their regulatory efforts to pursue the expansion of Islamic banking services, driving growth in a region with a significant Muslim population.

Malaysia aims to boost the share of Islamic banking assets in total banking assets to 40 per cent by 2020, compared with 32 per cent at end-August 2018, while Indonesia is seeking to increase its share to 15 per cent by 2023, from 6 per cent at the end of July 2018.

In Muslim-majority Asean nations, strong population gains, especially in the prime-age group, will result in an "expansion of core customer bases", while spurring domestic consumption and private sector demand for credit and banking services, Moody's report said.

Robust economic environments and banks' "sound solvency and liquidity positions" will help conventional banking groups, which Moody's said will continue to lead Islamic banking growth in the region as they have in Malaysia and Indonesia.

"Bank asset quality is also generally healthy and notably, non-performing loan (NPL) ratios for Islamic banks have been lower than for conventional banks in Malaysia, suggesting Islamic financing has not been a drag on the asset quality of banking groups," the report said.

It highlighted, however, that Islamic banks in Malaysia have significantly smaller capital bases than conventional banks, despite accounting for a significant share in total banking assets.

The capital gap between Islamic banks and conventional lenders is also much wider in smaller Islamic banking markets in Asean, such as Indonesia, Moody's said.