Digitisation among drivers for growth in Islamic banking sector

The Islamic banking sectors in Malaysia and Indonesia are on track to meet the ambitious growth targets that have been set, said analysts from Moody's.

Digitisation and regulatory support have been cited as key factors driving growth in the sector. Backed by strong profitability, Islamic banks in Malaysia and Indonesia have plans to step up investment in digitisation. Analysts said that these efforts will lead the industry to expand further at a lower cost.

Digitisation generally helps banks reduce operating expenses by enabling them to streamline and automate internal processes and lowering costs to acquire and serve customers, said the analysts. It also helps Islamic banks to be able to overcome their small physical presence in boosting revenue.

While analysts noted that the emergence of fintech will intensify competition, it will also facilitate the expansion of Islamic banking, instead of stifling it, by driving banks to increase investment in digitisation and keep up with evolving consumer demand for financial services.

As regulators in both Malaysia and Indonesia are not only promoting growth, but also steering banks to tackle emerging environmental, social and corporate governance (ESG) related risks, analysts saw these actions to be credit positive.

Malaysia, which has led the Asean region in regulatory efforts to support Islamic banking, has introduced a framework to incorporate ESG values in Islamic banks' operations and risk governance. Analysts said that this will create new growth opportunities for banks that follow shariah principles.

In Indonesia, analysts pointed out that recent government initiatives to boost the country's halal economy and raise awareness of Islamic financial services will also help the Islamic banking sector expand.