Relief packages to mitigate Covid-19 impact to Islamic finance

KUALA LUMPUR: Relief packages introduced by banks and the government are set to help soften the Covid-19’s near-term effects to the Islamic banking, according to Fitch Ratings.

The credit rating agency in its latest report, “Malaysia Islamic Banks Dashboard 2020” said, the Covid-19 outbreak poses some downside risk to growth and asset quality of the banking sector, including those of Islamic banks.

“Islamic banks’ credit profiles should remain broadly steady, with adequate loss-absorption buffers to withstand near-term challenges, though we see risks to asset quality and profitability should the Covid-19 outbreak be prolonged,” it said.

It expects the impact on the Islamic banks’ asset quality to be similar to the conventional banks, given a comparable financing mix. 

Fitch Ratings said the share of Islamic financing to total system loans is supported by the regulatory backdrop that provides a level playing field and banks that continue to promote Islamic products.

Hence, it expects Islamic financing to grow faster than conventional loans in the medium term but still likely to fall short of Bank Negara Malaysia’s (BNM) 40 per cent market share of the total banking assets target for 2020.

The Association of Islamic Banking and Financial Institutions Malaysia estimated half of the banking system’s assets to be Islamic by 2030.

By the end of 2019, Islamic financing has increased to 35 per cent compared to 27 per cent in 2015.

Meanwhile, the financing/deposit ratio, which includes investment accounts, was stable at 94 per cent at end-2019.

Malaysia also hosts the world’s largest sukuk market, with a 39 per cent share of global outstanding sukuk.

The nation comprises around 11 per cent of global Islamic bank assets.

“Malaysia is a leader among other Islamic finance hubs for fintech regulatory developments and digitalisation,” Fitch Ratings added. – Bernama