KUALA LUMPUR: Islamic banks in Malaysia are able to outperform their Indonesian counterparts in terms of asset growth and growth stability, says Moody's Investors Service.
"The outperformance of Malaysian Islamic banks reflects to a large part the Malaysian banks' more established franchises, deeper market penetration, and long-standing regulatory support," says its senior analyst Simon Chen.
Banks in both the neighbouring countries are recording slower growth in Islamic financing, reflecting the broader slowdown in their respective economies.
The lowdown in Indonesia is far more pronounced, with growth in the Islamic financing sector slowing sharply to below 10 per cent year-on-year in 2014 and 2015 from in excess of 50 per cent in 2011.
"By contrast, growth in the same sector for Malaysian banks during 2014 and 2015 registered well in excess of growth rates for conventional loans."
The Islamic banking sector accounts for 27 per cent of the total banking system assets versus 5 per cent in Indonesia.
There is also a more diversified portfolio mix in Malaysia.
In a report entitled "Islamic Banking - Indonesia and Malaysia: Market Depth and Regulatory Support Underpin Malaysian Islamic Banks' Resilience in Current Down
Cycle," Moody's said the asset growth and asset quality of Islamic banks in both countries will diverge further.
The non-performing financing (NPF) ratio on the Islamic assets of Malaysian banks are falling below their conventional loans unlike the case of Indonesian banks where the ratio has far surpassed the non-performing loan ratio of their conventional loans.
"The superior performance of Malaysian banks in terms of their Islamic banking portfolios reflects their greater success—when compared with other Islamic jurisdictions—in integrating this financing channel into their core franchises and establishing themselves as mainstream institutions both for retail and corporate customers.
"This situation reflects in turn Malaysia's pioneering role in establishing comprehensive legal, tax and regulatory frameworks to facilitate Islamic finance,"added Chen.