KUALA LUMPUR: Large Islamic banks in Malaysia might encouunter challenges in sustaining their high growth rates if their retail deposit growth does not keep pace, according to S&P Global Ratings.

In a report titled "Asia-Pacific is ripe for Islamic banking development," credit analyst Nikita Anand said to address this, banks might need to diversify into alternative funding sources such as investment accounts or rely on wholesale deposits, albeit at a higher cost.

"The launch of new Islamic banks in Malaysia and other Asia-Pacific markets this year could improve access to financial services for underserved regions and segments, such as small businesses," she said.

Anand noted that Islamic banks in Asia-Pacific should expect consistent growth and generally stable asset quality in the upcoming years.

She said that the agency also projects favourable financing growth for Islamic banks in the Asia-Pacific region in the near term.

Anand attributed this positive outlook to the stable economic conditions prevailing in Malaysia and Indonesia, the primary Islamic banking markets in the region.

She noted Malaysia's expected retention of its position as the largest Islamic banking market in the Asia-Pacific, boasting about two-thirds of the sector's total assets, valued at around US$400 billion (RM1.9 trillion).

On growth prospects, Anand identified Indonesia as a potential hotspot due to its significant untapped market potential.

While acknowledging Bangladesh's potential, she noted that liquidity shortages and weak external demand could impede financing growth in the next one to two years.

Anand also pointed out downside risks for Asia-Pacific Islamic banks, including prolonged higher interest rates and escalating geopolitical tensions.

She emphasised that small businesses and low-income households are particularly vulnerable to sustained increases in living costs and interest rates, which could lead to a decline in financing demand and asset quality.

"In such a scenario, we would expect both financing demand and asset quality to falter. Banks' ample capital and provisions provide a buffer against rising stress," she said.

https://www.nst.com.my/business/corporate/2024/05/1048274/local-islamic-banks-may-need-diversify-maintain-growth-says-sp