KUALA LUMPUR: Malaysia's Islamic financing growth is likely to moderate in 2023 as higher financing rates sap demand, but Fitch Ratings expects growth to continue to outperform that of conventional banks.
The rating agency said this was due to the country's supportive regulatory environment and Islamic finance ecosystem as well as the shift towards Shariah-compliant services.
Fitch said a strong economic rebound had pushed Islamic financing growth to a five-year high of 13 per cent in 2022, driven by a sustained pick up in working-capital loans and resilient household sector.
This increased the share of Islamic financing to 41 per cent of total banking system loans at end-2022, from about 38 per cent at end-2021, further cementing Malaysia as the world's third-largest Islamic banking market.
"Malaysia also has an established and world-leading sukuk market, with sukuk making up about 64 per cent of local outstanding issuance as at end-November 2022," it said.
Fitch said the higher-rate environment and a moderation in economic growth, nevertheless, was likely to temper momentum and weigh on Islamic banks' financing quality in 2023.
"Notwithstanding this, we expect any asset-quality deterioration to be manageable, given adequate provisioning levels and a still-expanding economy, with gross domestic product (GDP) forecast to expand by 3.5 per cent during the year.
"Islamic banks' capital levels remain healthy, as indicated by a system common equity Tier 1 ratio of 14.2 per cent as at end-2022. Funding conditions may further ease this year, with the Malaysian central bank levelling off on monetary tightening and as financing growth moderates," it added.