Islamic banking in East Asia is slowly developing, but needs more action by regulators to establish legal and regulatory frameworks in order to emerge as a significant segment across the region, according to an analyst.
Aside from Malaysia, where the industry’s assets now account for 15.4 percent or about US$62 billion of the country’s banking system assets, its market penetration across the region has been somewhat patchy, said Christine Kuo, vice president and senior analyst of Moody’s Investors Service.
For instance, she said, while Islamic banking has achieved relatively high market penetration in Brunei and asset growth in Indonesia has been rapid (though off a low base), Islamic banking services available in the Philippines, Singapore and Thailand remained very small in terms of asset size.
« In Malaysia, there exists a natural business potential for Islamic banking services as approximately 60 percent of its population is Muslim, but it is government reforms during the past 20 to 30 years which have really helped develop the necessary legal and regulatory framework and institutions for the industry to flourish, » Kuo said in a report.
« The adoption of various incentives, including tax breaks, has also proven critical to nourishing the business, » she said. « In fact, the Malaysian experience over the last three decades demonstrates how instrumental regulators can and need to be in order to grow the Islamic banking sector, » she added.
This compares to Indonesia, where the industry’s market share is still less than two percent (about US$3 billion) despite rapid growth in recent years, Kuo said. « The low penetration in Moody’s opinion can largely be attributed to the slow pace of change to related regulations and institutions, although a few important changes seem to be gathering momentum, » she said. However, over the long term, Indonesia has huge potential as it is home to more than 200 million Muslims, the largest Muslim population in the world, Kuo said.
« The growing acceptance of Islamic banking even among non-Muslims, combined with announcements from Singapore, Tokyo and Hong Kong that they are to increase their participation in Islamic finance, have also underlined the industry’s potential, » she said.
However, as Islamic banks expand they will need to deal with the twin challenges of managing their rapid growth while competing against conventional banks, Kuo said. « The former includes addressing risk issues specific to Islamic financial institutions, such as concentration risk due to a limited scope of eligible asset classes, higher costs for managing liquidity and concentration of liabilities, » she said. « These can best be dealt with if the banks are not under undue pressure to grow assets too quickly, » she added.
At the same time, the average bank financial strength ratings (BFSRs) of Islamic banks in East Asia are likely to be lower than their conventional banking peers in the same country because of higher Syariah law-related compliance costs and lack of economies of scale, according to Kuo. « Nonetheless, the deposit and debt ratings of Islamic banks could be significantly higher than the levels indicated by their BFSRs, thanks to support from parents and regulators, » she said.
Source: Bernama – Kualal Lumpur (Malaysia)