The report credited current low levels of Islamic financing penetration due to most governments having not yet actively seeking out the development of the sector, which resulted in low levels of public awareness of Islamic banking services and lack of incentives for banks to devote resources toward development.
It mentioned however, that economies within the ASEAN region, do have “ripe foundations” for the Islamic banking sector to grow, if government ever commits to it.
Moody’s vice-president and senior analyst Simon Chen emphasized the need, by stating: “ “However, translating these favourable conditions into actual growth requires government commitment to developing the Islamic banking sector.”
Chen noted that the authorities – especially those in Malaysia and Indonesia – are stepping up their regulatory efforts to pursue the expansion of Islamic banking services, driving growth in a region with a significant Muslim population.
Malaysia in itself aims to boost the share of Islamic banking assets in total to 40% by 2020, compared with 32% at end-August 2018. Indonesia on the other hand is seeking to increase its share to 15% by 2023, up from 6% at the end of July 2018.
In Muslim-majority ASEAN nations, strong population gains, especially in the prime-age group, will result in an “expansion of core customer bases”, while spurring domestic consumption and private sector demand for credit and banking services, stated the report.
Robust economic environments and banks’ “sound solvency and liquidity positions” will help conventional banking groups, which Moody’s said will continue to lead Islamic banking growth in the region as they have in Malaysia and Indonesia.
“Bank asset quality is also generally healthy and notably, non-performing loan (NPL) ratios for Islamic banks have been lower than for conventional banks in Malaysia, suggesting Islamic financing has not been a drag on the asset quality of banking groups,” the report said.
It highlighted, however, that Islamic banks in Malaysia have significantly smaller capital bases than conventional banks, despite accounting for a significant share in total banking assets.
The capital gap between Islamic banks and conventional lenders is also much wider in smaller Islamic banking markets in Asean, such as Indonesia, Moody’s said.