It may take three to five years for Malaysia’s Islamic banks to improve their funding profiles.
That’s according to a report S&P Global Ratings published today, titled, “Your Three Minutes In Malaysia’s Islamic Banking: Funding Fix May Be A Five-Year Wait.”
“The funding profiles of Malaysia’s Islamic banks will likely stay weaker than that of the overall sector, reflecting structural weakness in attracting low-cost retail deposits,” said S&P Global Ratings credit analyst Nikita Anand.
“The funding costs of Islamic banks are highly sensitive to rate increases,” Ms. Anand said.
This is because of their lower share of low-cost demand and savings deposits and higher share of costlier wholesale deposits.
Profitability of Islamic banks could stay lower than the sector in 2024 as well. Elevated deposit rates are exacerbated by intense competition for pricing household loans and financing in Malaysia’s saturated banking sector. Islamic banks saw a sharper contraction in net financing margins in 2023. For standalone Islamic banks, funding risks may be higher.
“In our view, Islamic bank subsidiaries of large banking groups are better positioned to manage this risk as they can benefit from intra-group funding,” Ms. Anand said.
“Standalone Islamic banks are on a relatively weaker footing and may face a contraction in their market share.”
Management actions could gradually fix the problem. Banks continue to ramp up efforts on growing Islamic deposits through promotional rates, campaigns, better service, and ease of migration of low-cost demand and savings accounts from conventional to Islamic.
“The sector has also been gradually diversifying its funding sources; for example, by increasing funding from investment accounts,” Ms. Anand said.