Islamic Financing To Maintain 8.0 Pct Growth In 2025 – RAM Ratings

KUALA LUMPUR, March 26 (Bernama) -- RAM Rating Services Bhd (RAM Ratings) expects Islamic financing to expand at a steady eight per cent growth rate in 2025 despite global challenges and uncertainties.

The credit rating agency said Islamic financing made up a sizeable 43 per cent of banking system loans as at end-2024, compared with 42 per cent in 2023.

Its co-head of financial institution ratings, Wong Yin Ching, said the influence and importance of the Islamic banking industry will remain in view of the ‘Islamic First’ policy adopted by major banking players and regulatory support.

In a statement today, RAM Ratings said the Islamic industry deposit growth, despite increasing to 5.9 per cent in 2024 from 5.2 per cent the previous year, still lagged credit expansion.

“Islamic term deposits were still the primary driver of deposit growth, accelerating by 7.4 per cent compared to 4.4 per cent in 2023: 4.4 per cent. Current and savings account (CASA) deposits grew at a slower 8.5 per cent from 10.0 per cent in 2023,” it said.

Meanwhile, customer investment accounts (IAs) expanded by 17.5 per cent in 2024, almost doubling from the 9.4 per cent growth in 2023.

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RAM Ratings said IAs for eight per cent of the Islamic banking industry’s total funding as at end-2024 compared to seven per cent in the previous corresponding period.

"IAs continue to be an attractive funding source for some banks because they provide capital relief as assets funded by IAs do not attract any capital charge," it said.

RAM Ratings said that most Islamic banks reported improved margins in 2024, in contrast to the wider banking sector, mainly attributable to a higher financing to deposit ratio, reduced deposit competition, disciplined pricing strategies and targeted efforts to increase CASA deposits.

It said the Islamic banking industry’s net financing margin was up at an annualised 1.93 per cent for the nine months of 2024 (9M 2024), compared with the annualised 1.84 per cent in 9M 2023.

"This, coupled with higher non-financing income and healthy financing growth, propelled the industry’s pre-tax return on risk-weighted assets to an annualised 2.22 per cent from 9M 2023's annualised 2.12 per cent.

“We anticipate moderate profit growth for Islamic banks in 2025 as trading and investment income normalise,” it said.

As in previous years, RAM Ratings said Islamic financing continued to outpace conventional banking loan growth, contributing an average of 72 per cent to loan growth in the past five years.

It said that Islamic financing recorded 8.1 per cent loan growth in 2024 compared to conventional banking's 3.7 per cent.

“The upcoming retargeting of subsidies in the second half of 2025 and global uncertainties may pose challenges to credit demand, but we remain optimistic that financing growth will stay healthy, fuelled by strong domestic demand and ongoing investments,” it said.

On the asset quality front, RAM Ratings said the Islamic banking industry’s gross impaired financing (GIF) ratio eased to 1.3 per cent as at end-2024 from 1.5 per cent previously, on account of rapid financing growth, alongside write-offs and recoveries. 

The average credit cost ratio, while edging up to an annualised 27 basis points (bps) in 9M 2024, from 21 bps previously, is still deemed sound while GIF coverage (including regulatory reserves) improved slightly to 122 per cent as at end-September 2024 from 119 per cent as at end-December 2023.

“We expect the asset quality of Islamic banks to stay resilient in 2025, bolstered by prudent underwriting and a strong labour market, which should help cushion any adverse impacts from subsidy rationalisation.

“The industry’s strong common equity tier-1 capital ratio of 14.0 per cent as at end-2024 also provides a solid buffer against potential credit deterioration,” the credit rating agency said.

Starting Jan 1, 2025, Bank Negara Malaysia’s revised policy on Islamic banking windows (IBWs) will require specific prudential requirements to ensure the financial resilience of IBWs to support Islamic finance activities independently of conventional banking functions and expand its scope to include development financial institutions, commercial, and investment banks.

“While IBWs constituted only approximately two per cent of the Islamic banking industry’s total assets as at end-2024, we view the policy enhancement positively, ensuring IBWs continued relevance in the current operating environment and enhancing the robustness of Malaysia's Islamic finance sector,” RAM Ratings added.

-- BERNAMA