The Edge Malaysia: The growth of Islamic banks in Malaysia has outpaced its conventional peers, with penetration growing tremendously over the past 10 to 15 years and now accounting for around 40% of the total financing in Malaysia, according to Moody’s Investors Service (Moody’s).

Moody’s Financial Institutions Group analyst Wong Chong Jun said the penetration rate stood around 20% around 10 to 15 years ago.

“Islamic banking growth in Malaysia is mainly driven by government policies as well as the ‘Islamic First’ strategy employed by the banks,” he said during the online 2023 Global Islamic Finance Industry Update Media Roundtable on Wednesday.

On the “Islamic First” strategy, which essentially means prioritising Islamic banks and Islamic products, Wong said it was observed that there had been a significant increase in Islamic banking products market share in Malaysia’s major banks.

“Looking at the breakdown of loans just for Maybank in Malaysia, Islamic financing contributed around 70% of the loans, and this proportion was actually at around 60% just a couple of years ago, prior to the (Covid-19) pandemic.

“So, within this short time, you can see that Islamic financing has increased quite a bit. Looking at another major bank in Malaysia, RHB, you can also see that the proportion has increased to around 45% from 40% over the same period,” he shared.

Wong said that the government has been very supportive of Malaysia’s Islamic banking industry, which has been reflected in the multiple policies announced and implemented over the past few years.

He said among the policies enacted include the value-based intermediation framework established in 2018, the Halal Industry Master Plan 2030, which was released earlier this year.

“In addition to that, in the Madani Economy, there are plans for Malaysia to be a leader in Islamic financing.

“Even when it comes to the digital banks, they have allocated two out of five for Islamic digital banks. So these are very clear that the government is taking steps to enhance and to develop the Islamic banking market in Malaysia,” he said.

Meanwhile, Moody’s Sovereign Risk Group senior vice-president Christian de Guzman highlighted that sukuk issuance fell 28% to US$66 billion in the first half of 2023 from US$92 billion a year earlier, largely reflecting lower volumes from major sovereign issuers, most notably Saudi Arabia.

At the regional level, he said the largest decline came in the  Gulf Cooperation Council (GCC) countries, where total issuance fell 33% to US$29.8 billion, while volumes in Southeast Asia declined by a lower 22 per cent to US$31.7 billion, helped by resilient activity in Malaysia.

“We expect stronger sukuk issuance of around US$80 to 90 billion in the second half of 2023, driven by our expectation of higher sovereign volumes in Southeast Asia and Turkiye.

“GCC sovereigns could also surprise to the upside if stabilising market conditions create windows of opportunity to refinance or prefinance upcoming maturities,” he said.

Guzman said that Malaysia continued to dominate global sukuk issuance, with issuance mostly denominated in local currency, with private-sector actors likely to continue to turn to the sukuk market for funding and investments.

“The Malaysian government, which remains a proponent of Islamic finance and continues to support the development of the domestic sukuk market, has announced in 2022 several initiatives to promote further growth in the industry.

“Malaysia’s wide, albeit declining, fiscal deficit, which we expect to be around five per cent of Gross Domestic Product in 2023 to 2024, could also bring additional sovereign volumes by the end of the year,” he added.