KUALA LUMPUR (May 11): Southeast Asia’s $290 billion (about RM1.27 trillion) Islamic banking market is expected to grow at a compound annual growth rate of about 8 % over the next three years, mainly driven by Malaysia and Indonesia.
In a report titled “Growth of Trust in the US$290 Billion Islamic Banking Market in Southeast Asia,” released Wednesday (May 11), S&P Global Ratings said Southeast Asia is the third most largest Islamic banking market in the world, accounting for 17% of the US$1.7 trillion global market. Islamic banking assets.
Nikita Anand, credit analyst at S&P Global, said in major markets of Malaysia and Indonesia, Islamic banks will grow faster than conventional banks, thanks to robust demand.
S&P Global said that in Malaysia, local Islamic banks could account for around 45% of the overall commercial bank loan portfolio by the end of 2026.
In Indonesia, the industry’s market share could improve to around 10% by the end of 2026, he said.
The agency said that in Brunei, Islamic financial institutions constitute about half of the total assets of the financial system and growth is expected to mirror that of the banking system as a whole.
In the Philippines, the sector is small but there is an untapped market and regulators are working to increase transparency in an effort to encourage local and foreign investment.
S&P Global said that trajectory will encounter inevitable obstacles.
He said the region’s recovery from Covid-19 had been uneven, explaining that pandemic-related loan relief had skewed the true health of asset quality.
At the same time, geopolitical shock waves have pushed up energy and commodity prices, which could affect domestic demand.
He said that in Malaysia and Indonesia, Islamic banks are stepping up efforts in digital transformation to narrow the wide technology gap with their conventional counterparts.
On the environmental, social and governance (ESG) front, he said leading Malaysian Islamic banks will benefit from issuing sustainable international sukuk.
S&P Global credit analyst Rujun Duan said these benchmark issues would broaden the investor base and facilitate greater awareness of Islamic finance and its intrinsic ESG connection in international debt capital markets. .