LOCAL ISLAMIC BANKS TO OUTPERFORM CONVENTIONAL, MALAYSIA REMAINS LARGEST SUKUK MARKET - MOODY'S

Islamic banks in Malaysia are expected to continue to outperform conventional peers, driven by policy support for the sector and growing public awareness of and familiarity with Islamic products, said Moody's Investors Service.

The credit rating agency said Islamic banks are often part of larger Malaysian banking groups that have adopted "Islamic First" growth strategies, offering Islamic products first to new and existing customers across all business lines.

“As a result, Islamic financing increased by 4.5% year-to-date in 2023, translating to a penetration rate of 41.2% as of September 2023 from 40.7% a year earlier,” it said in a note.

Moody's also said that digital Islamic banking licences would also support the sector's growth.

It said Islamic finance asset growth will continue to outperform conventional asset growth and Islamic banking assets to continue growing steadily, supported by robust economic activity in the Gulf Cooperation Council (GCC) and Southeast Asia driven by high hydrocarbon prices, sustained investment inflows, diversification agendas and demographic growth.

“Saudi Arabia (A1 positive) remains the largest Islamic finance market, followed by Malaysia (A3 stable) and the United Arab Emirates (UAE) (Aa2 stable),” it said.

Moody's said sukuk issuance increased by 3% in 2023 to US$200 billion thanks to a strong corporate issuance driven by the UAE and Saudi Arabia and higher short-term volumes in Malaysia. (US$1= RM4.74)

“Malaysia remains the largest market for sukuk, followed by Saudi Arabia and Indonesia,” it added.

Moody's said sukuk issuance in Southeast Asia declined 6% in 2023 to US$101.7 billion, with issuance in Indonesia, which is highly dependent on sovereign activity, dropping 39% year-on-year as a result of pre-financing activity in 2022.

“In Malaysia issuance rose slightly as a 32% year-on-year decline in long-term corporate issuance was partially offset by 9% growth in sovereign activity and a dynamic short-term sukuk market, which rebounded by 23% year-on-year in 2023,” it added.