Moody’s Investors Service says in a new report that a concentration on retail financing and other structural features will help Islamic banks withstand economic disruptions caused by the coronavirus outbreak.

The seven largest Islamic banks in Malaysia, five of which are subsidiaries of domestic banking groups with conventional operations, have a heavy concentration on retail financing, which is less vulnerable to an economic downturn than business financing.

“Declining economic growth and increasing unemployment will raise the risk of delinquencies in retail financing, but the impact on losses will be limited as most of it is secured by residential properties, cars or low-risk unit trusts,” says Tengfu Li, a Moody’s Analyst.

“In addition, Malaysian banks generally have prudent underwriting practices for retail financing thanks to regulatory guidelines for “responsible” financing, which adds to their asset quality,” adds Li.

Defending profit margins

Islamic banks are also well-positioned to defend profitability because they will see limited impairment losses as their asset quality holds up.

In addition, financing growth at Islamic banks will be supported by financial groups’ efforts to expand Islamic banking and increasing acceptance of such products by consumers. Also, Islamic banks will continue to keep their operating expenses low as they leverage on their parents’ infrastructure.

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Moody’s expects that the Islamic banks will maintain their capitalisation in the next 12-18 months, as a slowdown in capital consumption offsets a deterioration in profitability.

Meanwhile, their funding and liquidity should remain stable, underpinned by retail deposit growth, weak financing demand and support from the government and parent groups.

“Retail current and savings account deposits will drive overall deposit growth as consumers wary of spending save their funds, while financing demand will remain weak,” Li said.

Deposits growing faster

He added that deposits at Islamic banks in general will continue to grow faster than conventional deposits due to the popularity of sharia-compliant financial products and the Islamic drive by banking groups.

“And continued support from the government and parent groups, mainly in the form of deposits, investment accounts and sukuk, will also mitigate funding risks,” Li said.

There are currently 16 banks in Malaysia offering Islamic products.

In addition to banks, non-banks intermediaries offering shariah-based products include Malaysia Building Society Berhad (MBSB) and cooperatives registered under the Cooperative Commission of Malaysia (SKM).