JAKARTA (TheInsiderStories) – Moody’s Investors Service says that the economies of the Association of Southeast Asian Nations (ASEAN) have a ripe foundation for the growth of Islamic banking, but various challenges are evident, although the authorities are stepping up measures to develop the sector.

“Currently, Malaysia and Indonesia are actively making regulatory efforts to nurture Islamic banking, and this will drive growth in a region which has a significant Muslim population,” says Simon Chen, a Moody’s Vice President and Senior Analyst.

Furhtermore he added, “Within ASEAN, populations are also growing fast, economic environments are robust, and with solid fundamentals, banks are capable of pursuing  the expansion of shariah-compliant services.”

However, Chen rated, translating these favorable conditions into actual growth requires government commitment to developing the Islamic banking sector, hence the importance of the efforts of Malaysia and Indonesia.

Current levels of Islamic financing penetration in the region are
generally low because most governments have not until now actively sought to develop the sector, which has resulted in low levels of public awareness of Islamic banking services and a lack of incentive for banks to devote resources to develop them.

The report notes that Malaysia aims to boost the share of Islamic banking assets in total banking assets to 40 percent by 2020 from 32 percent at the end of August 2018, while Indonesia is seeking to increase the proportion to 15 percent by 2023 from 6 percent at the end of July 2018.

Strong population gains, especially in the prime-age group, in
Muslim-majority ASEAN countries will result in an expansion of core customer bases, while spurring domestic consumption and private sector demand for credit and banking services.

Robust economic environments and the banks’ sound solvency and liquidity positions will help conventional banking groups, which Moody’s believes will continue to lead Islamic banking growth in the region as they have in Malaysia and Indonesia.

Bank asset quality is also generally healthy and notably, nonperforming loan ratios for Islamic banks have been lower than for conventional banks in Malaysia, suggesting Islamic financing has not been a drag on the asset quality of banking groups.

However, Islamic banks in Malaysia have significantly smaller capital bases than conventional banks, although they account for a significant share in total banking assets. The capital gap between the two is much wider in smaller Islamic banking markets in ASEAN, such as Indonesia.

Written by Staff Editor, Email: theinsiderstories@gmail.com