Islamic banks in Malaysia to benefit from rebound in oil prices - Moody's

KUALA LUMPUR, Sept 21 -- Islamic banks in Malaysia are expected to benefit from a rebound in oil prices as the global economy recovers, Moody’s Investors Service said.

In its sector in-depth report, the rating agency said the Gulf Cooperation Council (GCC) countries, as major hydrocarbon producers, and Malaysia, where a significant part of the government revenue is derived from oil production, will benefit.

Moody’s, which expects economies in the GCC region and in South and Southeast Asia to return to growth this year, said its current medium-term oil price forecasts assume that spot Brent crude oil will average between US$45 and US$65 per barrel, up from US$42 per barrel last year.

“With the Organisation of Petroleum Exporting Countries (OPEC) reversing earlier production cuts, higher oil revenue will improve governments' capacity to stimulate their non-oil economies. The non-oil sector accounts for the bulk of banks' lending exposure,” it said.

However, Moody’s said, in most key Islamic banking markets, Gross Domestic Product (GDP) is unlikely to return to pre-COVID-19 levels until 2022.

Moreover, with new, more contagious coronavirus variants emerging, governments that cannot effectively trace and isolate new cases may need to reimpose some restrictions, delaying the economic recovery.

Many countries have already resorted to lock-down measures to curb the spread of new coronavirus waves.

“We therefore expect that Islamic banks and their conventional peers will continue to face economic headwinds over the next 12 to 18 months,” said Moody’s.

It said Islamic banks benefit from a sizeable personal finance focus, which is positive for their asset quality.

“Retail financing is typically secured, spread across a large number of customers and has historically performed well across the GCC countries and South and Southeast Asia.

“In contrast, corporate financing is prone to large single-customer concentrations and carries greater downside risk. Corporates are also directly exposed to the pandemic, particularly those in vulnerable sectors such as tourism and aviation,” it said.

In Malaysia, retail asset quality will remain strong because of well-established credit bureaus and a track record of prudent underwriting among the banks, Moody’s said.

“Malaysia's ‘responsible’ financing guidelines, introduced in 2011, have curbed excessive leverage among households. Moreover, most retail finance in both countries is secured by residential property,” it added.

While Islamic banks focus mainly on the retail market, corporate financing remains a significant component of their credit exposure, including to the historically cyclical and confidence-sensitive construction, contracting and real estate sectors.

Islamic banks in Malaysia and Indonesia, meanwhile, have sizable exposure to economically-sensitive small and medium-sized enterprises (SMEs), it noted.

SME loans in Malaysia accounted for 12 per cent of total Islamic lending as of June 30, 2021, Moody’s added.

-- BERNAMA