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Malaysia’s 34.2% Islamic Banking Market Share Edges Towards 50% Parity with Conventional Sector by 2030 as Sector Reinforces its Resilience and Relevance during COVID-19 Pandemic

Malaysia’s Islamic banking and Takaful industry continues its steady march towards the stated goal of the Malaysian government to achieve parity with the conventional sector in terms of 50% market share of the total banking sector by 2030. Bank Negara Malaysia (BNM) Governor Nor Shamsiah Yunus reiterated in the central bank’s 2020 Annual Report released in April 2021 that “the Bank remains committed to advancing Islamic finance with focused efforts on supporting a sustained (post-COVID) economic recovery, building social and climate resilience as well as empowering halal trade.”

This commitment is underlined by the strong industry growth fundamentals in 2020, which is good news for the global industry. In the last two years, partly due to the economic and health impacts of the coronavirus pandemic, there was a perception, perhaps erroneous, in the market that BNM’s attention to the Islamic banking industry had dampened.

A strong role by the sector in COVID-mitigation support packages, boosted by a proactive Minister of Finance Tengku Zafrul Aziz who launched the first COVID-mitigation RM500m Prihatin Sukuk in the world in 2020 culminating in April 2021 with a US$1.3 billion Sustainability Sukuk, the first such sovereign issuance in the world, and followed by a US$1 billion Sukuk offering by the country’s sovereign wealth fund (SWF), Khazanah Nasional Berhad, soon put paid any doubts about Putrajaya’s Islamic finance proposition.

Indeed, BNM’s objective is also to support the role of Islamic finance in driving the sustainability and climate resilience agenda for the financial system. “This is consistent with the fundamental values of Sharia’a to prevent harm and promote the attainment of benefits including safeguarding the environment,” added Governor Yunus.

The market share of Islamic banking assets to total banking system assets in 2020 reached 34.2% – well on its way to meeting the stated 50% parity with the conventional sector by 2030. Islamic financing fared even better reaching 41% of total loans/financing of the banking sector, with total Islamic deposits and investment accounts to total deposits not far behind at 38.9%. This robust banking sector growth dynamic however is not matched by the Takaful sector which still lags behind considerably compared with the conventional insurance sector.

Takaful funds assets to total insurance funds assets reached only11.8%, albeit Takaful net contributions to total net premium/contributions fared slightly better at 18.4%. A comparative analysis shows that the underlying growth trajectory of the Islamic banking sector is far more robust than the conventional counterpart – a trend very similar to the growth dynamics of the Saudi Arabian banking sector for instance.

The Islamic sector saw a 8.5% annual growth in 2020 in financing compared to 0.5% for the conventional sector; a 7.7% annual growth in deposits compared to 2.4%; a notable 13.2% growth in assets compared with 7.3%; and even in Takaful annual growth of net contribution of 2.6% compared with 1.8% for the conventional insurance sector.

Translated into actual figures, total Islamic assets at end 2020 reached RM1.09 trillion (US$264.5 billion) – up on the RM1.02 trillion at end 2019. Total Islamic financing reached RM817.4 billion up from RM753.61 billion; and total deposits and investment accounts reached RM889.95 billion up from RM826.2 billion. Similarly total Takaful fund assets reached RM41.3 billion up from RM36.517 billion, with Family Takaful dominating at RM36.485 billion up from RM32.3 billion; and net Takaful contribution Income reaching RM5.987 billion up from RM5.542 billion. Even the claims ratio for general takaful decreased from 59.5% in 2019 to 58% in 2020. In terms of the financial ratios, the two banking systems were on par for capital adequacy at 18.5% and impairment ratio at 0.9%-1%. Islamic banks’ liquidity coverage ratio stood at 137.2% compared with 151.7% for the conventional sector. But on return on assets the Islamic sector lagged at 0.7% compared with 1.2% for the conventional sector.

In 2020, the Bank dedicated efforts towards advancing Islamic finance in addressing the economic challenges posed by the pandemic. According to BNM, the Islamic banking and Takaful industry remained resilient and agile against the background of a highly uncertain economic and operating environment. “The industry continued to post a healthy growth, gaining further market share of the overall financial system. The industry also recorded strong financial soundness indicators,” added BNM.

Governor Yunus is particularly cogniscant of the “active role played by Shariah Advisory Council (SAC) of Bank Negara Malaysia which issued key rulings during the year to guide the implementation of assistance measures in line with Sharia’a principles. In fact, almost half of the 15 SAC meetings in 2020 were dedicated to discussing Shariah matters related to COVID-19 relief measures, especially focusing on reducing financial hardships experienced by customers affected by the pandemic, particularly in relation to repricing adjustments following the implementation of deferred payments.

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