Resilient Malaysian Islamic Banking Sector Continues its Growth Trajectory in 2021 and Beyond with Banking Sector Market Share Reaching 32% and Islamic Financing 43%

By all the financial metrics, the Malaysian Islamic banking sector continued to show remarkable resilience in 2021 despite the difficult local and global market and geopolitical conditions.

Never mind the fact that Bank Negara Malaysia Governor Tan Sri Nor Shamsiah Yunus unusually made no reference to the Islamic banking sector in her Foreword to the central bank’s Annual Report for 2021 released earlier this year. In the chapter on Islamic banking, she did however reiterate that “the Bank has, amongst others, a principal objective to develop a dual financial system that is sound, progressive and inclusive.”

The growth dynamics of the industry continued on its upward trajectory in 2021. Islamic financing accounted for 42.5% of total loans and financing of the banking system; and Islamic banking deposits and investment accounts constituted 39.8% of total deposits and investment accounts.

In the insurance sector, Takaful fund assets totalled 12.6% of total insurance/Takaful fund assets, and Takaful net contributions accounted for 20.6% of the total net premium and contributions in the insurance sector.

The annual growth rate of Islamic financing at 8.2% in 2021 paled that of the 2.1% growth of conventional financing. Similarly, Islamic deposits and investment accounts grew in the year by 8.9% compared with 4.9% in conventional deposits and investment accounts.

Takaful assets grew by 9.2% compared with 2.5% in conventional insurance assets; and Takaful net contributions increased by 18.5% compared with 2.9% for the conventional insurance premiums.

Islamic financing in 2021 totalled RM886.6 billion (US$198.88 billion) – up from the RM817.4 billion (US$183.36 billion) in 2020. Total Islamic deposits and investment accounts in 2031 amounted to RM968.9 billion (US$217.34 billion) – up from the RM889.9 billion (US$199.62 billion) the year before.

Total Takaful assets increased from RM41.8 billion (US$9.38 billion) in 2020 to RM45.7 billion (US$10.25 billion) in 2021; while total net contributions increased from RM11.7 billion (US$2.62 billion) to RM13.7 billion (US$3.07 billion) in the same period.

“Much emphasis in 2021,” explained Governor Nor Shamsiah, “was centred on supporting the economic recovery, assisting financially distressed customers, and pursuing initiatives to shore up social and climate resilience. These initiatives were guided by Sharia’a rulings that provided operational clarity for Islamic financial business. Overall, the Islamic banking and Takaful industry remained resilient and agile. The industry also continued to grow at a faster pace than conventional counterparts, albeit from a relatively smaller base.

“This has enabled the industry to step up support for businesses and households, especially throughout the challenging period during the pandemic. Efforts were intensified through extended and targeted financial relief programmes, alongside
greater access to new financing, as well as protection needs.”

The holy grail of Malaysia’s stated Islamic banking proposition is to reach market parity by 2030 between the Islamic and conventional banking sectors in the dual system mentioned by Governor Nor Shamsiah, cooperating, interacting but not co-mingling. According to Bank Negara Malaysia data, the market share of Malaysian Islamic banking assets of the total banking system assets reached 31.42% at end 2021. Total Islamic banking assets amounted to RM979.8 billion (US$219.8 billion) out of total banking assets of RM3,118.7 billion (US$699.6 billion).

This market share trajectory continued in the first four months of 2022, when Islamic banking assets of the total banking system assets reached 30.42% compared with 30.66% at end December 2021. Total Islamic banking AUM at end April 2022 reached RM978.82 billion (US$219.56 billion) – up on the RM956.13 billion (US$214.48 billion) at end 2021.

The importance of the Islamic banking sector to the Malaysian economy in 2021 is underpinned by various metrics – 1.23% contribution to national GDP; RM153 billion (US$34.32 billion) in Sukuk issuances to finance real economic sectors; 8.6% contribution in sustained household financing; 8.7% higher business financing growth to meet business demand across economic sectors; 27% higher growth in financing disbursed to microenterprises and SMEs; and promoting financial inclusion through an 18.6% Higher penetration rate of Family Takaful.

Going forward, BNM’s priorities in 2022 “will be guided by the Financial Sector Blueprint 2022-2026. We will continue to work with the industry to advance value-based finance and strengthen Malaysia’s position as a global gateway for trade, investment and business activities. These initiatives will elevate the role and contribution of Islamic finance to socio-economic developments in Malaysia and globally.”

The Financial Sector Blueprint has five key thrusts – i) advancing digitalisation of the financial sector; ii) positioning the financial system to facilitate an orderly transition to a greener economy; iii) funding Malaysia’s economic transformation; iv) elevating the financial well-being of households and businesses; and v) advancing value-based finance through Islamic finance leadership for example deepening of Islamic financial and capital markets, and alignment of the applications of Sharia’a contracts.

Other key ongoing objectives include further initiatives to assist the Islamic banking industry’s customers affected by the pandemic and the resultant global economic shocks; a commitment by BNM’s Shariah Advisory Council (SAC) in issuing “progressive Sharia’a rulings to ensure viable and agile Islamic finance landscape and operations”; and encouraging the innovation of inclusive and diverse financial solutions to prioritise developmental initiatives, including i) building social resilience; ii) promoting climate resilience and sustainability; and iii) advancing Halal trade and business.

The Halal sector has been identified as one of the high impact industries to propel the growth of Malaysia’s economy in the 12th Malaysia Plan. By 2025, the sector is expected to contribute 8.1% to the national GDP and generate RM56 billion (US$12.56 billion) in export revenue.

“We are supporting this national agenda by working closely with relevant Government agencies in the Halal sector, such as the Halal Development Corporation. Initiatives in 2021 include playing advocacy role for Islamic finance strategies to support the implementation of the Halal Industry Masterplan 2030”, stressed Bank Negara.

Share this post