As per a new report by Moody’s Investors Service, Islamic banks in South and Southeast Asia have sufficient capital and liquidity to meet the increased demand for financing as economies recover from the pandemic, while young, growing populations and government efforts to develop the sector will support long-term growth.
A Moody’s Analyst said that even though Islamic banks’ profitability in these regions weakened in 2020, their capital buffers remain mostly robust, supported by government measures to soften the impact of the coronavirus outbreak. Strong capitalization will in turn enable Islamic banks to meet the increased demand for financing as economies recover.
According to the report, liquidity has become easier for the banks because of growth in low-cost deposits (deposits with low-interest rates) and lower spending by businesses. It can also be attributed to lower reserve ratio requirements by the central bank, meaning banks were allowed to lend a higher percentage of deposits, and open market operations.
The agency expects Islamic Financing to expand more than conventional financing as the loans are being taken out by the people aged 25-54, who make up for the higher percentage of the total population. This will increase the share of Islamic financing in the total financing in South and Southeast Asia.
The other factors include the role the governments in these regions play in promoting this sector as Islamic banking has a role in bringing financial inclusivity to this area and inherent alignment with environmental, social, and governance (ESG) principles, which are growing in relevance during the pandemic. The governments of these regions want to create the halal ecosystem which will help in the economic development due to inclusivity.