Southeast Asia’s Islamic banking market set for 8% growth, says S&P

Southeast Asia’s US$290 billion (about RM1.27 trillion) Islamic banking market market is poised to grow at a compound annual growth rate of about 8% over the next three years, primarily led by Malaysia and Indonesia.

In a report titled “Growing Belief In Southeast Asia’s US$290 Billion Islamic Banking Market” released on Wednesday (May 11), S&P Global Ratings said Southeast Asia is the world’s third largest Islamic banking market, forming 17% of the US$1.7 trillion in global Islamic banking assets.

S&P Global credit analyst Nikita Anand said in the major markets of Malaysia and Indonesia, Islamic banks will grow faster than conventional banks, riding on robust demand.

S&P Global said that in Malaysia, local Islamic banks could account for about 45% of the overall commercial banking loan book by the end of 2026.

In Indonesia, the sector’s market share could improve to about 10% by the end of 2026, it said.

The agency said that in Brunei, Islamic financial institutions constitute about half of the total financial system assets and growth should mirror that of the broader banking system.

In the Philippines, the sector is small but there is an untapped market and regulators are striving to increase transparency in a bid to encourage local and foreign investment.

S&P Global said this trajectory will face inevitable hurdles.

It said the region’s recovery from Covid-19 had been uneven, explaining that pandemic-related loan relief had distorted the true health of asset quality.

Meanwhile, geopolitical shockwaves have pushed up energy and commodity prices, which could affect domestic demand.

It said that in both Malaysia and Indonesia, Islamic banks are making greater efforts in digital transformation to narrow the wide technology gap with conventional peers.

On the environmental, social, and governance (ESG) front, it said top-tier Malaysian Islamic banks will benefit from the issuance of international sustainability sukuk.

S&P Global credit analyst Rujun Duan said such benchmark issuances will widen the investor base and facilitate broader awareness of Islamic finance and its intrinsic ESG connection in international debt capital markets.