Malaysia’s Islamic financing is expected to account for nearly half of the country’s total banking sector financing by 2030, rising from 42% at the end of 2024, according to S&P Global Ratings. The ratings agency said the growth will be supported by steady expansion, a comprehensive regulatory framework, a deep and well-developed sukuk market, and strong acceptance among retail customers.
In its report Asia Pacific Islamic Banking Outlook 2026: Rebound Masks Regional Divergence, S&P said consumers and small businesses will continue to be the main drivers of financing growth, following similar trends seen in Malaysia’s conventional banking sector. The agency noted that Islamic financing growth remains largely driven by domestic operations, although overseas business is gradually gaining traction in selected markets.
S&P added that intense competition in Malaysia’s mature Islamic banking market has prompted some of the largest players to explore overseas growth opportunities, particularly in South-East Asia. This includes expansion into areas such as Islamic wealth management. Malayan Banking Bhd, which owns the largest Islamic bank in Malaysia, has already begun operations in the Philippines through an Islamic banking window.
Across the Asia-Pacific region, S&P expects financing growth for Islamic banks to edge toward the higher end of its projected 8% to 10% range over the next three years, following a slowdown last year. Total Islamic banking assets in the region are forecast to exceed US$550 billion by the end of 2028, up from US$430 billion at the end of 2024, accounting for about 20% of the global Islamic banking market.
The ratings agency also highlighted that Malaysian Islamic banks continue to play an important role in promoting inclusive financing, in line with Bank Negara Malaysia’s value-based intermediation principles. Malaysia and Brunei’s Islamic banks are expected to maintain strong asset quality, with non-performing financing ratios projected to remain below 2%, reflecting lower economic risks and higher wealth per capita.
In Malaysia, asset quality is supported by prudent underwriting standards, diversified financing portfolios and conservative provisioning. Stage-two financing, which measures potential increases in credit risk, remained manageable at around 7% as of the end of last September and has been broadly stable over the past two years.
However, S&P noted that financing-to-deposit ratios in Malaysia remain elevated, largely due to structural factors within the banking system, including a higher reliance on relatively costly wholesale deposits.