ISLAMABAD: Islamic banks in South and Southeast Asia have sufficient capital and liquidity to meet 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, according to a new report by Moody’s Investors Service.
“Although 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 increased demand for financing as economies recover,” said Tengfu Li, a Moody’s Analyst.
Liquidity has also eased or remained stable because of strong growth in low-cost deposits as consumers and businesses cut spending, and as central banks relaxed reserve requirements and carried out open market operations.
Moody’s expects Islamic financing will continue to expand faster than conventional loans across South and Southeast Asia, increasing the share of Islamic financing in total financing. Prime-age populations, or people aged 25-54 years, will boost the long-term expansion of Islamic banking, especially given these countries’ large untapped market.
Key to the growth of Islamic banking are efforts by governments of major Islamic banking markets in South and Southeast Asia to develop the sector, given its role in increasing financial inclusion and inherent alignment with environmental, social and governance (ESG) principles, which are growing in relevance amid the pandemic. Additionally, Islamic banking is part of a halal ecosystem governments want to create to spur economic development.
Economies are recovering from disruptions caused by the coronavirus pandemic. Economic growth rates in South and Southeast Asia will rebound in 2021.
Governments adopt less restrictive social distancing measures. Businesses find new ways, such as digitalization, to boost operations. Governments opt fiscal policies to stimulate their economies.
Islamic banks also have sufficient liquidity to grow business. Pakistan in July 2020 started allowing Islamic banking windows. Conventional banks start offering financing Islamic mode. As part of the country’s financial inclusion strategy, the Pakistani government aims to increase the share of Islamic banking to 25%.
Temporary Economic Refinance facility showed a growth of 3% in a week. By end of February 11, Rs 398 billion has been approved in temporary economic facility window. A week back the amount approved was around Rs 386 billion. About 466 applications have been approved under Temporary economic facility window. Requests for financing under this window by end of February 11 reached to 714 billion rupees.