Malaysian banks' Islamic loan share reaches 27.9% of system loans in the first half of 2016

Growth will continue at a modest pace, says Fitch.

The strong expansion of Malaysian Islamic finance pushed Islamic loan share to 27.9% of system loans at end-1H16, says Fitch Ratings in a new report.

According to Fitch, Malaysia continues to lead the global Islamic finance industry in terms of regulation, standardisation and sukuk issuance, representing more than half of the world's issuances at end-1H16. Islamic banks in Malaysia have access to a sharia liquidity facility from the central bank, an active Islamic capital market, interbank money market and secondary market.

"The Islamic banking system's gross impaired loan ratio rose slightly to 1.34% at end-1H16, but remained better than the conventional banking system's ratio of 1.74%. The Islamic banking system's core equity Tier 1 (CET1) ratio of 13.0% was marginally lower than the 13.4% of the aggregate banking system."

Fitch believes a shift in appetite for investment accounts versus Islamic deposits largely reflects the higher yield offered by investment accounts. Fitch has not seen customer migration from Islamic banks to conventional banks or a significant change in Islamic banks' risk profiles.