Focus on retail finance to help GCC Islamic banks weather pandemic
Demand for Islamic finance growing faster than conventional banking, says Moody’s
Islamic banks in the Gulf Cooperation Council (GCC) region are weathering the coronavirus pandemic due to their focus on low-risk retail finance, Moody’s Investors Service said on Monday.
Banks across the region have had a challenging period since the health outbreak began. Interests are low, while credit growth has slowed down and provisioning costs are high.
However, Moody’s noted that there has been a strong demand for Islamic finance, which is growing faster than conventional banking. Such trend will offset the strains caused by subdued operating environment, low interest rates and high provisioning costs.
“Islamic banks are focusing on low-risk retail finance, which will help protect their asset quality amid an uneven economic recovery across these regions,” Moody’s said.
Overall, Islamic banks’ regulatory capital remains well above minimum requirements. Their liquidity is also strong, thanks to the growth in deposits as customers cut down on spending due to economic uncertainty.
The ratings agency, however, forecast that more Islamic banks are expected to pursue mergers, particularly smaller players that are being crowded out by their large peers. High provisioning costs will likewise continue to weigh on profitability, said Badish Shubailat, analyst at Moody’s.
“But their capital and liquidity buffers should comfortably absorb unexpected losses. Consolidation within fragmented Islamic banking markets presents opportunities,” said Shubailat.
(Writing by Cleofe Maceda; editing by Daniel Luiz)