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Tuesday, 15 April 2008

Islamic Banking In East Asia Growing But Faces Challenges, Says Moody's

KUALA LUMPUR, April 14 (Bernama) -- Islamic banking in East Asia is growing but needs more action by regulators to establish legal and regulatory frameworks in order to emerge as a significant segment across the region, according to Moody's Investors Service.

Other than Malaysia, where the industry's assets accounted for 15.4 percent (about US$62 billion) of its banking system assets, its market penetration across the region has been slightly patchy, the firm said in a new report titled "Islamic Banking in East Asia -- Growing But Not Without Challenges".

"For example, while Islamic banking has achieved relatively high market penetration in Brunei and asset growth in Indonesia has been rapid, Islamic banking services available in the Philippines, Singapore and Thailand remain very small in terms of asset size," Moody's said.

"There exists a natural business potential for Islamic banking services in Malaysia as approximately 60 percent of its population is Muslim, but it is government reforms during the past 20 to 30 years which have really helped develop the necessary legal and regulatory framework and institutions for the industry to flourish," said the report's analyst and author Christine Kuo.

The adoption of various incentives, including tax breaks, has also proven critical to nourishing the business, Kuo said.

"We believe the Malaysian experience over the last three decades demonstrates how instrumental regulators can and need to be in order to grow the Islamic banking sector," she said.

This compares to Indonesia, where the industry's market share is still less than two percent (about US$3 billion) despite rapid growth in recent years.

The low penetration, in Moody's opinion, can largely be attributed to the slow pace of change to related regulations and institutions though a few important changes seem to be gathering momentum, the report said.

Indonesia has huge long-term potential as it is home to more than 200 million Muslims, the largest Muslim population in the world, Kuo said.

She said the growing acceptance of Islamic banking even among non-Muslims, combined with announcements from Singapore, Tokyo and Hong Kong that they are to increase their participation in Islamic finance, has also underlined the industry's potential.

However, as Islamic banks expand they will need to deal with the twin challenges of managing their rapid growth while competing against conventional banks, the report said.

These included addressing risk issues specific to Islamic financial institutions, such as concentration risk due to a limited scope of eligible asset classes, higher costs for managing liquidity and concentration of liabilities.

However, these can be dealt with if the banks are not under undue pressure to grow assets too quickly, according to Moody's.

"We think that the average bank financial strength ratings (BFSRs) of Islamic banks in East Asia are likely to be lower that their conventional banking peers in the same country because of higher syariah law-related compliance costs and lack of economies of scale," Kuo said.

"Nonetheless, deposit and debt ratings of Islamic banks could be significantly higher than the levels indicated by their BFSRs, thanks to support from parents and regulators," she said.

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