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Fitch: Islamic Finance in Malaysia: An Evolved Sector
Malaysia is leading the global Islamic finance industry in terms of regulation, standardisation and sukuk issuance, representing more than half of issuance worldwide in 2015, Fitch Ratings says in a new report.
Malaysia's Islamic bank financing reached MYR390bn as of end-2015, equal to 27% of its banking-system loans (2014: 25.0%). Islamic financing expanded 16.2% in 2015 (conventional banking system: 5.2%), and has had a compound annual growth rate (CAGR) of 18.2% since 2011, against conventional banks' average of 7.0%. Islamic finance adheres to banking rules as laid out by the sharia, or Islamic law, and includes tenets such as prohibiting usury.
The Malaysian Islamic banking system's impaired loan ratio remained stable at 1.2% in 2015 (conventional banking system: 1.7%), while the segment's provision coverage (impairment reserves as a proportion of gross loans) remained lower than that for conventional banks. The Islamic banking system's Core Equity Tier 1 (CET1) and Tier 1 ratios were broadly comparable with that of the aggregate banking system.
Fitch sees the implementation of the Islamic Financial Services Act 2013 (IFSA 2013) as a key development that enhances the regulatory and supervisory framework of Malaysia's Islamic financial industry, adding transparency and clarity on issues.