The rating agency said Islamic banks have larger funding requirements to cover faster financing growth, driven by policy support for the sector and growing public awareness and familiarity with Islamic products.
“In addition, the repricing of term deposits to reflect rises in interest rates will affect Islamic banks in Malaysia and Indonesia more than their conventional peers because they rely more on such funding,” it said in a statement today.
Moody’s said Bank Syariah Indonesia, the largest Islamic bank in Indonesia, is projecting its net financing margins will contract by at least 20 basis points in 2023, while major conventional banks in the country expect net interest margins to be broadly stable.
Between Islamic banks in the two countries, the impact of higher funding costs will be milder for those in Malaysia, it said.
“In Malaysia, most Islamic banks are parts of larger banking groups and are well integrated into their core operations.
“Major Malaysian banking groups have adopted ‘Islamic First’ strategies for growth, offering Islamic products first to all new and existing customers across all business lines. This helps the Islamic units of banking groups attract deposits without paying excessively high rates,” it said.
Moody’s said the bulk of financing at Islamic banks also carries variable rates which gives them an advantage when interest rates rise.
“Bank Negara Malaysia raised rates four times in 2022, and financing rates of Islamic banks increased in tandem,” it added.
Moody’s said unlike at Malaysian Islamic banks, the bulk of financing at Indonesian Islamic banks has fixed rates.
“As such, while banks can reprice part of fixed-rate financing periodically, any adjustments lag rate hikes.
“Average rates for Indonesian Islamic banks’ consumer and investment financing, which accounted for 74% of their total financing at the end of January 2023, declined 70 basis points on average from June 2022 to January 2023, possibly because of competition,” the firm said.
In addition, Moody’s said, it is more difficult for Islamic banks in Indonesia than those in Malaysia to gain deposits because of their smaller scale and lower rates of market penetration.
“While some Islamic banks in Indonesia are parts of larger banking groups, they are not as integrated as those in Malaysia and have different distribution networks,” it said.