The credit rating agency said young, growing populations and government efforts to develop the sector would support long-term growth.

In a report, Moody’s analyst Tengfu Li said although the profitability of Islamic banks in the two regions weakened in 2020, their capital buffers remained mostly robust, supported by government measures to soften the impact of the pandemic.

He said strong capitalisation would in turn enable the banks to meet increased demand for financing as economies recovered.

“Liquidity has also eased or remained stable because of strong growth in low-cost deposits as consumers and businesses cut spending, and as central banks relaxed reserve requirements and carried out open market operations,” he said.

Moody’s expects Islamic financing to expand faster than conventional loans across South and Southeast Asia.

It said prime-age populations, or people aged 25 to 54 years, will boost the long-term expansion of Islamic banking, especially given these countries’ large untapped markets.

“Key to the growth of Islamic banking are efforts by governments of major Islamic banking markets to develop the sector, given its role in increasing financial inclusion and inherent alignment with environmental, social and governance principles, which are growing in relevance amid the pandemic.

“Additionally, Islamic banking is part of a halal ecosystem governments want to create to spur economic development,” it said.