Growth of Islamic investment account in Malaysia will remain strong – Moody’s
KUALA LUMPUR: Moody’s Investors Service expects the growth of syariah compliant investment accounts in Malaysia to remain strong over the next three to five years through the active promotion of Bank Negara Malaysia and banks.
“We expect investment accounts to become an increasingly important tool in managing business growth and income, as well as capital adequacy,” the rating agency said in its report on Islamic banks in Malaysia released yesterday.
Syariah Compliant Investment Accounts are defined in the Islamic Financial Services Act 2013 as accounts under which money is paid and accepted for investment in accordance with the principles of syariah and on terms that state that there is no express or implied obligation to refund the money in full.
“By February of this year, syariah-compliant investment accounts had grown to Ringgit 74.2 billion, or 13 percent of total Islamic banking system liabilities,” Moody’s noted.
According to Moody’s Vice President and Senior Analyst Simon Chen, Malaysian banks have a strong incentive to promote syariah-compliant investment account growth, as it provides capital benefits and an additional source of funding to grow their businesses. active.
“At the same time, concerns exist about the untested state of loss sharing mechanisms in accounts, although regulators have instituted guarantees to protect banks,” he added.
Nonetheless, Moody’s warned that at this stage in the development of syariah-compliant investment accounts in Malaysia, a key question is whether and to what extent the loss-sharing mechanism between banks and investors will be honored in cases of actual losses.
“An important loss event to test the resilience of this regime has yet to take place,” he said.
But based on Moody’s observation of Islamic banks in other Islamic jurisdictions, including some Gulf Cooperation Council countries, they do not in practice exercise the contractual nature of absorbing losses from bank accounts. investment and therefore bear much, if not all, of the risk associated with the assets. on behalf of investment account holders.
“Maybe it’s because of customer expectations and fear of damaging their reputation,” Moody’s said.
“So far, the strong growth of these products has not put pressure on the provisioning and capitalization of the Malaysian banking system due to their risk-sharing assumptions,” he added.
Moody’s said another credit risk is liquidity.
“Just like customer deposits placed with banks that can be withdrawn on demand, investment accounts would also be subject to withdrawals, which could lead to bank liquidity problems.
“Given the higher risk of investment accounts compared to deposit accounts, investment accounts are more likely to come from retail and corporate clients who are looking for higher returns on their excess funds. As such, these funds could be more volatile than deposit accounts, which are primarily business cash balances maintained for day-to-day operational purposes and, therefore, more stable, ”he said.
Nonetheless, this liquidity problem is partially alleviated by Malaysia’s regulatory requirement for investment accounts to maintain liquidity coverage ratios for individual accounts.