Cost of branches and credit risks expected to slow Islamic banking growth

THE GROWTH of Islamic banking in the country is expected to remain slow despite regulatory pressures to grow the sector, mainly due to cost and credit risk concerns, S&P Global Ratings said.

The rating agency sees the outlook for Islamic banking in the country as an outlier amid “growing belief” for the market in Southeast Asia.

“In the Philippines, the market share of Islamic banks will remain insignificant despite a regulatory push. About 5-6% of the Filipino population is Muslim, lives in heavily underbanked areas and thus forms an untapped segment,” S&P said in a note Wednesday.

Last week, the Bangko Sentral ng Pilipinas (BSP), along with other government agencies, signed a memorandum of understanding for the establishment of the Shariah Supervisory Board (SSB) in Bangsamoro Autonomous Region in Mindanao Muslim. The SSB should help develop the regulatory environment for Islamic banking and services.

Al Amanah Islamic Bank is the only Islamic lender currently operating in the country. It falls under the Development Bank of the Philippines.

“The bank’s growth and earnings are expected to improve in 2022 as it is likely to benefitIft of the ongoing recovery in the Philippines. However, the bank’s market share will remain very low (less than 0.1%),” S&P said.

Meanwhile, S&P noted that there appears to be “little interest” from major commercial banks in offering Islamic banking services.

“We believe this is due to the high cost of establishing branches in the region and higher credit risk due to the lower income profile of borrowers,” S&P said.

Since the establishment of the Islamic banking framework in 2019, the BSP said that there have not yet been formal requests for the establishment of Islamic banks or Islamic banking units. However, he said a few local and international players have shown interest in the sector.

S&P noted that the central bank is considering lowering minimum capital requirements for Islamic banks compared to conventional banks.

“While this may encourage both local and foreign participation in the sector, it could also make the Islamic banking sector less resilient and capital tight.ffers compared to conventional banks,” S&P said.

The $290 billion Islamic banking market is expected to grow at a compound annual growth rate of about 8% over the next three years, S&P said. — Luz Wendy T. Noble