RAM Ratings has maintained a ‘Stable’ outlook for Malaysia’s Islamic banking industry in 2025, projecting steady financing growth of around 8% despite global uncertainties. 

The sector’s resilience is supported by a solid capital base, strong asset quality and sustained domestic economic growth. 

Islamic financing continued to gain traction, comprising 43% of total banking system loans as of end-2024, up from 42% the previous year.

According to RAM Financial Institution Ratings co-head Wong Yin Ching, “the steady expansion reflects the increasing prominence of the industry, driven by the ‘Islamic First’ policy adopted by major banks and ongoing regulatory support.” 

Islamic financing growth outpaced conventional loan expansion once again, recording 8.1% in 2024 compared to 3.7% for conventional banking loans. 

While global uncertainties and the upcoming subsidy retargeting in the second half of 2025 may challenge credit demand, RAM remains optimistic that strong domestic consumption and continued investments will sustain financing growth. 

Asset quality also remained robust, with the industry’s gross impaired financing (GIF) ratio easing to 1.3% by end-2024 from 1.5% a year earlier. 

The improvement was attributed to rapid financing expansion, recoveries and write-offs. 

The credit cost ratio increased slightly to an annualised 27 basis points (bps) in the first nine months of 2024, up from 21bps in the same period last year. 

However, GIF coverage, including regulatory reserves, improved to 122% as of September 2024, up from 119% at end-2023. 

RAM expects asset quality to remain resilient in 2025, supported by “prudent underwriting standards and a robust labour market that should help mitigate the impact of subsidy rationalisation”. 

Additionally, the industry’s strong common equity tier-1 capital ratio of 14% provides a solid buffer against potential credit deterioration. 

Islamic industry deposit growth rose to 5.9% in 2024 from 5.2% the previous year but continued to lag behind credit expansion. Term deposits remained the primary growth driver, increasing by 7.4%, while current and savings account (CASA) deposits grew at a slower pace of 8.5%, down from 10% in 2023. 

Customer investment accounts (IAs) saw substantial growth, expanding by 17.5% compared to 9.4% in 2023. 

RAM noted that IAs accounted for 8% of total Islamic banking funding by end-2024, up from 7% the previous year. 

“These accounts remain an attractive funding source for some banks, as assets financed through IAs do not attract capital charges, providing capital relief,” it said. 

Most Islamic banks reported improved margins in 2024, contrasting with the wider banking sector. 

The gains were attributed to a higher financing-to-deposit ratio, reduced deposit competition, disciplined pricing strategies, and targeted efforts to increase CASA deposits. 

The industry’s net financing margin rose to an annualised 1.93% in the first nine months of 2024, up from 1.84% in the same period in 2023. 

Strong non-financing income and healthy financing growth further boosted profitability, with pretax return on risk-weighted assets improving to an annualised 2.22% from 2.12% a year earlier. 

RAM Financial Institution Ratings co-head Sophia Lee anticipates “moderate profit growth in 2025 as trading and investment income normalises”. 

A significant regulatory development in 2025 is Bank Negara Malaysia’s revised policy on Islamic banking windows (IBWs), effective Jan 1. 

The new framework introduces specific prudential requirements, including minimum capital and liquidity thresholds, to ensure IBWs’ financial resilience and independence from conventional banking operations. 

The scope has also been expanded to cover development financial institutions, commercial and investment banks. 

Although IBWs accounted for only about 2% of total Islamic banking assets as of end-2024, RAM views the policy enhancement positively, as it “reinforces IBWs’ relevance in the evolving financial landscape and strengthens Malaysia’s Islamic finance sector”.