KUALA LUMPUR (March 10): RAM Rating Services Bhd said that the consolidation of Malaysia’s Islamic banking industry is still widely discussed, despite the call off of the proposed tripartite merger between CIMB Group Holdings Bhd, RHB Capital Bhd and Malaysia Building Society Bhd.

In a statement today, the ratings agency said this was in line with Bank Negara Malaysia’s aim to strengthen Malaysia’s leadership in Islamic finance.

“We believe the creation of an Islamic bank with greater financial clout and reach is still on the agenda,” said Wong Yin Ching, co-head of financial institution ratings, RAM Ratings.

The ratings agency noted that the Islamic banking industry has seen its assets almost double over the past four years to RM479 billion as at end-Dec 2014.

“Our expectation is that financing growth will still be robust at 15% this year despite tighter macro-prudential measures and the more challenging economic environment,” said Sophia Lee, co-head of financial institution ratings, RAM Ratings.

Furthermore, RAM considers the low gross impaired-financing (GIF) ratio of 1.2% as at December 2014 as healthy. The agency said the ratio may increase but will remain manageable below 2%, due to an expected slower financing and economic growth.

RAM also highlighted that the Islamic finance sector has a sturdy common-equity-tier-1 capital ratio of 11.4% as at end-Dec 2014.

“Another point of strength for the sector is that most Islamic banks in Malaysia operate on a universal-banking model, which allows them to benefit from their parents’ branding as well as derive capital and funding support,” it said.

Meanwhile, the rush to meet the Basel III liquidity coverage ratio by June 2015 has intensified competition for deposits, resulting in increased funding costs and negatively impacting the profitability of the industry.

However, the sector’s financing-to-deposits ratio stood at 83% as at Dec 2014, which is still considered a “comfortable” funding and liquidity position for the Islamic banking industry, said RAM.