What impact has the coronavirus pandemic on Islamic banks?

Bashar Al-Natoor, Fitch Ratings. (Photo: Fitch Ratings)

In many countries, government relief packages amid the coronavirus pandemic should help to soften the near-term effect for Islamic banks, says Bashar Al-Natoor from Fitch Ratings.

Islamic banks’ risk factors and mitigations vary from country to country. A common risk factor currently is the COVID-19 pandemic. To illustrate, while Islamic banks in Indonesia are likely to be affected to a similar degree as conventional banks, those with significant exposure to the tourism sector are likely to be more affected. If the outbreak prolongs, there is a potential downside risk to the sector’s growth and asset quality.

In Malaysia, we expect Islamic banks’ credit profiles to remain broadly steady, with adequate loss-absorption buffers to withstand near-term challenges, though we see risks to asset quality and profitability should the COVID-19 outbreak be prolonged.

In Turkey, asset quality pressures faced by Islamic banks are significant, as for conventional banks, due to seasoning risks following rapid financing growth, exposure to risky segments and above-average foreign-currency financing, given potential lira depreciation.

In the GCC countries, Islamic banking is an integral part of banking system. For example, in Saudi Arabia about 80% of financing is Sharia-compliant (Islamic banking + Islamic windows of conventional banks) and in Kuwait the share of Islamic banking is around 40% of total banking sector assets. Each bank’s expected performance is subject to their standing in terms of asset quality and liquidity and their exposure to different sectors.

In many countries, government relief packages amid the coronavirus pandemic should help to soften the near-term effect for Islamic banks.

Bashar Al-Natoor is Fitch Ratings global head of Islamic finance.