Rapid asset growth drove sukuk issuance by Malaysian Islamic banks to a record MYR3.25 billion (US$1 billion) in the first half of 2014, says Moody's Investors Service.
Islamic banking assets in Malaysia totaled MYR434 billion at the end of May 2014, representing 21% of total banking-system assets versus 16% at end-2009.
In addition, the 20% compound annual growth in Islamic financings since 2009 has steadily outpaced the 16% growth in Islamic deposits, creating a funding gap.
"We expect Malaysia's strong growth trends to continue, driven by strong demand from the predominantly Muslim population coupled with the government's comprehensive and coherent strategy to increase the proportion of Islamic financing to 40% of total domestic financing by 2020 from 24% at the end of May 2014," says Khalid Howladar, Moody's Global Head for Islamic Finance.
Moody's says sukuk issuances will rise if Islamic banks maintain their current risk adjusted profitability to support their internal capital growth of 8% per annum, and risk-weighted assets grow at 11% per annum.
Moody's estimates that the banks will need an additional MYR2.5 billion in new equity or capital qualifying securities such as Basel III compliant sukuk by 2016 to maintain capital ratios at current levels.
Moody's expects the Islamic banks will continue to raise new capital - such as from sukuk issuance - ahead of future business growth, balance their capital structure with a mix of equity and capital securities, and at the same time, build loss-absorbing buffers above the regulatory minimum capital requirements.