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Islamic banking sector set for steady expansion
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Fitch noted that Islamic banking assets grew at a faster pace than conventional banking, reinforcing the sector’s rising importance within Malaysia’s financial system.
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In its latest Malaysian Islamic Banks Monitor: 2026, Fitch noted that Islamic banking assets grew at a faster pace than conventional banking, reinforcing the sector’s rising importance within Malaysia’s financial system.
Islamic banking assets expanded by 7% to US$312bil by end-2025, outpacing the 4% growth recorded by conventional banking assets.
The expansion lifted Islamic financing to approximately 44% of total system loans and financing, up from 43% in 2024.
Fitch expects this upward trend to continue, noting that Malaysian banks remain committed to an “Islamic First” strategy.
The agency said Malaysia has “cemented its position as one of the largest Islamic banking markets in Asean and globally,” with Islamic financing expected to command a larger share of the system over the medium term.
The household segment remains the main driver of Islamic financing growth, with about 64% of Islamic financing extended to households, compared with 57% for conventional banks.
Fitch said the rising share reflects “sustained housing finance needs and the banks’ consistent strategy.”
Asset quality within this segment has remained resilient, supported by stable employment conditions and a relatively steady property market.
The agency expects asset quality metrics to remain sound in the near term despite elevated but stable household leverage.
Market dominance continues to rest largely with domestic banking groups.
Six major Islamic banks that are subsidiaries of local banking groups, together with Bank Islam Malaysia Bhd, account for roughly 76% to 77% of total Islamic banking assets and financing.
Fitch said it does not expect new Islamic digital banks or smaller players to materially disrupt the competitive landscape in the near-to-medium-term.
Nevertheless, Islamic banks face profitability pressures stemming from tighter liquidity conditions.
The sector’s financing-to-deposit ratio stood at around 100% as at end-2025, compared with 77% for conventional banks, reflecting faster financing growth and intensifying competition for Shariah-compliant deposits and investment accounts.
Fitch noted that these factors “have increased pressure on banks’ financing margins relative to conventional banks, affecting overall profitability in recent years,” although profitability remains adequate overall.
Malaysia’s well-developed Islamic capital market continues to underpin the industry’s growth.
Outstanding domestic sukuk exceeded US$350bil and accounted for more than 60% of the local debt market, supported by tax incentives such as stamp duty exemptions and tax breaks on profits paid from sukuk.
Meanwhile, a banking analyst from a foreign research firm told StarBiz that Islamic banking in Malaysia is likely to remain on a steady growth trajectory, supported by structural demand, regulatory backing and the country’s mature syariah-compliant financial ecosystem.
“The sector’s increasing share of total financing reflects both consumer preference – particularly in housing – and banks’ deliberate push to expand Islamic offerings.
“Malaysia also retains a strong competitive advantage globally due to its deep sukuk market, supportive tax framework and well-established regulatory standards,” she said.
On the other hand, the analyst projects that growth will probably be gradual rather than explosive, as liquidity constraints and rising funding costs could continue to compress margins, especially as Islamic banks rely heavily on deposits and investment accounts to fund expansion.
Looking ahead, Fitch expects banks’ ongoing efforts to diversify funding sources and the deepening of Islamic money market activities to support liquidity and sustain long-term growth in Malaysia’s Islamic banking sector.
Disclaimer
The information provided in this report is of a general nature and has been prepared for information purposes only. It is not intended to constitute research or as advice for any investor. The information in this report is not and should not be construed or considered as an offer, recommendation or solicitation for investments. Investors are advised to make their own independent evaluation of the information contained in this report, consider their own individual investment objectives, financial situation and particular needs and should seek appropriate personalised financial advice from a qualified professional to suit individual circumstances and risk profile. The information contained in this report is prepared from data believed to be correct and reliable at the time of issuance of this report. While every effort is made to ensure the information is up-to-date and correct, Bond and Sukuk Information Platform Sdn Bhd (“the Company”) does not make any guarantee, representation or warranty, express or implied, as to the adequacy, accuracy, completeness, reliability or fairness of any such information contained in this report and accordingly, neither the Company nor any of its affiliates nor its related persons shall not be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof.
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