Islamic lenders buffered by Malaysia’s net energy exporter status

PETALING JAYA: Malaysia’s Islamic banks may face higher funding costs and tight liquidity, but the country’s position as a net energy exporter of liquefied natural gas (LNG) should provide a buffer against knock-on effects from the Middle East conflict, according to a Moody’s Ratings report.

The report indicated that the country’s strong foothold in syariah-compliant banking poses a double-edged sword, given Islamic banks’ larger presence in retail and small and medium enterprise (SME) financing.

This makes Islamic banks more sensitive to higher living costs and weaker business cash flows.

Malaysia’s Islamic banks face tighter liquidity than conventional banks in comparison.

This is because rapid growth in Islamic financing had pushed their financing-to-deposit ratio to 113% at the end of 2025.

“Funding pressures will tighten liquidity while capitalisation remains adequate against risks.

“Islamic banks’ liquidity is tighter than that of conventional peers, as reflected in higher financing-to-deposit ratios,” the report highlighted.

Moody’s Ratings cautioned that the second-order effects of the Middle East conflict could further tighten liquidity through funding pressures.

Nonetheless, the report expects liquidity pressure to ease as financing growth moderates, with investment accounts providing an additional funding source.

It pointed out that Islamic banks in Malaysia, Indonesia and Pakistan have broadly adequate capital ratios, similar to their conventional peers.

“While capital ratios are largely aligned to conventional peers, Islamic banks are more leveraged and the density of risk-weighted assets is lower because of supportive regulatory norms,” it said.

Meanwhile, the rating agency expects capital buffers to remain adequate in absorbing the impact of the Middle East conflict.

For Malaysia, Moody’s Ratings views the conflict as a manageable risk for Islamic banks.

This is supported by the country’s net energy-exporter status, diversified oil sourcing and strong domestic demand.

“We also do not expect significant oil supply disruption because of diversification in sourcing and onshore refining capacity,” the report said.

It added that while fuel subsidies help contain inflationary pressures on households, higher food, transport and input costs remain a concern.

However, robust domestic demand should partly offset these pressures and support the central bank’s steady monetary policy stance.

Domestic Islamic banks can reprice relatively quickly through their deposit and financing structures despite being relatively sensitive to changes in interest rates.

Moody’s Ratings said Islamic time deposits accounted for 61% of Islamic deposits at the end of 2025.

The majority was based on Tawarruq, which has shorter maturities, the rating agency added.

Tawarruq financing accounted for 65% of total Islamic financing.

While technically fixed-rate, Malaysia’s ceiling-rate and Ibra (rebate) mechanism gives banks greater flexibility to adjust effective rates, it explained.