A credit ratings agency said local lenders, with the exception of state-owned Al Amanah Islamic Bank, are unlikely to expand their Islamic finance activities in the next several years.
According to an S&P Global Ratings report released Monday night, the Philippines has a potential Islamic banking market to capture because around 5 to 6 percent of the country’s population is Islamic and lives in underbanked areas
However, Al Amanah, a subsidiary of the Development Bank of the Philippines, is the country’s only Islamic commercial bank, it underscored.
As a result, the debt watcher sees Al Amanah as a pioneer in development projects such branch openings and Islamic finance windows.
“We don’t expect material progress from other banks given they have not shown much interest in serving this market,” it added.
This, S&P said, could be attributable to the high cost of opening branches in the region, as well as a higher credit risk due to the borrower’s low-income profile.
It expects bank and borrower operating conditions in the Philippines to gradually steadily improve.
“In our base case, banks’ recovery to pre-Covid-19 (coronavirus disease 2019) levels will likely stretch beyond 2022. Higher NPFs (nonperforming financings), elevated credit costs and lower margins will hurt banks,” the credit rater also emphasized.
In 2020, Al Amanah, for example, saw a significant drop in its loan portfolio and a multi-fold increase in credit loss reserves. As a result, the bank’s net losses for the year grew by 15 percent to P86 million.
S&P believes that a prolonged Covid-19 crisis in the Philippines will harm consumers’, small businesses’, and leveraged enterprises’ debt-servicing ability.
In the second half of 2021 and 2022, the impact on banks will be determined by how well the economy recovers and lending conditions stabilize. It forecasted that bank operating conditions would improve progressively as the economy grew by 6 percent this year.
“If Al-Amanah opts to utilize the central bank’s relaxation of accounting and provisioning norms, that will delay the proper recognition of stressed exposures,” S&P said.