KUALA LUMPUR, Oct 30 (Bernama) -- Moody's Investors Service said ASEAN economies had a strong foundation to facilitate Islamic banking growth, with right regulations in place. 

Moody's Vice President and Senior Analyst Simon Chen said although the foundation was strong, various challenges are evident, but the authorities were stepping up measures to develop the sector.

"Currently, Malaysia and Indonesia are actively making regulatory efforts at nurturing Islamic banking, and this would drive growth in a region which has a significant Muslim population,’ he added.

"Within ASEAN, populations are also growing fast, economic environments are robust, and with solid fundamentals, banks are capable of pursuing the expansion of shariah-compliant services," he said in a statement today.

Moody in its latest report on Islamic banking also note that the current levels of Islamic financing penetration in the region are generally low as most governments have yet to actively sought to develop the sector, which has resulted in low levels of public awareness of Islamic banking services.

The report also states that Malaysia aims to boost the share of Islamic banking assets in total banking assets to 40 per cent by 2020 from 32 per cent at the end of August 2018, while Indonesia is seeking to increase the proportion to 15 per cent by 2023 from six per cent by end of July 2018.

“Strong population gains, especially in the prime-age group, in Muslim-majority ASEAN countries will result in an expansion of core customer bases, while spurring domestic consumption and private sector demand for credit and banking services," he said. 

However, Islamic banks in Malaysia have significantly smaller capital bases than conventional banks, although they account for a significant share in total banking assets as the capital gap between the two is much wider in smaller Islamic banking markets in ASEAN, such as Indonesia.

“Robust economic environments and the banks' sound solvency and liquidity positions will help conventional banking groups, which Moody's believes will continue to lead Islamic banking growth in the region as they have in Malaysia and Indonesia,” he said.

-- BERNAMA