Page 68 - Full Book_24.4.2021

MANAGEMENT
DISCUSSION & ANAlYSIS

INTEGRATED ANNUAL REPORT 2020 Client to Provide Photo

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IMPACT OF COVID-19
BIMB HOLDINGS BERHAD 199701008362 (423858-X) 2020. Compared to conventional banking, Islamic finance has a larger exposure to SMEs, microfinance
The COVID-19 pandemic has affected aggregate demand, small and medium enterprises (“SMEs”),
and low-income individuals particularly hard, and this will impact the performance of Islamic finance in

and retail lending, especially in Asia. With SMEs facing multiple financial issues, this will increase the
quantum of non-performing financings and vulnerability of Islamic banks’ portfolios.

Lower issuance of Islamic corporate bonds, or corporate Sukuk in Southeast Asia was recorded in 2020.
In Malaysia, for instance, the large increase in government Sukuk during the period did not quite fully
offset the weakness on the private issuance side. After four years of consecutive growth, global issuance
of Sukuk is predicted to decline by a modest 5% in 2020 to register an estimated Sukuk issuance size of
US$170 billion this year, down from US$179 billion in 2019.

On the bright side, banks entered the pandemic crisis with much stronger liquidity than in
2007 – 2008, and because of this, as well as substantial external liquidity support from central banks
and robust government incentives, it is unexpected that there will be broad confidence issues in banking
systems. Extraordinary measures including a range of regulatory and supervisory responses have been
rolled out by Islamic finance jurisdictions to preserve resilience of relevant financial systems and the
continued provision of financial services to the real economy. These include payment moratorium and
Shariah-compliant government guarantees on bank exposures to certain sectors in receipt of Islamic

financing.
To ensure Shariah compliance, the Islamic Financial Services Board (“IFSB”) has had to issue public statements
and provide technical guidance related to the extraordinary measures when calculating the capital
requirements of institutions offering Islamic financial services. This is in line with treatments prescribed
by the International Accounting Standards Board (“IASB”), the Basel Committee on Banking Supervision
(“BCBS”) and the Accounting and Auditing Organisation for Islamic Financial Institutions (“AAOIFI”).
In any case, Islamic banks should have adequate buffers for loss absorption to meet near-term challenges,
but risks to asset quality and profitability are envisaged should the COVID-19 outbreak be prolonged.