Measures To Cap Household Debt Cool Islamic Home Loans

islamic mortgage

Due to the sluggish economy and tighter lending rules, demands for Islamic mortgages have cooled, and helped in capping the highest level of household debt in Southeast Asia.

Based on the data released by the central bank in October, home loans that are Shariah-compliant have only increased by 17% in the first nine months of 2015, whereas they had been rising an average of 29% per annum in the past five years.

This comes after the Government raised property gains taxes, cut the maximum tenure on lending and implemented restrictions on foreign ownership to curb speculation in the property market.

Growth in Islamic mortgages will likely ease to below 10% in 2016, which spells bad news for Malaysians aspiring to own a property but a healthy development as the Government seeks to reduce leverage, Chua Hak Bin, economist from Bank of America Merrill Lynch, forecasted.

In June, Fitch Ratings warned that unmanaged consumer liabilities can lead to the derailing of economic activity, and also build up disproportionate financial risk.

“Property projects have started to slow and stricter macro-prudential requirements have tightened bank lending as the risk of property prices sliding increases,” said Singapore-based Chua. “My sense is that mortgages, including Islamic mortgages, will slow to single digits in 2016.”

While growth in Islamic home loans eased, lending still climbed to a record RM90.6 billion in the first nine months, after rising 25% in all of 2014 and 30% in 2013. Its conventional counterparts, on the other hand, rose 6.7% to RM318.6 billion, with increases of 10% in 2013 and 11% in 2014.

Malaysia’s household debt was recorded by Standard & Poor’s and also the Institute of International Finance, as the highest in Southeast Asia. According to central bank figures, the country’s household debt amounted to 87.9% of gross domestic product (GDP) as of December.

Chua of Bank of America said it stood at RM988 billion in September, equivalent to about 87% of GDP using his own calculations, up from 66% in 2007.

Fitch’s June report, authored by analysts in Singapore, said the 10% increase in household debt in 2014 was a “healthy adjustment,” after falling below 2010’s 15% in the previous three years.

Property financing would likely dawdle further as living cost rises. The implementation of the goods and services tax in April this year, hikes in toll prices, bus fares and cigarette prices, all contributed to that.

As a result, consumer sentiment fell to its lowest since 1998 in the third quarter amid a slump in the Ringgit and oil.

“It’s getting more difficult to obtain house loans since lenders are becoming stricter,” said Abas A Jalil, chief executive officer of Kuala Lumpur-based consultancy Amanah Capital Group Ltd. “In 2016, the growth rate in Islamic mortgages is expected to be lower than previous years based on the overall economic growth projection, but we could still expect to be in double-digit growth.”

Last quarter, Malaysia’s economy expanded by 4.7%, the weakest pace in more than two years. Forecasts by the Ministry of Finances expected growth of up to 5.5% in 2015, down from 6% last year, and a maximum of 5% in 2016.

“We are expecting moderate growth for Islamic property financing,” said Dzulkifly Aminuddin, head of consumer financial services at OCBC Al-Amin Bank Bhd in Kuala Lumpur.

“The continued sluggish economy seen in the weaker ringgit and the general higher cost of living, together with other uncertainties, have, to an extent, contributed to the lacklustre sentiment.”

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