Bank Islam Integrated Annual Report 2022

ISLAMIC BANKING REVIEW & OUTLOOK A REVIEW OF 2022 The Global Economy The year 2022 began with positive developments in the global economy as it continued to rebound strongly from the pandemic-induced slowdown of 2020. The global GDP growth in 2021 was 6.3%, setting the stage for a promising start to the year. However, Russia’s invasion of Ukraine caused significant disruptions to the global economy. The displacement of millions of Ukrainians and the resulting humanitarian crisis has been unprecedented in Europe since World War II. The conflict also profoundly impacted the prices of gold, crude oil, and natural gas, while the stock markets were also affected. This situation further highlighted the need to transition towards cleaner and more sustainable energy sources. The rising inflation rates in many countries emerged as another major concern in the global economy. Prices for essential commodities like energy, shelter, clothing, and food rose significantly, which put immense pressure on the lower-income groups. This trend has transformed the economic mood and potentially redirected the trajectory of national and global economies for the foreseeable future. To curb the rising inflation, central banks across the world have aggressively increased their policy rates throughout 2022. However, the pace of these rate hikes has not kept up with the pace of inflation in most countries. The Malaysian Economy The Malaysian economy performed remarkably well, with real GDP growth coming in at 8.7% in 2022. The impressive growth was due to base effects and an increase in domestic demand, fueled by improved labour market conditions and aggressive policy support amid raging global inflation. As the borders reopened and the pandemic status shifted to endemicity, economic activity picked up pace and returned to normal levels. The demand for electronic and electrical (E&E) products remained high, contributing significantly to the growth of exports, while the manufacturing and services sector continued to play a pivotal role in driving the country’s economy. The Banking Sector In 2022, Bank Negara Malaysia (BNM) took steps to address inflation by increasing the overnight policy rate (OPR) four times, ultimately bringing it to 2.75%. While this move was expected to be positive for the banking industry, the benefits were partially offset by increased deposit competition leading to higher costs of funds. Despite this, Malaysia's banking industry showed strength throughout the year despite market uncertainties and global events. Household, personal, and term financing were the primary drivers of the industry's net financing growth, which increased by 4.9% YoY. Islamic Banking, in particular, stood out with a ten-year CAGR of 10.9% and financing growth surging by 12.4% in 2022, outpacing Conventional Banking. This momentum was driven by the increased proportion of Islamic Banking assets relative to the entire banking system's assets across various sectors, spurred by news of the global economy reopening, strong economic recovery, and higher adoption of digital financial services. OUTLOOK The Global Economy All multilateral development banks (MDBs) are projecting lower global growth rates for the second year due to the ongoing global cost of living crisis, tight financial conditions, the prolonged Russia-Ukraine military conflict, and the lingering effects of the pandemic. Trade in 2023 may also be weighed down by lower overall external demand, particularly among advanced economies. Some policymakers argue that more tightening is necessary to quell stubborn inflation following a series of strong job reports, prices, and consumption data. The US unemployment rate in January reached the lowest level since May 1969 at 3.4%, pointing to sustained labour market strength. Such a situation and persistent inflationary pressures have led to the growing expectation that the Fed will continue to tighten its policy rates for higher and longer, despite the recent banking crisis in the U.S. The wrong monetary policy mix could be a problem. Overly expansionary fiscal policy could prevent economies from necessary slowdowns and eventually lead to more aggressive monetary policy responses to control inflation. This could cause a more painful downturn to wring inflation pressures out of the economy, at the cost of lost fiscal space. The Malaysian Economy Malaysia’s economy recorded its highest growth in two decades, driven by pent-up demand that has placed the country at the top of Asia’s fastest-growing economies, according to Bloomberg. However, this trend is likely temporary, and many other countries are still struggling to recover from post-pandemic growth headwinds. In response to high inflation, the Malaysian prime minister has unveiled several initiatives to reduce living expenses and promote more progressive taxation. The government is proposing to increase taxes on the top 20% of incomes (T20) while decreasing income taxes for the middle 40% of workers (M40). The Banking Sector The nation’s banking sector remains strong and competitive, enabling it to continue serving as a reliable financial intermediary. In the wake of the COVID-19 pandemic, Malaysian banks have extra cash in anticipation of pandemicrelated loan losses, which could potentially be utilised for deterioration in any asset quality caused by the inflationary environment, providing potential earnings in the form of writebacks in 2023 and beyond. Malaysian Islamic financing growth is expected to moderate in 2023 due to higher financing rates reducing demand, though it is expected to continue outperforming conventional banks due to the country’s supportive regulatory environment, Islamic finance ecosystem, and the shift towards Shariahcompliant services. At the end of 2022, the share of Islamic financing in the total banking system loans was 41%, solidifying Malaysia’s position as the third-largest Islamic banking industry worldwide. Integrated Report 2022 40 STRATEGIC REVIEW Operating Environment

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