From Mazli Noor
The Malaysian banking sector must urgently consider further consolidation to bolster its strength while ensuring the continued resilience of the nation’s financial system.
This observation stems from the ongoing decline in overall bank liquidity levels, which have been trending downwards since 2022.
A key factor in the current liquidity crunch is the weakening growth in deposits. The year-on-year deposit growth rate slipped to 3% in March, down from 5% a year earlier, increasing pressure on banks’ operational capabilities.
Analysts attribute this to a combination of domestic economic conditions and external market factors.
Whatever the causes, the situation prompted Bank Negara Malaysia (BNM) to halve the statutory reserve requirement (SRR) from 2% to 1% two months later, its lowest level in 14 years.
The cut is expected to inject RM19 billion into the local banking system, improving liquidity and supporting financial intermediation. The last time BNM reduced the SRR was in March 2020, during the peak of the Covid-19 pandemic.
Things, however, worsened when the overnight policy rate (OPR) was cut in July 2025, ahead of Putrajaya‘s talks on tariffs with Washington.
Generally, a 25-basis-point reduction shrinks the sector’s margins by 2% to 3%, reducing profits by 1% to 2%. Collectively, these moves present a dual challenge for the industry, placing significant strain on its overall health and stability.
While Malaysian banks have, as seen in recent quarterly disclosures, managed to maintain satisfactory performance levels, this has required increasingly tight management of resources due to a continuously shrinking liquidity base.
Given the current economic landscape, it is almost inevitable that net interest margins (NIM) will experience further compression, with opportunities for non-interest income (NOII) remaining limited.
The impact of these compounded factors will be closely scrutinised in the coming release of Q2 figures.
It is timely, therefore, for the sector to consider further consolidation to create larger, more resilient financial institutions that can benefit from economies of scale and improved efficiency.
Such a move would enhance stability, allow the industry to weather market volatility and safeguard long-term consumer interests.
Mazli Noor serves on the boards of several public and private companies and is an FMT reader.
The views expressed are those of the writer and do not necessarily reflect those of FMT.
