Malaysia’s GDP grew by 5.4% in the second quarter of fiscal year 2012, backed by reviving exports. Banking industry followed its growth trend, too, after the economic crises of 2008-2009. There was double digit growth in assets and loans, as well as deposits, of Malaysian banks in the first half of 2012.

Loans for purchase of residential property dominated the portfolios of most banks followed by transport vehicle loans. Rising per capita income and growing urbanization in the country is driving loan growth in these two segments. Fixed deposits and investment deposits continued to dominate total deposits in banks. More than half of the deposits were in these two segments. Tax rebates and lower risk drove customers to these segments. The banking system remained stable with ample liquidity to meet demand for deposit withdrawals and other liquidity obligations. The overnight policy rate of central bank has remained stable for a while now. The banking system in Malaysia has perhaps again entered a period of stability following crises requiring minimal intervention by the central bank.

Though pre-tax profit of Malaysian commercial banks is experiencing double digit growth, the net interest income growth has been subdued. Hence, the banks are promoting fee based products and services to enhance their profitability. The capital adequacy of Malaysian banks remained strong as of June 2012. Both core-capital and risk weighted capital remained at sufficiently higher levels than prescribed by Bank Negara Malaysia (BNM): Malaysian banks are striving to achieve the capital requirements prescribed in the Basel III requirements. Net non-performing loan ratio has also shown a successive quarterly decline, thereby showing the strength of the banking system.

The outlook for Malaysian banking is positive owing to consistent GDP growth and rising per capita income in the country. The emergence of Malaysia as an Islamic banking hub will add further to the growth of this sector.

Key Points:

• As of August 2012, total assets held by banking institutions in Malaysia amounted to MYR 1,883bn, an increase of 11.5% compared to the same period last year.

• Loan disbursal followed its long term growth trend in the first half of 2012. Total loans disbursed by commercial banks grew by 11.1% in June 2012.

• As of June 2012, total deposits of the banking system grew by 12.6% year on year to reach MYR 1,360bn. The bulk of the deposits were in fixed deposits, investment deposits and demand deposits.

• Bank Negara Malaysia (BNM) raised the overnight policy rate by 25 basis points in May 2011. Since then, it has remained stable at 3%.