On April 4th Malaysia's second-largest provider of financial services, the CIMB Group, hurriedly reversed an earlier decision to increase its base lending rate by 5 basis points, to 6.35%. One of the group's banking arms, CIMB Bank, was trying to offset the negative impact on its profitability of an increase in the statutory reserve requirement (SSR), which was raised from 1% to 2% on April 1st. The decision to increase the SSR was made on March 11th at a regular monetary policy committee meeting of Bank Negara Malaysia (BNM, the central bank); in an accompanying statement, BNM had been keen to stress that the increase in the SSR should not be used as a benchmark by banks for setting interest rates and that the move should be viewed only as a means of managing liquidity. It added that the increase in the SSR was intended to mitigate risks to macroeconomic and financial stability caused by a build-up of liquidity as a result of large capital inflows. It is widely believed that CIMB was strongly reprimanded by BNM, prompting it to reverse its decision to raise the cost of borrowing after only a single day.

BNM had been quick to start to normalise monetary policy when it raised interest rates by 75 basis points, to 2.75%, in 2010. Since then, the central bank has focused on measures that have no direct effect on interest rates. However, so far these moves have failed to dent loan demand. Total household debt is estimated to have been equivalent to 76% of GDP in 2010. Households account for 55% of bank loans, and of this 49% consist of residential-property loans. Property speculation was partially addressed in November 2010 with the imposition of higher deposit requirements on loans to purchasers of a third or subsequent property. Housing loan applications and approvals weakened in the first two months of 2011, but this may be attributable to seasonal influences. BNM recently tightened credit-card lending rules, raising income requirements and placing limits on the number of cards issued to any one individual. Further measures to control household debt are to be expected in the third quarter of 2011. There will be improved disclosure of loan terms and obligations, as well as tests for suitability of loan applicants and loan affordability, and verification of applicants' income is also likely to be tightened.

BNM appears to have adopted a pragmatic approach to merger and acquisition activity in the banking sector in recent months. The central bank governor, Zeti Akhtar Aziz, stated on April 6th that in the current environment existing market mechanisms should determine the number of banks. There are nine domestic financial services groups in Malaysia at present, and in addition many foreign banks would like to operate in the country or increase their shareholdings in local banks, which are currently limited to stakes of 30%. In June BNM is due to publish a comprehensive financial sector master plan for the next ten years. This will constitute the financial element of the government's drive to make Malaysia a high-income nation. A particular focus of the plan will be the country's development as an international Islamic-finance centre.