An important development in the Malaysian financial sector since the 1997 Asian financial crisis has been the reduction in the banking institutions’ credit exposure to businesses and the greater focus on household financing. In recent years, there has been a growing trend among corporations of securing longer-term financing, in larger amounts, from the capital markets. As the corporate sector turns to the capital markets to meet its financing needs, banking institutions are shifting their focus to the household sector as part of their business diversification strategy.

The household segment accounted for one third of the banking sector’s total loan exposure before the crisis; it now accounts for more than half. With the shift towards high-volume, low-value loans, the banking sector has diversified credit risks and minimised the potential for large losses stemming from the failure of a few large borrowers. At the same time, as lending to households becomes a larger segment of the financial system, it is crucial for policymakers to be aware of the implications for monetary policy and financial stability. This paper briefly discusses the current development of household finance in Malaysia, its implications for monetary policy, financial stability and some of the policy issues it raises.