Malaysian firms turn to short-term borrowing as cash buffers shrink: Bank Negara
Middle East conflict pressures hit trade, construction and manufacturing, with small firms most at risk
[KUALA LUMPUR] Some Malaysian companies are increasingly turning to short-term borrowing to keep operations running as rising costs and slower payments drain cash buffers, even as overall business lending and credit quality remain healthy, according to Bank Negara Malaysia.
In an insights report released on Monday (Oct 5), the central bank said pressures linked to the Middle East conflict were particularly visible in wholesale and retail trade, construction and selected manufacturing segments, with smaller firms more vulnerable to higher costs and disruptions.
Its engagements with businesses indicated that some companies were facing delayed payments and longer cash conversion cycles, extending the time needed to turn spending on supplies and production into cash receipts.
Small and medium-sized enterprises have thinner margins, smaller liquidity buffers and less scope than larger companies to diversify suppliers or absorb cost increases, Bank Negara said in an October assessment of geopolitical risks to financial stability.
Some firms had consequently become more reliant on short-term and working-capital financing as their cash buffers declined.
The central bank’s findings come alongside signs of mounting cost pressures among manufacturers.
A Federation of Malaysian Manufacturing survey released in September found that 69 per cent of respondents reported higher production costs in the first half of 2026, while 38 per cent expected profits to decline in the second half.
Business loan growth accelerates
Outstanding business loans grew 7.3 per cent year on year in June 2026, compared with average growth of 4.1 per cent between 2022 and 2025, supported by working-capital financing, based on the central bank’s report.
Separately, more recent data showed that business loan growth accelerated to 8 per cent year on year in August, from 7.6 per cent in July, driven primarily by working-capital financing. Banking system gross impaired loans remained broadly unchanged at 1.4 per cent.
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Banks were exercising greater caution when assessing borrowers in affected sectors, but Bank Negara said this reflected “a recalibration of risk assessments rather than broad-based credit tightening”.
The continued expansion of financing indicated that credit was still flowing to the real economy.
“Maintaining a balance between supporting viable businesses and managing credit risks is important,” it said.
Business conditions nevertheless remained broadly stable, underpinned by sustained domestic demand, robust electrical and electronics exports and continued investment.
In primary manufacturing, higher fertiliser and petrochemical-related input prices added to costs, but most firms could still secure essential supplies.
Which sectors face more repayment issues
The business loan impairment ratio stood at 2.8 per cent in June, while the share of loans classified as having increased credit risk remained below its near-term average.
Repayment pressure had nonetheless emerged among SMEs in transportation, wholesale and retail trade, and primary manufacturing.
“These developments point to the possibility of latent credit risk building up among selected firms experiencing persistent liquidity pressure,” Bank Negara said.
Malaysia’s financial system has limited direct exposure to the Middle East, with the conflict’s effects transmitted mainly through trade, business conditions and global financial markets.
Higher costs, supply disruptions and softer demand could weaken corporate finances, while inflation could erode household purchasing power. Market volatility could also affect exchange rates, asset valuations and funding conditions.
Household finances remained generally resilient, supported by stable labour markets, government cash assistance and fuel subsidies. Deeper repayment arrears increased marginally, particularly among lower-income borrowers, but Bank Negara found no broad-based rise in new repayment difficulties.
Financial institutions remain resilient
Banks retained strong buffers, with a total capital ratio of 17.9 per cent and an aggregate loan impairment ratio of 1.4 per cent. Their liquidity coverage ratio stood at 149.6 per cent, above the level required by regulations.
Competition for deposits had pushed up some funding costs, without creating broader funding stress or constraining lending.
Domestic financial markets also remained orderly despite geopolitical uncertainty and changing expectations for US monetary policy. Non-resident holdings of government securities increased RM8.1 billion (US$2 billion) on a year-to-date basis.
A longer or more severe conflict could bring larger commodity-price shocks, persistent supply disruptions and weaker global growth, Bank Negara warned.
However, its earlier stress tests captured geopolitical risk aversion and inflationary supply shocks, with the financial system remaining resilient under adverse scenarios.
The central bank said it would continue to focus on monitoring business liquidity, repayment trends among vulnerable firms and households, bank funding conditions, and the potential for financial markets to amplify external shocks.
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