KUALA LUMPUR: Malaysia's banking sector is expected to grow firmly next year with loans expanding 5.5 per cent.

This will driven by strong demand from households and businesses, according to Bank Muamalat Malaysia Bhd chief economist Dr. Mohd Afzanizam Abdul Rashid.

Speaking to Bernama, Dr. Afzanizam attributed the optimistic outlook to the continuation of full employment, which is expected to support households' ability to manage debt repayments.

He also highlighted expansionary fiscal policies, increased government development spendingand a stronger external sector as factors likely to stimulate demand for business financing.

However, he cautioned that the planned rationalisation of the RON95 petrol subsidy in mid-2025 could have significant implications for general price levels and household debt repayment patterns.

Afzanizam also cautioned that higher costs for consumers and businesses might challenge the financial resilience of both household and non-household sectors.

Despite these potential risks, he said the banking sector's strict credit standards would act as a buffer, helping to mitigate vulnerabilities in an evolving economic landscape.

The sector is also expected to benefit from stable interest rates, with the overnight policy rate likely to remain at 3.0 per cent, sustaining net interest margins.

Meanwhile, potential interest rate cuts by the US Federal Reserve could lower its treasury yields, benefiting Malaysian bond yields.

Higher bond prices resulting from lower yields could enable local banks to realise mark-to-market gains on fixed-income assets, boosting non-interest income.

However, Afzanizam identified competition in the deposit market and the growing influence of digital banks as emerging challenges for traditional financial institutions.

He emphasised the importance of external factors, such as US trade policies, which could shape Malaysia's banking sector.

While the overall economic outlook remains favourable, the RON95 subsidy rationalisation introduces a degree of uncertainty, warranting close monitoring of its broader economic effects.

Afzanizam said Malaysia's banking sector, though poised for profit growth, must navigate a complex environment shaped by subsidy reforms, global influences and the digital transformation of financial services.