The government will not allow consolidation in the banking sector to continue to the point where only a few mega-banks remain, a report said today.

With a second round of mergers in the sector hotly anticipated, Second Finance Minister Nor Mohamed Yackop said the government would intervene if it went too far.

"If the banks decide to merge until only one bank is left, then we cannot let this happen. We have to ensure that the service to customers is kept up," Nor Mohamed was quoted as saying by the New Straits Times.

"For instance, account holders in small towns and kampungs (villages) must get the same service as those in big towns and cities. If they do not, we cannot allow this," he said.

Malaysia initiated a sweeping consolidation program shortly after the Asian financial crisis in 1997-98, which merged the country's 54 banks and finance houses into 10 banking groups to strengthen the sector.

Commercial reasons

The government, which has not prescribed a target number of banking groups, has since stated that further mergers will be made for commercial reasons.

The latest merger in March saw the acquisition of boutique lender Southern Bank by Bumiputra-Commerce Holdings, Malaysia's second largest financial group.

The deal took the number of groups to nine ahead of full liberalisation in 2007, which will open the market to competition from foreign banks.

Swinging between a hostile takeover and a friendly merger, the deal sparked hopes of further consolidation as well as intense market speculation over Bumiputra's move.

Nor Mohamed denied that the Malaysian government had played a role in the merger, saying it was a commercial decision.

"There is no body in Malaysia that has the power to influence the decision to merge. It is in the hands of the board of directors and the shareholders," he said.