Originally posted by Achinz
In a nutshell, it's a racial issue.
The proposal for Singapore to merge with the old Malaya and the British Borneo territories into Malaysia fell through because of the fear in then Malayan government leaders that the predominantly Chinese population of Singapore would tip the balance in the latter's favour cf the Malays.
If you visit Singapore today, there is an interesting exhibit in the museum of a video of a tearful Lee Kuan Yew (the then Prime Minister) announcing the breakdown of the merger talks.
Close, but maybe not quite.
It's a politics issue, as well. In 1963, Sarawak, Sabah (the north Borneo territories) and Singapore, together with the already-independent Federation of Malaya, formed the Federation of Malaysia. The indigenes in north Borneo, added to the Malay vote, allowed the indigenes in the new entity to outnumber the Chinese vote (incl Singapore's Chinese).
The dominant National Front coalition then was on a losing streak against the Singapore-based opposition People's Action Party (Lee's party), which championed a cause based on meritocracy and equal rights for all citizens. The PAP was making some headway in Malaya itself (Lee was a formidable demagogue).
Tunku, leader of the National Front, fearing loss of control to the non-racial based PAP (the component parties of the NF were racially-based), then got Singapore out of Malaysia. Probably for the best, as in 1969, racial riots broke out in KL and elsewhere in Malaysia and hundreds of people, mostly Chinese, were killed.