Especially since their leader Lee Kuan Yu wanted to be kept in it.
indeed, Lee Kuan Yew was a strong advocate for merger between the Federation of Malaya and Singapore (with Sabah and Sarawak included to balance out the ethnic chinese population in Singapore) in the aftermath of the gradual transition from British rule to independence due to his belief that merger was necessary for Singapore's survival, given her perceived untenable situation without. in fact, when announcing separation, Lee Kuan Yew displayed a rather strong emotional response - "For me, it is a moment of anguish. All my life, my whole adult life, I have believed in merger and unity of the two territories."
despite this, the two years experienced under merger would see how untenable this was instead, for a variety of reasons, politically and socially.
first and foremost, the Federation of Malaya (or Malaysia today) operated under the policy of bumiputra, malay for 'son of the soil' which extended special privileges to ethnic malays. as noted by Algebrace, Singapore's population consists mainly of ethnic chinese. cognizant of the limitations that the bumiputra policy would impose on Singapore, the People's Action Party (PAP) under Lee Kuan Yew began advocating instead for a 'Malaysian Malaysia' which would grant equal rights to Malaysian citizens regardless of ethnicity. this obviously proved a key source of tension between the PAP and UMNO, the malay dominated political organization in Melaya under Tungku Abdul Rahman, which wished to retain the status quo. given the low possibility of Malaysia reneging on this policy, separation was ultimately necessary - last year, in response to the question whether "in retrospect [he had] pushed" too hard on Malaysian Malaysia", Lee Kuan Yew unequivocally replied "No. If I had not pushed then, we would be prisoners now." even if his blasé comments are spoken with 50 odd years of hindsight post separation. correspondingly, assurances made before merger that neither party would interfere in the other's constituency were ignored as UMNO ran candidates in Singapore's 1963 elections and the PAP challenged the Malaysian general elections in 1964. in the months leading up to separation, extremist UMNO elements called for the arrest of PAP leaders for this perceived 'chinese coup'
regardless, at the grassroots level, merger proved untenable due to the racial conflicts that arose. today, Singapore remains fairly racially harmonious, but during merger, not only were the ethnic chinese spiteful against the aforementioned bumiputra policy, ethnic malays in Singapore were disdainful that similar treatment extended to the malays in Malaya were not given to them by the PAP. economic opportunities promised from the benefits of merger failed to materialize, which UMNO capitalized on to incite antigovernment movements, racial and religious tensions. this came to a head on July 21, 1964, where a celebration of Prophet Mohammad's birthday descended into a massive racial riot between the ethnic chinese and malay. UMNO stirred ethnic malay sentiments, while communist elements in Singapore stirred up chinese communal sentiments. amidst this was the Konfrontasi, under Sukarno, Indonesia launched a policy of confrontation in direct response to the merger, in effect a state of war against the new entity of Malaysia. relevant to this topic is how Indonesian provocateurs engineered a riot in September 1964, with the death of a malay trishaw rider assumed to have been murdered by chinese youths. not only, terror attacks were also utilized - with the most well known being the 1965 March MacDonald House bombing by two Indonesian commandos (a recent point of conflict between Singapore and Indonesia being the naming of KRI Harun Usman in commemoration of the two saboteurs Harun Said and Usman Muhammad Ali, trialed and hanged in after the act). it is thus evident that even on the ground, displeasure with merger was rising with the escalation of fear and racial tensions.
economic opportunities that were praised due to merger also were slow to come to fruition - the establishment of a common market between Singapore and Malaysia was fraught with delays, one of the key reasons Lee Kuan Yew had advocated for merger was precisely due to this economic hinterland provided by mainland Malaysia. to this extent, Singapore had even provided substantial developmental loans to Sabah and Sarawak ($150 million loan over 15 years without interest for the first $100 million). contrastingly, taxes were even raised in December 1964, ostensibly to fund defense expenditure as a result of Konfrantasi. finally, Malaysia threatened to close the local branch of the Bank of China which arranged trade between China and Singapore and handled remittances between the countries.
the result of this was Tungku Abdul Rahman decided that in light of escalating tensions, political disagreements between the PAP and UMNO, separation was necessary. on August 6th, he informed Lee Kuan Yew of such - while Lee Kuan Yew had hoped for the continuation of merger under more tenable terms, upon consultation with Dr Goh Keng Swee, "ask[ing] him to negotiate a looser re-arrangement for Singapore but keep Singapore within the Federation [who] decided that the best alternative was a clean break" the terms for separation were also set into motion by the Singaporean side. (the above links to a eulogy made by Lee Kuan Yew for Dr Goh Keng Swee in 2010, an interesting read of a man responsible for several of the key policies in Singapore's transition to and post-independence, if not as equally responsible as Lee Kuan Yew himself).
therefore, on August 9th, Singapore was formally separated from Malaysia after the Malaysia parliament passed a bill voted 126 to 0 with the Singapore delegates purposely absent. it is on this day that Singapore celebrates her independence from British colonial rule and the ill-fated Malaysian merger, setting her on trajectory for several of the political and economic developments that define her today.
Differences in demographics and economics.
I wrote alot of useless information and deleted, hopefully this is better (i wrote an essay on the history of population density in Singapore least year).
Putting it simply Singapore is highly concerntrated with Chinese biologicals unlike the Federation of Malaya that is much more Malay focused. When i say this i mean that in 1957 the Malay pop of Malay's was 50% while in Singapore it was 13% with 37% and 75% chinese respectively. In Singapore the Malay were discriminated against in comparison to the Chinese and in Malaya it was the opposite with the Chinese being discriminated against.
Adding onto this in Malay the language of Malay was the first and only language to have legal rights while in Singapore there was an emphasis on English and Chinese due to the population.
So there was a very basic problem of demographic differences but the necessity of it was seen by both sides as Singapore needed a larger partner to grow while Malay could use Singapore's ports to spread trade, particularly rubber around the world.
So the merger went ahead with a combined name of the Malaysia and a Hong Kong/China relationship between the two. However when the merger did happen splits began to appear within the two as the Ethic Chinese and Malays clashed in riots where hundreds of people were injured/killed. The riots themselves stemming from the perception of the Chinese having the money while the Malays didnt.
In a sense this was true as the Chinese certainly did have a disproportionate economic advantage over their Malay counterparts in terms of population however the two governments went about dealing with this disproportionate income in a different manner.
In Malaysia the conservative aristocrats saw the way forward as the protection of the wealth for the elite while in Singapore it was much more focused on the even distribution of wealth for everyone to enjoy.
This difference was a large divergent point to the point where the Malaysian government wanted either the PAP (majority party of Singapore at the time) to leave or Singapore as a whole to leave.
So Singapore left in 1965.
The answer is fragmented but im listing out the notes i wrote last year, if you would like me to upload the notes as a whole for you to look at i can do that.
Source: The History of Singapore Jean Abshire 2011