The subject of fiscal federalism has been associated for many years with economics, in particular with the study of public finance. However, its political dimension is often neglected. This is the case in the conventional study of fiscal federalism in Malaysia, which focuses on the economic perspective. The aim of this thesis is to examine the design, implementation and problem of fiscal federalism in Malaysia as a political process in promoting national integration and the unity of the federation. This research is based on an intrinsic case study approach as the subject of fiscal federalism attracts strong public interest, which requires an in-depth study of the case. In doing this research, a combination of narrative report, statistical analysis and interview has been used. One of the significant findings of this research is that the design of fiscal federalism in Malaysia is essentially based not on the federal spirit, but on the strong central government theme imposed by the colonial authority concomitant to the historical and political background to the formation of the federation. As a result, today, fiscal federalism displays a federal bias and mounting centripetal forces, even to the extent of coercion on the states, making the federal government grow bigger and more dominant, financially and politically. Thus, the working of fiscal federalism depends not on what is enshrined in the Constitution and federal spirit but on centre-state political interactions. If states' politics are not affiliated with the ruling political party that control the federal government, federal-state fiscal relations will be strained. The effects are felt in petroleum royalties payments, disbursement of grants, borrowing and other form of fiscal 'sanction' imposed by federal executive supremacy. On the other hand, if the states are ruled by the same political party, they become financially complacent. To all intents and purposes, the exclusive control of revenue sources by the centre has enabled the federal government to prevent most states from falling to the opposition party, thus ensuring a majority in parliament. The outcome is that the states are subordinated and subservient to the centre and hence the futures of the states are subject to the federal government's 'unilateral action'. In the long run, Malaysia is moving towards becoming a unitary state. This is the antithesis of the federal spirit, and thus becomes a threat to the federation. Therefore, fiscal federalism is a crucial acid test of the viability of any federation. Fortunately, thus far, Malaysian federalism had passed the test, though the states find more pain than gain. In the final analysis, this thesis suggests that structural reform of the federal-states' financial arrangements should be undertaken in order to strengthen the states' finances and subsequently reduce the states' dependence on the largesse of the federal government for funds.