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ASEAN banking needs further integration

The ASEAN market and production base is comprised of five core elements — the free flow of goods, services, investment, capital and skilled labour. But progress has been limited.

Back in 1997, ASEAN leaders agreed to transform Southeast Asia into a stable, prosperous and competitive region characterised by equitable economic development.

The ‘ASEAN Vision 2020’ sought to reduce poverty and socio-economic disparities. As a vehicle to achieve this vision, ASEAN leaders established the ASEAN Economic Community (AEC).

The AEC is built upon a blueprint of four interrelated pillars: realising a single market and production base; creating a highly competitive economic region; achieving equitable economic development; and full regional integration into the global economy.

The first pillar of the blueprint, establishing a single market and production base, will help ASEAN become a more dynamic and competitive region.

This ASEAN market and production base is comprised of five core elements — the free flow of goods, services, investment, capital and skilled labour. But progress has been limited.

So far, ASEAN financial integration has only translated into a free flow of services

The need for further integration of the financial market is clear

With it, ASEAN corporations will be able to enjoy more abundant sources of low-cost funding and ASEAN countries’ international competitiveness will in turn increase.

The banking industry, which dominates the financial sector, is now the main target of further integration through the ASEAN Banking Integration Framework (ABIF).

The purpose of the ABIF is to facilitate progressive market access and operational flexibility for Qualified ASEAN Banks (QAB), subject to prudential requirements and reciprocal arrangements. QABs are envisaged to have an even greater role in facilitating intra-ASEAN trade and investment by 2020.

Under the ABIF initiative, QABs will act as ‘special banks’ with preferential treatment over non-QABs or non-ASEAN foreign banks. In countries that have a multi-layered banking licensing regime, QABs will reap more benefits than non-QABs or non-ASEAN foreign banks due to their operational flexibility. QABs can offer a broader suite of banking products and services at the same level as local banks.

Since ASEAN integration is supposed to support equality and lessen disparity, there should be greater efforts made to minimise gaps in banking presence.

The most obvious such gap is the difference in the number of banks from some ASEAN members as compared to other ASEAN member states.

In Indonesia, the existence of ASEAN big banks is obvious

While their presence is mainly in the form of foreign branches and joint venture banks, their networks are extensive. One joint venture bank has more offices in Indonesia than in its home country.

The revenue contribution from Indonesian banking operations has been significant, with some ASEAN banks in Indonesia establishing financial conglomerates. They acquired leasing companies or established Islamic Banks. This suggests that the Indonesian economy has great potential.

In order for ASEAN countries to gain access to QABs through the ABIF, member countries must reach a bilateral agreement.

Until now, there have been four such arrangements, three of which involve Indonesia. This shows that despite the current economic situation, the Indonesian market is still attractive to ASEAN countries or, at the very least, ASEAN banks would like to uphold their presence in the Indonesian market.

While it is obvious that the motives behind these agreements are not always the same, one unifying desire is to reap sustainable benefits from the ASEAN banking market that all member countries serve.

The journey to establish the ABIF has been long and bumpy. Fancy guidelines are not automatically achievable and applying the ABIF concept is even more difficult than was previously imagined.

There are many aspects to be considered in the dialogue process that go beyond financial and economic figures.

A good-to-go agreement should meet three criteria. It should consider the current landscape, be business friendly and focus on a win-win solution. The existing ASEAN banking presence is the best departure point to reach such an end agreement. No matter how good this agreement is, at the end of the day the most important thing is that it should be operational at a business level. There is the risk that a concluded agreement may not attract banks to use it because it is not financially feasible.

So what now for ASEAN governments? In order to facilitate greater financial integration, the major role for governments now is to focus on investing in infrastructure so that businesses can run efficiently.

Author: Triyono, Indonesia Financial Services Authority

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