ASEAN banking integration: positioning Indonesia

Authors: Joko Siswanto and Maria Monica Wihardja, Bank Indonesia

In a decisive step toward ASEAN banking integration, central bank governors from around the region came together in early April 2011 to endorse the ASEAN Banking Integration Framework (ABIF).

This framework is part of the ASEAN Economic Community Blueprint, which promises to bring economic benefits and financial stability to individual countries and the region through multilateral liberalisation by 2015.

Flexibility is key to this process, and so a double-track implementation plan has been adopted for the ASEAN 5 (Singapore, Malaysia, Thailand, the Philippines and Indonesia), and BCLMV countries (Brunei Darussalam, Cambodia, Laos, Myanmar and Vietnam).

Authorities from the 10 central banks agreed upon four preconditions to ensure the banking integration framework is successfully implemented. The first is harmonisation of regulations. The second is building financial-stability infrastructure. The third is assisting the BCLMV countries to build their banking capacity. The fourth is establishing set criteria for ASEAN qualified banks to operate in any ASEAN country with a single ‘passport’.

Yet even at this early stage, the integration framework has sparked many crucial debates.

The first is about the definition of integration and its benchmark indicators. Banking integration can be measured by price-based measures or quantity-based measures. When calculating banking integration, the ASEAN Framework Agreement on Services (AFAS) currently takes four factors into account: cross-border bank flows, consumption abroad, the presence of commercial banks, and the movement of people. But ABIF’s concept of integration is restricted to only the commercial presence of qualified banks, which it takes as the benchmark for ASEAN banking integration by 2020. This is highly debatable because it will not necessarily reflect the success of ABIF in bringing about economic benefits and financial stability.

Another issue is the preconditions set down in the banking integration framework, which appear to contradict AFAS’s promotion of services liberalisation. There are concerns that ABIF may increase regulatory and prudential barriers instead of promoting banking liberalisation. But there is no ground for such concerns: the framework provides both the ‘soft infrastructure’ (harmonised regulation) and ‘hard infrastructure’ (financial-stability infrastructure) needed to consolidate banking integration.

There is also the matter of benefits, opportunities, costs and risks associated with the framework itself. It is passé to think that financial integration is always good. But ASEAN banks have learned a lot from the European banking crisis and they will likely apply these lessons in designing the association’s own banking integration platform. In the short term, ABIF should deliver its promise to facilitate economies of scale, a bigger market, technological transfer and information sharing. In the long term, it should assist in establishing stronger regional growth and accelerate poverty reduction. At the same time, the framework should help minimise systemic risks, contagion effects and financial instability.

Another key debate centres on strategies to maximise the opportunities and minimise the risks of banking integration. ASEAN should thus accelerate plans to put a regional financial safety net in place. The current ASEAN+3 Chiang Mai Initiative Multilateralisation (CMIM) is not yet operational and is riddled with inconsistencies. For example, the likely donor countries (China, South Korea and Japan) are still reluctant to uncouple the CMIM from the IMF because they will have a greater responsibility to bail out troubled countries.

ASEAN should also consider the differentiated impacts of banking integration on the ASEAN 5 and BCLMV countries. There remain wide gaps in some areas of regulation and financial-stability infrastructure. To date, cross-border bank lending flows more often to politically stable, less-corrupt countries with efficient government policies and legal protection. Unless the framework is improved, integration may not result in capital flowing to less-developed countries with generally poorer institutional qualities.

Yet another crucial debate is how Indonesia should position itself. At 99 per cent, its foreign equity participation (FEP) limit is one of the highest in the region. It is natural that Indonesia should want to protect its domestic market, demand reciprocal treatment and even revert its FEP. On the one hand, some believe that Indonesia should prioritise its domestic interests by protecting its domestic market until its banks can compete domestically and are able to penetrate foreign markets. On the other hand, it is argued that Indonesia should fully support the acceleration of ABIF even before attaining this level of competitiveness, with the attendant risk of losing its market to foreign banks.

Regardless of which stance Indonesia takes, there are several foregone conclusions. First, soundness and credibility of domestic policies are not substitutes for regional commitments even though, at times when domestic policies are ‘stuck’, regional commitments can help to ‘tie hands’ and exert external pressure. Second, authorities should not impose strict benchmarks on integration. Instead, they should facilitate and encourage it, while allowing the market to work freely. Third, regardless of whether the banking integration framework is itself successful, it will result in the ASEAN banking sector being more integrated, for the simple reason that it will have reduced dependence on European and American markets. The conclusion is clear: ASEAN countries should welcome this latest step toward banking integration and prepare accordingly.

Joko Siswanto is a senior researcher at Bank Indonesia.

Maria Monica Wihardja is a researcher at the Centre for Strategic and International Studies, Jakarta, and a lecturer at the Department of Economics, University of Indonesia. She is currently on leave to work as a consultant at Bank Indonesia. She is also Associate Editor at the EAF Indonesia desk.

The views provided are personal and do not necessarily reflect those of Bank Indonesia.

A different version of this article will be published in the Jakarta Post.