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Friday, May 22, 2015, 14:29

Erasing barriers

By ALFRED ROMANN in Hong Kong and KRISHNA KUMAR VR in New Delhi
Erasing barriers
People walk past a branch of OCBC bank in Singapore. Regional giants such as OCBC, which is based in the city-state, will face more competition from other ASEAN banks once regulatory barriers are removed within the economic bloc. (AFP)

Bank Mandiri in Indonesia has a huge domestic retail network, but expanding into the wealthier neighboring markets of Malaysia and Singapore has proven more difficult.

Regulatory barriers — for example, a requirement that foreign banks plop down $85 million to open up a fully licensed branch in Malaysia — have long made regional expansion a challenge for all but the largest banks.

Hence, Bank Mandiri, large as it is, is still working to join the ranks of such regional giants as OCBC and DBS of Singapore and Maybank and CIMB of Malaysia.

However, a new agreement among members of the Association of Southeast Asian Nations (ASEAN) that would ultimately see a unified regional banking market is changing all this and giving the Indonesian bank, as well as its peers, more region-wide access.

On March 21, ASEAN finance ministers and central bank governors signed a pivotal ASEAN Banking Integration Framework (ABIF) that will eventually allow ASEAN banks to operate freely in other countries in the region.

The deal, which has been in the works for several years, is a significant part of the drive toward a more fully integrated ASEAN Economic Community (AEC), which is set to launch on Dec 31. Greater regional integration for banks and other finance institutions will elevate the regional bloc into a more integrated European-style economic community.

“We made a major milestone,” said Zeti Akhtar Aziz, Malaysia’s central bank governor, at a press conference after the signing of the ABIF.

The banking integration framework makes it easier for any two ASEAN countries to enter into reciprocal bilateral agreements that provide qualified banks with greater market access and the ability to operate as domestic banks.

Indonesia and Malaysia had already signed such a bilateral agreement in 2014, but the expanded ABIF opens the door for more such deals. For Bank Mandiri, for example, the agreement means it will only have to meet minimum capital requirements, on par with domestic banks, to open branches in Malaysia.

“It is a great step towards a seamless and borderless banking system in the region,” Sumit Agarwal, vice-dean of research at the department of economics and finance of the National University of Singapore, tells China Daily Asia Weekly.

“The new framework would create a more consistent banking environment throughout the region,” he says. “Initially, only a small number of high-quality banks that meet specific qualifications will be able to gain access to the banking markets in all member states, but it is the beginning of a major move.”

However, even for the largest banks in the region, there are a few hurdles that have to be overcome.

For starters, banks have to meet a series of criteria to become eligible for qualified ASEAN bank (QAB) status. The status will give ASEAN banks, such as Singapore’s Bank of East Asia or Malaysia’s Maybank along with Indonesia’s Bank Mandiri, the ability to be treated as local banks when operating in neighboring countries — a significant leg up on international banks from outside the bloc, like Japan’s Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking Corp, which have recently been expanding in ASEAN member Myanmar, or China’s Industrial and Commercial Bank of China or Bank of China.

“Banks are the key players in ASEAN’s financial integration, given their roles as the primary financial intermediary in the region. So the integration of the banking market will substantially benefit the ASEAN Economic Community,” says Fauziah Zen, an economist at the Jakarta-based Economic Research Institute for ASEAN and East Asia.

Another hurdle is the differences in the levels of development and regulatory structures across the region. Vastly different stages of development across Southeast Asia could delay the completion of financial integration for years.

ASEAN countries also differ significantly in size and industrial structure. For example, Indonesia, the largest economy in the region, is almost 100 times the size of Laos.

“On the one hand you have a country like Singapore, which is an international financial center, and on the other hand, you have countries like Cambodia and Myanmar, which still have a long way to go in terms of developing their economic and financial systems,” says Vikas Kakkar, an associate professor in the department of economics and finance at City University of Hong Kong.

There are also large differences in other areas such as the total deposits held by banks in Singapore or Cambodia, and the stock market capitalization between banks in Myanmar and Malaysia. There are also major disparities in the size and complexity of bond issues.

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