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Friday, May 22, 2015, 14:39

Closing economic gap in region

By KRISHNA KUMAR VR in New Delhi
Closing economic gap in region
People walk past a local bank in downtown Hanoi, Vietnam. The country is considered underbanked with only 16.5 percent of its population having bank accounts. A huge economic disparity exists between countries in the ASEAN region. (AFP)

Singapore is a global financial center but in fellow ASEAN member Cambodia, fewer than three out of every 100 adults have a bank account, while in Vietnam the ratio is about one in six.

This access to basic financial services highlights the huge economic disparity that exists among the 10-member Association of Southeast Asian Nations (ASEAN).

Finance ministers and central bank governors across ASEAN are now looking to narrow the economic disparities confronting the region and make financial inclusion “a top priority”.

On March 21 in Kuala Lumpur, at the conclusion of the two-day 19th ASEAN Finance Ministers’ Meeting and the inaugural ASEAN Finance Ministers and Central Bank Governors’ Joint Meeting, the top economic officials of ASEAN said “financial inclusion is important for accelerating financial integration and inclusive growth”.

This understanding led to the signing of the ASEAN Banking Integration Framework (ABIF), which they expect will be a key driver of banking integration and the development of affordable financial services, particularly in so-called underbanked and less developed ASEAN economies like Cambodia.

Teo Wing Leong, head of the school of economics at the University of Nottingham (Malaysia Campus), says the prospects for the region are high.

“With the ABIF in place, many established banks from more developed ASEAN members are expected to expand their operations to the less developed countries,” he says.

“This can help increase financial inclusion among less developed countries.”

The disparities are great between the six more developed economies in the region, collectively called the ASEAN-6 — which, aside from Singapore, includes Brunei, Indonesia, Malaysia, the Philippines and Thailand — and the CLMV economies, consisting of Cambodia, Laos, Myanmar and Vietnam, considered the least developed countries in the region.

As shown by the examples of Cambodia and Vietnam in terms of the number of people with bank accounts — 2.4 percent and 16.5 percent of their populations, respectively — the financial sectors in the CLMV countries are relatively underdeveloped, as people have limited access to credit, savings and payment services.

Ironically, it is these markets that play a key role in accelerating financial inclusion.

Access to banks and other formal financial institutions in the CLMV countries is severely constrained, pushing many to turn to unreliable and costly informal financial services.

Improving access to financial services can help the poor in these countries step up consumption, trade in goods and services, and invest in income-generating activities in housing, education and health, thus allowing them to improve their livelihood, says the Asian Development Bank.

“When facing increasing competitive pressure, local lenders may turn to look for new business models, including providing financial services at lower cost and to customers in the remote areas, where foreign banks would lack expertise,” says Ruta Cereskeviciute, a senior economist in the banking risk service at consultancy firm IHS.

The ABIF could lead to faster development, greater efficiency, product innovation and increased competition in CLMV countries, as long as institutions are not dragged down by certain factors.

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