ASEAN Financial Integration – SME Funding Needs

Interesting speech from Mr Muhammad bin Ibrahim, Deputy Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the ASEAN Risk Conference. The 10 countries which together are defined as ASEAN, make up a large and fast developing economic area with 600m people, and it could be the fourth largest trading bloc by 2050. But the credit gap for SMEs in East Asia is estimated to be more than USD250 billion, due to under-developed financial systems. Cross regional financial services players could have a critical role to play in future growth and development.

The vision for an economically and financially integrated ASEAN represents the aspiration of many policy makers, old and new. A recent take on this can be found in a document titled “The Road to ASEAN Financial Integration”, a study on the financial landscape and formulating milestones on ASEAN monetary and financial integration. This document endorsed by the ASEAN Central Bank Governors and approved by the Finance Ministers presents a clear, ambitious and committed statement by the region to collectively embark on this journey. In this respect, ASEAN has made meaningful progress in the identification, articulation and implementation of principles to advance financial and economic integration among its members.

ASEAN is home to more than 600 million people and if considered as a single entity, would represent the sixth largest economy in the world with a combined GDP of USD2.5 trillion. According to the OECD, the region is projected to sustain an average annual growth of 5.6% over the next four years and is expected to be the fourth largest trading bloc by 2050. Concurrently, the standards of living among the general populace will continue to improve. Household purchasing power has risen significantly over the last decade, transforming the region into a thriving hub of consumer demand. The size of ASEAN’s consuming class is expected to double from 81 million to 163 million by 2030. By 2020, Asia is estimated to account for more than half of the total global middle class population, with ASEAN representing more than USD2 trillion of additional consumption within the region.

Also, as the sources of economic growth become increasingly domestic-based, this enables many economies to diversify their sources of growth. An important development is the significant increase in intra-regional trade. These developments augur well for the region and would expand domestic demand and further fuel greater intra-regional trade among ASEAN member countries.

The promise of higher living standards and employment is also drawing large numbers of people from the countryside to cities. Today, just over a third of ASEAN’s population are living in urban areas. This is expected to rise to 45% by 2030.

Integrating national financial systems within the region is key to unlocking ASEAN’s enormous economic growth potential. As a critical component of the AEC, financial integration will significantly enhance the efficiency and effectiveness of intermediation and allocation of resources. This is crucial as the region pursues greater economic prosperity that is both inclusive and sustainable. By allowing the region’s financial resources to move more freely across borders, financial integration will open up new opportunities for businesses and trade, enhancing further financial linkages within the region.

A more integrated regional financial system would also allow a larger share of the region’s surplus savings to be deployed within the region towards productive ends, such as in physical infrastructure projects. According to the Asian Development Bank, ASEAN will require approximately USD1 trillion 1  over the next 10 years in infrastructure investments across the region. This includes for the provision of sufficient housing, efficient public transportation and access to clean water and electricity. While the numbers seem staggering, the ability to recycle the huge savings within ASEAN will substantially enhance the region’s prospects to fund and sustain such investments.

With one of the highest savings rate in the world, at approximately 30% of GDP which currently amounts to USD750 billion, a well-integrated regional financial system would provide a more comprehensive eco-system for an efficient and competitive intermediation and investment.

An important component of ASEAN growth is the critical role of SMEs in all economies. The AEC recognise this and calls for SMEs to play a greater role in contributing to the overall economic growth and development of ASEAN as a region. Access to financing, however, remains a key challenge for many businesses. Despite various national level efforts, more needs to be done for SMEs to obtain access to financing, including the funding required to grow their business beyond national borders. The credit gap for SMEs in East Asia is estimated to be more than USD250 billion.  The difficulties in access to financing are compounded by underdeveloped financial systems, the need to manage multiple banking relationships across different markets, and a lack of coordinated financial advisory support to help businesses navigate the regulatory and business environment in different jurisdictions. A larger presence of regional financial institutions can significantly reduce these challenges. Banks with wide regional networks would possess the intimate knowledge of each economy and understands the unique requirements of SMEs. Such banks are well placed to serve and harness SMEs’ capability to participate more meaningfully in the region’s production networks.

For ASEAN financial institutions, the prospect of regional financial integration will also serve to raise industry standards across the region. This includes enhancing the breadth and quality of financial products and services as a result of more efficient markets and the transfer of knowledge and technology. Financial institutions will also need to meet higher standards in how they manage risk and govern their operations. To some extent, this will be driven by regulatory efforts to elevate prudential and business conduct standards. But aside from regulation, greater economies of scale and scope will also make it more feasible for financial institutions to invest in talent and more advanced technology and systems, to support business development and risk management.

Author: Martin North

Martin North is the Principal of Digital Finance Analytics

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