AEC needs financial lifeblood

14 March, 2015
As appeared in

WHILE actualisation of the Asean Economic Community (AEC) is concentrated on non-tariff barriers and measures (NTBs, NTMs) which frustrate the effort, insufficient attention has been paid to how insufficient progress in financial services integration is weighing it down.

We all know finance is the lifeblood of the real economy. Yet in the work to erect the economic pillar of the Asean community, the Asean Economic Ministers (AEMs) do not work closely enough with the finance ministers and regulators. When economic sectoral issues are discussed, issues involving finance – as they would – are kicked into the court of the Asean Finance Ministers (AFMs).

The AFMs meanwhile work on their own agenda at their own pace. This absence of full coordination between the AEMs and the AFMs, and their various bureaucracies of course, retards actualisation of the AEC. So apart from the NTBs and NTMs, the AEMs must ensure there is the flow of financial lifeblood to realise the many integrative plans in the various priority sectors.

But, more than the sector by sector impact, the whole of the AEC integration effort will always be half-cocked if Asean banks cannot operate regionally to support their customers to have regional presence and to engage new customers to enjoy the benefits of diversified, more efficient as well as cheaper financial services. (see table)

And, when the economies of scale are denied, the full extent of benefits that could accrue to those in dire need of finance, such as the MSME (Micro, Small and Medium Enterprises) sector, will also not be available.

This is a very important point. MSMEs are the backbone of the Asean economy. Again and again, access to finance has been flagged as the single most important need for them to face the competition of an integrated regional economy and to take advantage of the single market and production base as well as to connect with the global economy.

An imaginative establishment of a regional universal MSME Bank, founded on a commercial basis and not dependent on governmental capital commitment, would show that Asean leaders are serious about attending to MSME needs. Yet AEMs would say this is a technical financial matter and the AFMs will say it is not possible to establish it until ALL regulatory issues of a regional financial system have been thrashed out. As we have noted, this is taking a mighty long time.

What, therefore, will the SME Strategic Action Plan being prepared as an economic pillar under the AEMs have to say about access to finance? Bodies such as the Asean Business Advisory Council have proposed it be made mandatory that a proportion of total banking assets be set aside for SME facilities, that banks from one Asean country wishing to operate in another be compulsorily required to mentor MSMEs on how to keep accounts and to make effective credit applications.

Even this, however, will barely scratch the surface. An announcement giving support for the establishment of universal Asean MSME bank would show real intent rather than yet more words of an action plan to be announced in November at the point when the AEC is supposed to be actualised.

In the announcement of the AEC blueprint in November 2007, eight years ago, it was stated trade within Asean was virtually tariff-free and, the lifting of NTBs and NTMs and other targets are to be achieved (now) in 2015. NTBs and NTMs were to have been removed in five Asean Member States (AMS) by 2010, in the Philippines by 2012, and in the CLMV (Cambodia, Laos, Myanmar and Vietnam) by 2015, with some allowance for them in some sectors until 2018.

Here we are in 2015, on the cusp of actualisation of the AEC in November still talking about the removal and greater transparency of the NTBs and NTMs. Will we at the end of 2025 still be talking about more action plans for MSMEs even as many would have fallen by the wayside because these plans have only remained good on paper and because the open, globalised economy would have obliterated these enterprises – with however the AEC being identified as having caused the destruction?

Investments diverted

There will then be a roll-back. Not only would the AEC not really have been achieved, but it will be identified as the cause of so many MSMEs going under and of so many people being thrown out of work, made worse as investments are diverted to other places in the world because the promise of a single and integrated Asean economy has not been fulfilled. Irony upon irony.

Will we still be talking about the e-Asean priority sector when e-Commerce in retail business continues to be inhibited by the lack of regionally harmonised e-Payment system? When we are technologically in a position to drive enormous growth if not for the missing link of financial life support.

When we are in a position to fashion financial arrangements among interested Asean countries which could address systemic stability issues and prudential regulatory concerns In a focussed manner. Just imagine how Indonesia would become more Asean-inclined if one of its great companies – the Lippo Group – was able to realise its big e-Commerce ambitions.

(Lippo just announced at the end of last month a huge investment of US$500mil in e-Commerce with the launch of its MatahariMall site and hopes to reap forecast revenue of US$1bil in the next two years, with 20% coming from retail Internet business; John and James Riady, the heads of the family that drives Lippo, have often expressed their frustration at the e-payment roadblock on the expansion of their business regionally).

Imagination and enablement are what’s needed to make the AEC real and meaningful – especially financial enablement backed by legal and tax arrangements which do not cause delays and uncertainties. Blueprints and Masterplans are necessary but absolutely not sufficient. Asean’s truly outstanding economic prospects are fantastic.

But they do not happen of themselves. Businesses and people make things happen. They cannot when policy – especially financial clog-ups – choke their imagination and disable and retard business prospects.

That is why policy makers must engage the private sector to make the AEC happen, not just for feedback but to help in the process of realisation, implementation and execution. That is why I am pushing and pushing, with the support of the whole of the private sector and all kinds of industry experts, for meaningful establishment of this Asean public-private partnership.

That is why the Asean Business Club has proposed – for the critical financial services and capital markets sector – the setting up of an expert group to be embedded in the formulation and particularly the implementation process of regional financial integration.

And it is not just about removing the financial roadblocks of which there are so many already. It can also be about developing and discovering financial market opportunity. The expert group will:

1. Identify and propose the removal of the financial lifeblood blockages in various Asean business sectors;

2. Advise and formulate the parameters and detailed terms of reference for a commercially-driven Asean MSME universal bank;

3. Assist in the furtherance of the many financial market initiatives already developed by Asean finance ministers and policy-makers.

Just imagine what could also be done with the further development of Islamic finance in Asean. Malaysia’s groundbreaking work in this field is without peer. It must use this first mover advantage, which has a limited shelf-life, to engage Indonesia particularly to forge an Asean Islamic financial centre in the area of the world with the largest and most peaceful Muslim population with the greatest growth potential.

That is only the huge base. Islamic finance is not only for Muslims. It can be offered to drive Asean’s enormous economic potential across regional borders. It could be used to finance the great infrastructure needs. That requires more imagination and integration initiatives.

The chart on Islamic Finance shows how fast Islamic finance is growing in Malaysia relative to the conventional sector even if it remains less than 30 per cent of the total financial services sector.

However two points stand out. Indonesia is way behind in terms of both growth and financial industry presence. Imagine what can be done together between Indonesia and Malaysia to whack the numbers up.

More than that, the second point, in terms of diversity of average product holding against the conventional sector, Islamic finance is some way behind. Which means a lot of room for imagination and innovation which needs financial policy and regulatory support.

The critical point for actualisation of the AEC is to infuse the lifeblood from the financial sector to the real economy. There must be strong coordination and connectivity between the AFMs and the AEMs. If there is going to be any real progress in the next few months to make some meaningful initiatives happen before commemoration of the AEC on 22 November this year, this strong link and support must begin NOW.

For post-2015 Asean AEC the refresh and reset buttons must be switched on to ensure progress by not just continuing along the old blueprint way but by recalibrating plans to achieve actualisation. In the financial world we call it good execution. That link with the financial sector is absolutely essential for the real economy.


Tan Sri Dr Munir Majid, chairman of Bank Muamalat and visiting senior fellow at LSE Ideas (Centre for International Affairs, Diplomacy and Strategy), is also chairman of CIMB Asean Research Institute.

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