Indonesia & Malaysia Support Banking Integration in ASEAN Region
Bank Indonesia (the central bank of Indonesia) and the Financial Services Authority (OJK) signed an agreement (the ASEAN Banking Integration Framework, abbreviated ABIF) with Malaysia’s central bank to support banking integration in the ASEAN region. The website of Bank Indonesia states that ABIF “provides an operating framework for ASEAN member states to implement principles and the integration process in the banking sector to support the ASEAN Economic Community (AEC) [which is to be implemented later this year]”.
Below is the press release of Bank Indonesia:
The main objective of ABIF is to provide market access and operational flexibilities for Qualified ASEAN Banks (QABs), which consist of ASEAN banks that meet pre-determined requirements agreed by ASEAN members. The requirements are for indigenous ASEAN banks that are financially strong, highly resilient and well-managed, as well as being adherent to the prevailing international prudential standards. These banks are expected to have a greater role in boosting trade and investments in ASEAN.
Reciprocity is one of the salient principles of ABIF, in which market access and operational flexibilities are to be acceptable by and mutually beneficial to the ASEAN member states. Under ABIF, QAB candidates are to meet the prudential requirements of an ASEAN country in order to enter and operate in the said country. Country readiness is a factor in considering ASEAN member states’ participation in ABIF. In order to enhance the readiness of ASEAN member states to implement ABIF, it is possible for major ASEAN members to assist other members to improve their readiness by way of training and technical assistance.
In the ABIF implementation process, ASEAN central banks and financial supervisory authorities formulate ABIF Guidelines multilaterally. This is followed by a bilateral agreement concerning the entry of banks into ASEAN member states. Bank Indonesia and the Financial Service Authority (OJK) conducted simulation exercises which helps to ensure that ABIF principles are implementable while taking into account national interests. In this regard, Indonesia and Malaysia which lead ASEAN countries in establishing ABIF, conducted bilateral negotiations resulting in a Heads of Agreement document. This Heads of Agreement aims at reducing gaps in market access and operational flexibilities of QABs based on reciprocity. The commitment undertaken in this Heads of Agreement will be reflected in the bilateral agreement under ABIF and to be carried out by the OJK and Bank Negara Malaysia.
Positive impacts of ABIF for Indonesia are increased opportunities and greater potentials for Indonesian banks and businesses looking to expand to the ASEAN market. By putting forward the principle of reciprocity and agreeing to a mechanism to reduce gaps in market access and operational flexibility in the ASEAN banking integration process, Indonesian banks will have greater opportunities to have better market access and a wider scope of business activities in the ASEAN region. In doing so, Indonesian QABs will enjoy similar treatment as accorded to domestic banks in the host country. In this regard, Indonesian banks must anticipate ABIF by strengthening their capital, human resource quality, and efficiency in order to be able to compete at regional and global levels. In return, banking integration will benefit business sectors through the larger and safer sources of financing for trade and cross-border investment activities.
Subsequently, the ABIF arrangement will be incorporated as a provision in the Protocol to Implement the Sixth Package of Commitments on Financial Services under ASEAN Framework Agreement on Services (AFAS), which is mandated in implementing services liberalization in the ASEAN region.