Myanmar regulators aid development of a single ASEAN financial services market

While the ASEAN Economic Community (AEC) was formally established in 2015, financial cooperation across the region remains somewhat fragmented. Goods and services move freely between countries, but banks, stock exchanges and securities companies tend to be limited to their home markets.

Since the 1997-98 Asian financial crisis, ASEAN has remained focused on integrating regional financial markets. This issue is key to the AEC Blueprint 2025, ASEAN’s long-term development plan that seeks to facilitate the seamless movement of goods, services, investment, capital and skilled labour in the region. However, in recognition of the different stages of development between member states and the fundamental importance of the finance sector to development, there has been considerable leeway allowed regarding the extent to which member states work towards this goal. This sentiment was formalised in the ASEAN Financial Integration Framework in 2011, under which it was agreed that each country would be able to establish its own timelines for integration.

Integration Barriers

The ASEAN Financial Integration Framework is made up of three core frameworks: the ASEAN Banking Integration Framework (ABIF), the ASEAN Capital Markets Infrastructure and the ASEAN Collective Investment Scheme Framework, a mutual recognition scheme that provides fund managers with a streamlined authorisation procedure for cross-border transfers. A number of other programmes and initiatives are also helping to connect financial sectors across countries. The ASEAN Capital Markets Forum, for example, was established in 2004 to initially harmonise rules and regulations in each country, before shifting to more strategic issues under the AEC Blueprint 2025.

Nevertheless, the integration process has been hindered by unbalanced involvement. The ASEAN Trading Link exemplifies some of the challenges presented by this irregular approach. Commencing operations in 2012, the ASEAN Trading Link was intended to allow investors to directly trade in other markets in ASEAN member states. However, only the stock exchanges of Singapore, Malaysia and eventually Thailand joined. Partly due to a lack of harmonisation in market regulation, the trading link ceased operations in October 2017.

While many aspects of the move to economic integration have been vague, there are certain goals that are hoped to propel development. In particular, in late 2014 the ABIF created a new category of banks – Qualified ASEAN Banks (QABs) – which are allowed to operate in other ASEAN countries as local banks, and are not regarded as foreign institutions. The status was issued under bilateral agreements between member states and can only be granted to banks that meet stringent criteria. It is not a general right that all ASEAN banks can qualify for.

The ABIF has called for each of the five-largest ASEAN markets – Indonesia, Malaysia, the Philippines, Singapore and Thailand – to have at least one bilateral agreement in place by 2018. All remaining markets in the group must have at least one agreement signed by 2020. By 2025, banking in ASEAN should be fully open along the lines of the AEC single market. So far, the process seems to be working, with national regulators starting to accept QABs.

Bilateral Agreements

In late 2014 Indonesia and Malaysia became the first two countries to sign a bilateral agreement outlining the measures the two countries would implement under the ABIF. A later agreement, signed by both countries in August 2016, outlined their intention to provide greater access and operational flexibility for their QABs in each other’s markets. Progress is partly attributable to apprehension about competition from elsewhere in Asia. Increasingly, regional banks are responding to this threat with further expansion and investment. Because many banks can no longer generate sufficient business within their home markets, they have been forced to work across regional borders to develop the necessary critical mass to be able to compete with international giants. ASEAN member states have tended to deal with foreign banks more so than those in the region, but it is expected that the eventual signing of these agreements will lead to significant changes in this regard.


Thailand has been especially active in negotiating bilateral agreements and preparing for the ABIF. It is currently in discussions with Malaysia, Indonesia and Myanmar over QAB agreements. “The integration brought about by the ABIF will benefit both commercial banks and their clients who are seeking to enhance their growth potential and expand their presence in neighbouring nations,” Predee Daochai, chairman of Thai Bankers’ Association and president of Kasikornbank, told OBG. “Adjustments in strategy and business processes are paving the way for more comprehensive cross-border provision of services, which coincides with the move towards banking integration and the continual growth in trade and investment between Thailand and our neighbours.” In addition, Piti Tantakasem, CEO of TMB Bank, highlighted possible opportunities from integration. “The QAB mechanism will stimulate a lot of interest in regional partnerships, and banks will have to assess the potential returns from establishing a full presence in other markets, but it may not necessarily lead to banks establishing a full presence in other markets,” he told OBG. “For example, many Singaporean and Malaysian banks already operate in Thailand and I’m not convinced more will come. However, if we look at Myanmar and Cambodia, ASEAN banks can bring technology to reach the underserved segments in the corporate and retail sectors, especially through partnerships with financial technology companies.”

In addition to engaging with their fellow association members on banking integration, the authorities are also active at home. The Bank of Thailand is encouraging mergers to make local institutions stronger in the context of the ABIF. Global ratings agency Fitch believes that Thailand’s policies could lead to significant consolidation, resulting in one or two large domestic banks that dominate the sector.


The authorities in Indonesia increased the ceiling on foreign ownership in its banks to 99% in order to attract international investment following the 1997-98 Asian financial crisis. Some limits on foreign shareholdings were then introduced in 2016, though these were grandfathered in. As a result, there are already numerous foreign players in the market. In early 2018 the People’s Representative Council ratified a protocol to allow for ASEAN banks to open their own branches in the country.

Malaysian banks are particularly interested in gaining access: their home market is highly competitive and mature, while Indonesia remains underbanked, offering the potential for strong profits. Indeed, Indonesia has the highest net interest margin in the region, while Singapore has the lowest of the main ASEAN banking markets. Banks that have expressed interest in entering Indonesia include RHB Bank, Affin Bank and Bank Islam Malaysia. However, there has been some hesitation on the Indonesian side, as its banks do not yet have a presence in Malaysia. Officials have said they would like to see this disparity narrowed before allowing further access. As of mid-2017 Malaysian banks had 7% market share in Indonesia. The expectation is that the deal between the two countries would be for three banks from each to be granted access to the other’s market. RHB is likely to be the next Malaysian candidate allowed to do so. It has previously tried to enter the market through an acquisition of a minority stake in a local lender, but the bid was rejected by the regulators. Likewise, a number of Indonesian banks hope to expand regionally and take advantage of ASEAN initiatives. Bank Mandiri will most likely become Indonesia’s first QAB, and it has signalled its intention to enter the Malaysian market.

Islamic finance banks meeting other perceived needs may have a better chance of being approved to commence operations in Indonesia. “We have a more selective way of dealing with foreign investors in banking, because we would like to have more value-added participation from them. For example, we need Islamic banks because our Islamic banks are very small,” Muliaman Hadad, former chairman of Indonesia’s Financial Services Authority, told local media in August 2017. “We need those that are focused on infrastructure. If they fit these requirements, then, in our view, their presence in Indonesia will create value to the local economy.”


Having liberalised in 2014, the Philippines is now almost completely open to foreign competition. Under the reforms, 100% foreign ownership of local institutions is permitted. The only restriction is a 40% cap on foreign ownership of a bank’s total assets. While new entrants have been restricted to buying existing institutions, in 2014 the central bank, Bank Sentral ng Pilipinas (BSP), lifted the moratorium on granting new licences, enabling foreign banks to open wholly owned institutions within the country.

Despite the sector being completely open, the Philippines is also working to reach bilateral agreements under the ABIF. In April 2017 Bank Negara Malaysia and the Philippine central bank reached a Declaration of Conclusion of Negotiations on QABs. The BSP entered into negotiations with Thailand and Indonesia’s Financial Services Authority shortly thereafter. This cooperation has been wide ranging and has started to extend beyond the QABs. For example, in December 2017 the Bank of Thailand and the BSP signed a memorandum of understanding on banking supervision. In advance of ABIF agreements, the BSP is implementing reforms to strengthen local institutions. It will address issues such as corporate governance, fit and proper requirements, related-party transactions, compliance and audit. It is also preparing for the increased competition.

Indeed, the country is a popular target, with interest from a range of international banks. In November 2017 Malaysia’s CIMB submitted its application to the BSP for a licence, which was approved in late 2018. It is now the first bank to operate in all 10 ASEAN markets, with the launch of its digital retail banking business in December 2018. According to the central bank’s “Report on the Philippine Financial System” published in December 2017, 12 foreign banks had been given approval to start operations in the country since liberalisation in 2014.

Some local banks are concerned about the flood of foreign institutions in the market and are taking steps to strengthen their operations in order to protect their domestic footprint. For example, BDO has formed a partnership with Japan’s Shinkin Central Bank, and although BDO has not yet expanded in ASEAN, it has set up representative offices in South Korea, the UK, Japan, Singapore and the US.

Possible Pitfalls

The ABIF is built upon the notion that freer financial markets will create opportunities for everyone, but some have expressed concerns that it may only benefit dominant banks. Large, well-established institutions will seek to gain customers in other ASEAN markets, but they may be unwilling to part with their own. The potential for protectionism exists, leading smaller banks and smaller economies to be on guard for signs of monopolisation in their respective financial services sectors.

The varying levels of development across different ASEAN member states also raises concerns. Many have speculated that this vast disparity will prevent a smooth rollout. As an illustration of this, large Singapore banks have more assets than entire banking systems in some ASEAN countries. These gaps could result in conflicts and misunderstandings down the track, potentially creating a tiered market. Some banks in ASEAN are already well placed throughout the region, giving them an advantage ahead of ASEAN operating as one financial market. CIMB is in all of the 10 markets, and Bangkok Bank is in nine. On the other hand, banks from Vietnam, Indonesia, the Philippines, Laos, Brunei Darussalam and Cambodia have little or no presence in other ASEAN markets. Kanbawza Bank became Myanmar’s first bank to have an office outside the country after it received permission to open a representative office in Thailand in 2016.

Even more significantly, the sector lacks regional mechanisms robust enough to deal with systemic risks and instability. ASEAN may not be ready for a major financial shock, raising questions about the goals of the framework. In some ways, the current lack of integration could offer more protection during uncertainty. If the market is to unify it will need to prepare itself for the handling of extreme money flows and volatility. Furthermore, the ABIF will require major mergers to boost the capacity of banks, but it is not clear how achievable this will be.

EU Example

The EU is being studied closely by ASEAN policymakers to learn lessons about boosting financial integration. It has been noted that the EU suffered from the lack of regional supervision and standards during the last financial crisis. The takeaway is that successful integration will require harmonisation and cooperation. ASEAN knows that the job is more than just taking down borders. It is also about forging strong regulatory links. The other worrying message from the EU is that after the financial borders were removed, business remained within home markets to a surprising extent. Customers did not so easily shift to banks and stockbrokers in neighbouring countries, though this could be different in ASEAN.

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The Report: Myanmar 2019

Financial Services chapter from The Report: Myanmar 2019

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