Indonesia's banking sector prepares to compete in an expanded market

As the largest economy and home to the largest population among the 10 ASEAN member states, Indonesia is considered to be a driving force behind the establishment of the ASEAN Economic Community (AEC), which formally launched in 2015. The AEC project, which has been under way since the mid-2000s, aims to integrate the region into a single market and production base by allowing for the free flow of goods and services, uninhibited immigration for skilled labourers and the liberalisation of the regional capital markets, trade and investment flows.

A key component of the plan is the integration of ASEAN banking sectors into a single market. The opportunities that are expected to result from this process are immense. According to ASEAN data, as of the end of 2014, the region’s total GDP reached $2.47trn, making it the third-largest economy in Asia and the seventh largest in the world.

Similarly, with trade totalling around $2.5trn and incoming foreign direct investment (FDI) of $136bn in 2014, the region is already a major global trade partner and investment destination.

Lastly, with a combined population of more than 620m people, the 10 ASEAN member states represent a sizeable market in their own right, and one that has yet to be fully developed. AEC integration, which looks to build on these strengths, has the potential to drive economic growth in the region for decades to come. “We are broadly optimistic about ASEAN integration,” Herwin Bustaman, the head of sharia banking at Maybank Indonesia, a Malaysia-based lender that is active across the region, told OBG. “On the banking side, we are working to ensure that we can provide financing for the enormous FDI projects that we expect to see as a result of the AEC project.”

Obstacles To Overcome 

The successful implementation of the AEC is by no means a foregone conclusion. A wide range of challenges stand in the way, both within Indonesia and across the region. For instance, disparities persist among ASEAN countries. In terms of GDP per capita, Singapore and Brunei Darussalam are considerably richer than the other eight members, which points to large potential inflows of foreign labourers into these two nations as full AEC integration comes into effect. Indeed, ensuring that trade, labour and capital flows among member states do not overwhelm individual nation’s ability to function will be a key issue moving forward. More specifically, while some ASEAN-based banks have been carrying out business across the region in various forms for years, differences in size, regulatory regimes, capital buffers, loan and deposit make-up, technology uptake and market access have the potential to lead to major disparities in a single market. “The government is working with the banking sector to boost operational efficiency and ensure that we are prepared for AEC integration,” Ninis Adriani, vice-president and head of investor relations at Bank Rakyat Indonesia, one of the nation’s largest banks, told OBG. “However, as of now, Indonesia is not yet ready to compete in an open regional market with ASEAN’s largest financial sector players.”

In Development 

While the idea of a fully integrated ASEAN economy dates back to the founding of the association in 1967, member states did not begin to seriously consider implementing the plan until the years following the 1997-98 Asian financial crisis. In October 2003 ASEAN member states signed the Bali Concord II, which formally established the AEC as a means of rebuilding the regional economy with increased stability and security through market integration. In 2007 ASEAN nations signed on to a binding AEC blueprint, which laid out a long-term strategy to implement the aforementioned single market and production base, as well as equitable social development and strong integration with the global economy.

This effort was stymied somewhat by the 2007-08 international economic downturn, which saw many countries across the region implement new protectionist regulations in an effort to insulate domestic economies from rising global pressures.

Indeed, according to the Global Trade Alert database, between 2009 and 2013 some 186 new non-tariff barriers were implemented by ASEAN governments. Indonesia, which was responsible for 75 of these new barriers, accounted for the largest percentage of the total.

Nonetheless, work proceeded on AEC plans. Following the adoption of an initiative for ASEAN financial integration in 2009, in 2011 the region’s member states endorsed the ASEAN Financial Integration Framework (AFIF) and established a task force to develop the ASEAN Banking Integration Framework (ABIF), which was formally endorsed at a meeting of member states’ finance ministers in 2014.


The ABIF is the blueprint for ASEAN banking sector integration, though it is being implemented to varying degrees across the region. Broadly, the strategy aims to facilitate AEC regulation while maintaining financial stability and ongoing economic growth across the region. Ensuring this balance is expected to prove challenging as implementation moves forward, given existing disparities among national banking sectors. For example, Indonesia’s banking sector is relatively profitable compared to many of its ASEAN neighbours. As of the end of 2015, the country’s net interest margin (NIM) of 5.2% was considerably up on a NIM of 3.3% in the Philippines and margins of 2.5% in Thailand, 2% in Malaysia and 1.6% in Singapore. At the same time, banking in Indonesia is expensive relative to many of its neighbours, with the sector’s cost-to-income ratio at 75.4% at the end of 2015, compared to 64.2% in the Philippines and below 50% in Thailand, Malaysia and Singapore.

By many other metrics, however, the region is already on relatively similar footing. Indonesia’s non-performing-loan (NPL) ratio of 2.5% at the end of 2015 was similar to the NPL rate in many of its neighbours. For example, Thailand’s NPL rate was 2.6%, while in Malaysia and the Philippines the rate was 2.2%, and in Singapore it was 1.1%. The fact that the region’s various banking sectors share relatively low exposure to bad debt is widely considered to be a positive indicator in terms of AEC integration plans.


The version of the ABIF that is in place was restructured in mid-2015 in an effort to facilitate more comprehensive banking sector integration. Prior to the restructuring, the primary thrust of the agreement involved liberalising individual banking sectors in order to prepare institutions that had only competed at a national level for international competition. The restructuring expanded the ABIF’s remit, effectively implementing a broader, more holistic plan to balance continued market liberalisation across the region with efforts to ensure financial inclusion and stability. The implementation of the renewed plan relies to a large extent on reciprocal bilateral agreements between national central banks. Under the ABIF, all ASEAN-based lenders have the opportunity to gain access to other ASEAN markets by meeting a series of requirements decided by a given country’s central bank, thereby becoming a Qualified ASEAN Bank (QAB). The requirements to achieve QAB status are expected to differ slightly depending on which two ASEAN central banks are negotiating a given bilateral agreement, though they will likely include requirements related to capital adequacy, exposure, accounting and transparency.

Any institution that qualifies as a QAB will be awarded full market access to the banking sector of the country involved in the bilateral arrangement and is expected to be treated similarly to domestic institutions based in the host country. Furthermore, ABIF stipulates that a QAB should have operational flexibility in a host market, including the ability to carry out a range of banking activities and offer various products and services, as mutually agreed upon in bilateral negotiations. A series of broad, foundational requirements will apply to all QABs. For instance, the qualification will only be available to indigenous ASEAN banks that are both owned by ASEAN citizens and based in an ASEAN country.

The OJK signed an ABIF agreement with Bank Negara Malaysia, Malaysia’s banking authority, in August 2016. The bilateral deal, which was in negotiation for a lengthy period of time, will allow three banks from Indonesia to operate in Malaysia and vice versa. The agreement covers guidelines to open bank branches, ATMs, QABs’ access to electronic payment, as well as capital and customer funds guarantees.


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The Report: Indonesia 2017

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