Asia comprises a highly heterogeneous group of countries, which differ widely in terms of economic structure, natural resources, degree of market orientation, stage of development, size and degree of openness.

Given the diverse nature of the region, it would be highly challenging to achieve the necessary preconditions for achieving an integration similar to that seen in Europe, where it was advanced with the establishment of supranational institutions with mandates to promote common approaches and frameworks across EU member states. Asia is adopting a more flexible approach. Financial integration has manifested itself in the form of greater regional participation in domestic financial systems. This is taking place via gradual liberalisation of the financial sector and the capital account. Capital account liberalisation is prompting increased intra-regional investment and portfolio flows, which contributes to the deepening of the financial markets.

By itself, liberalisation of the financial sector and the capital account will not be sufficient to achieve financial integration. Most important are the development of regional financial markets, the strength of payment and settlement systems, harmonisation of standards and practices – including the regulatory regime – and building the institutional capacity of domestic financial intermediaries. For the ASEAN region, agreement has been reached to allow for different speeds of integration depending on individual members’ readiness. This is being reinforced by arrangements for risk assessment and frameworks for crisis management and resolution, including mutual assistance. Equally important is cooperation between regulatory authorities on regional financial stability. Much of this work has focused on putting in place effective institutional arrangements.

Another key development is the increasing role of Islamic finance in the international financial system. In its early stages of development Islamic finance was largely undertaken domestically, but the past decade has seen its rapid internationalisation, resulting in significant growth in cross-border financial flows.

We have witnessed the development of the Islamic bond (sukuk) market, progressive financial sector liberalisation, and the establishment of international arrangements and institutions that help safeguard financial stability. There are currently more than 600 Islamic financial institutions operating in more than 75 countries. Islamic finance has become an increasingly important channel for the efficient allocation of financial resources across borders and for diversification of risk, facilitating stronger financial ties between Asia and the Middle East. The sukuk market, in particular, has become a very important avenue for international fundraising and investment activities that generate significant cross-border flows.

The role of the private sector in driving regional financial integration is equally important, particularly in relation to building the institutional capability to intermediate funds. While the foreign presence facilitates this process, it needs to be complemented by strong domestic regional intermediaries whose operations would be more inclusive, and thereby increase the potential for balanced growth in our region.

Asia has already demonstrated its resilience to external shocks during the recent global financial crisis.

Stronger domestic demand, greater intra-regional trade and investment, resilient financial systems and strong macroeconomic fundamentals have supported the region’s economic performance. There have been huge pay-offs from the decade of reforms, institutional building and development of financial infrastructure.

Despite the very challenging environment of slower trade and volatile financial markets, financial intermediation in Asia has continued uninterrupted and financial markets, while more volatile, have remained orderly. Integration has continued and regional financial cooperation has strengthened, reinforced by the increased participation of the private sector.

The above is an excerpt from the speech at the International Conference on Asian Market Integration and Financial Innovation, Tokyo, Japan on February 10, 2012.