Financial sector reform for sustaining Asia’s growth: 8 takeaways

Published on Saturday, 02 May 2015

Published by ADB Blog Team on Saturday, 02 May 2015

The joint ADB-IMF panel discussion featured the participation of ADB President Takehiko Nakao and Mitsuhiro Furusawa, IMF Deputy Managing Director.
The joint ADB-IMF panel discussion featured the participation of ADB President Takehiko Nakao and Mitsuhiro Furusawa, IMF Deputy Managing Director.

As developing Asia looks to continue boasting robust economic growth in the future, many look at the region’s financial sector as a key element to helping increase investment and productivity.

But to achieve that goal, Asia’s financial sector needs to transform itself into a beacon of stability that will unlock growth potential, not undermine it like during the Asian financial crisis of 1997-1998.

This is, of course, easier said than done, but several high-level experts gave a few tips on how to develop the region’s financial sector to deliver stable, inclusive, long-term growth during a seminar co-organized by ADB and the International Monetary Fund (IMF) at ADB’s Annual Meeting in Baku, Azerbaijan taking place here from 2-5 May.

Here are a few highlights from the panel discussion:

  1. The People’s Republic of China (PRC) is moving in the right direction to ensure financial stability for Asia’s largest economy, although banks should become more independent and allocate more resources to private firms rather than state-owned enterprises that deliver less return on investment.
  2. India, which many experts believe could overtake the PRC in economic growth in the near future, has made strides in expanding its financial sector by providing bank accounts and other services to a huge chunk of its “unbanked” citizens, but must do more to encourage the population to move beyond illiquid assets such as gold or land to realize the full potential of the country’s financial sector.
  3. Asian financial systems are dominated by commercial banks. Maybe, they said, it’s time to explore other options to allocate credit more efficiently, although capital markets are less inclusive.
  4. Developing Asia needs to build a long-term investor base, with more institutional investors, channeling funds into areas like infrastructure.
  5. For the region’s financial system to become more inclusive, it should provide additional support to microfinance as well as small- and medium-sized enterprises, precisely those which would benefit the most from commercial bank loans.
  6. Asia must continue to embrace macroprudential regulation to protect the whole financial system against systemic risk, but excessive regulation can also make countries less attractive to investors, so regulators need to strike the correct balance between the two.
  7. The ASEAN Economic Community set to be implemented at the end of 2015 could boost the financial sector in Southeast Asia.
  8. Myanmar stands out as a shining opportunity to develop a financial sector practically from scratch.

Panelists at the seminar—entitled Financial Sector Development for Sustaining Asia’s Growth and moderated by Bloomberg columnist William Pesek—included ADB President Takehiko Nakao; IMF Deputy Managing Director  Mitsuhiro Furusawa; India’s Finance Minister Rajiv Mehrishi; Peterson Institute for International Economics senior fellow Nicholas Lardy; and head of Asia Economics and Market Analysis for Citigroup Global Markets Asia Johanna Dee Chua.