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When thinking about regional financial integration, one would think of regional currencies like the Euro as the epitome example, however a different story is unfolding in Southeast Asia. Financial integration in ASEAN has been a long sought-out dream for a region with an undeniably large market growth in the future. An integrated market would mean further development within the finance sector including banking, insurance, capital markets, as well as trade. In a region with great market potential yet low intra-regional trade, improving access to financial services will not only lead to economic and trade growth but also to market efficiency by lowering the cost of capital. However, financial integration is a complex matter and in order to fully understand it, one must understand ASEAN’s progress thus far and the small concrete steps the organization is taking in ensuring a financially integrated future.

Progressing ASEAN financial integration

ASEAN’s financial integration has been a drawn-out process, but its saliency has been expressed since the 1997 ASEAN Finance Ministers Meeting in Thailand. The first concrete step towards financial integration was taken in 2003 after the agreement between ASEAN’s finance ministers on The Roadmap for Monetary Integration in ASEAN.[1] This was followed by another step in 2007 when ASEAN leaders declared for the establishment of the ASEAN Economic Community (AEC) by 2016 within the formulation of the AEC Blueprint which encompasses plans for trade and services liberalizations, which includes financial services, capital account regimes, and financial system integration.[2] This would mean that the AEC plans to work on removing the restrictions for intra-regional financial service and capital account provisions, capital market harmonization and development, harmonization of payments and settlements systems, and mutual qualification for financial professionals.

               By 2011, the ASEAN Financial Integration Framework was established as the main approach for initiatives to liberate and integrate financial sectors. With the goal of a semi-integrated financial region by 2020, the main objectives of the framework include the provision for intra-ASEAN financial services, capacity building and development of ASEAN capital markets, capital flow liberalization, harmonization of payments and settlement systems, and regional financing surveillance and arrangements. Two years after, the Central Bank Governors of ASEAN member states (AMS) published the “The Road to ASEAN Financial Integration—A Combined Study on Assessing the Financial Landscape and Formulating Milestones for Monetary and Financial Integration in ASEAN” Summary Report as a reference guide got the financial integration process.[3] The establishments of the AEC in 2015 only furthered the on-going progress. Currently, ASEAN has taken two very distinct steps in fulfilling the goal of the ASEAN Financial Integration Framework.

Local Currency Settlement Framework

In a region where intra-ASEAN trade has not yet reached unprecedented levels, bilateral trade in Southeast Asia has long been dominated by the use of the dollar. This is mainly due to the dollar’s stability and liquidity, and also the lack of a regional currency unlike the Eurozone.[4] However, transactions using the dollar has made trade, investments, and business less efficient as it takes more time to convert local currencies into the dollar and reconvert them back. Overreliance on the dollar also causes it to strengthen which could potentially make local currencies depressed and trade more costly. Furthermore, ASEAN local currencies are known to fluctuate against the dollar which may impact their debt value, as a stable currency against the dollar would lead to less debt, but a fluctuating currency would increase debt.[5]

In 2016, Thailand and Malaysia initiated a bilateral cooperation for a local currency settlement and was followed by Indonesia in 2018. The aim was to establish a monetary framework that enables the usage of local currencies to facilitate cross-border payments and flow of trade. This framework became known as the Local Currency Settlement Framework (LCS) which enables bilateral transactions to be done using local currencies within each country. The goal was to reduce overreliance on the US dollar as the currency used for trade transaction settlements and to generate local currency stability by diversifying currency exchanges.[6] Ultimately, LCS is also a strategic move in developing transaction efficiency by implementing direct trading without having to buy and sell the dollar for conversion. Broadly, it will also enhance market efficiency and local currency market development.[7]

In its implementation, the central banks of these AMS (the Bank Negara Malaysia, Bank of Thailand, and Bank Indonesia) have appointed several banks within their respective countries as Appointed Cross Currency Dealers (ACCD). These are banks that have the ability to facilitate transactions in foreign currencies, under the consideration that they have good resilience and health, experienced in providing various financial services, and have good relations with banks in partner countries.[8] Services provided by the ACCD banks in local currencies includes issuing receipt of import and export payments for trades in goods and services, receipt and payment of labor compensation transactions and investment incomes, remittances, and direct investment between LCS customers with a 10% ownership minimum limit. Currently, there are 7 AACD banks appointed by Indonesia, 6 ACCD banks appointed by Malaysia, and 5 ACCD banks appointed by Thailand.[9]

               As of now, the LCS cooperation has expanded to include Japan and China through the MoU signed between Bank Indonesia and the Ministry of Finance of Japan in 2020, followed by an MoU signed by Bank Indonesia with the People’s Bank of China (PBC) in 2021. The central bank of the Philippines, the Bangko Sentral ng Pilipinas, has also signed commitments with the central banks of Indonesia, Thailand, and Malaysia during the ASEAN Finance Ministers and Central Bank Governors Meeting in 2019, though they have yet to appoint any ACCD banks domestically.[10] Though trade between these countries is still heavily dominated by the dollar, the implementation of the LCS has showed a positive trend. In 2018, Bank Indonesia reported that Indonesia’s trade with Malaysia using the LCS framework reached 1.4% which rose to 3.6% in 2019 and 4.1% in 2020. Thailand also experienced a rise in LCS implementation numbers from 0.6% in 2018 to 1.1% in 2019 and 1.3% in 2020.[11] Additionally, it is predicted that trade and investments using the LCS framework will increase up to a targeted 10% in 2022, noting the US$2,53 billion transactions done within the framework in 2021. Such number constitutes 35% from trade transactions, 14% from remittances, 1% from investments, and 50% from interbank cover positions.

The LCS framework brings several notable benefits as its payments system is more efficient for faster transactions, provides alternative hedging instruments to export financing and direct investment, and exposes transaction settlement to diverse currencies whereby diversification is hoped to be able to support macroeconomic stability and foster economic recovery. The usage of the LCS has the potential to bring structural changes in payments invoicing within ASEAN.  Though the share of local currency usage for trade and investments are still small—with only around less than 10% of transactions conducted in local currencies compared to the dollar—there is great hope for a more wide-spread use of the LCS framework, noting the positive growth of its usage since 2016. As of 2019, total trade done within the LCS has accumulated up to US$83 billion.[12] It is a slow and small step towards the long road for currency resilience in ASEAN.

Cross-border QR Payments

                Likewise, Indonesia recently created an initiative to expand the Quick Response Code Indonesia Standard (QRIS) features and services. The initiative was reiterated in 2021, and was followed with the commitment to establishing QR interconnectivity domestically and regionally. This is in line with the Bandar Seri Begawan Roadmap (BSBR): An ASEAN Digital Transformation Agenda to Accelerate ASEAN’s Economic Recovery and Digital Economy Integration document endorsed by the AEC that reaffirms ASEAN’s collective agreement to a five-year agenda towards the development of the ASEAN Digital Economy Agreement and negotiations on the Digital Economy Framework Agreement (DIFA) by 2025. Within the document, there is a special focus on the creation of financing, payment, and service connectivity in relations to the ASEAN Payments Policy Framework as also noted in the joint statement issued during the 8th ASEAN Finance Ministers and Central Bank Governors Meeting (AFMGM) this year.[13]

The ASEAN Payments Policy Framework for Cross-Border Real-Time Retail Payments fall under the Acceleration phase, whereby it aims to implement an inter-operable cross border digital payment via QR within the ASEAN region. This is done to increase the promotion for financial inclusion through digital finance services and regional payment connectivity in order to accelerate the Inclusive Digital Transformation Strategy, which includes the development of an ASEAN inter-operable QR Code Framework by 2022.[14] This is in line with the ASEAN Payments Connectivity Initiative which plays a key role towards furthering financial integration and connectivity of financial transactions in ASEAN, noting that QR payments are a reliable, affordable, and efficient method of payment that holds the potential to boost SMEs participation within international trade of goods and services, particularly within the tourism sector due to its practicality and convenience.[15] A cross-border QR holds a potential in increasing transaction efficiency and hastens the digitalization of trade and investment. Furthermore, the initiative holds the potential to go hand-in-hand with the LCS framework to help maintain macroeconomic stability. According to Bank Indonesia Governor, Doni P. Joewono, Bank Indonesia, Bank Negara Malaysia, and the Bank of Thailand has initiated a pilot cross-border QR that allows merchants and consumers to make retail and real-time cross-border payments via QR known as the Real-Time Retail Payments Systems (RT-RPS).[16]

A conclusion on the future of ASEAN’s financial integration

It should be noted that the current existing cooperation for the LCS framework and the cross-border QR initiative is being spearheaded by Indonesia, Thailand, and Malaysia, which so happens to also be part of the Indonesia-Malaysia-Thailand Growth Triangle (IMT-GT). These three countries also share similar sentiments in decreasing reliance on the dollar, and their strategic geographical proximity may have contributed to higher levels of trade amongst them, considering Malaysia and Thailand are part of Indonesia’s top 10 trading partners in 2018.[17] Through small concrete steps, these three ASEAN member states are paving the way for a wider ASEAN financial integration.

Since a reduction on dollar reliance and currency diversification could mean value stability for local currencies, governments need to make sure that data disclosures on the usage of the LCS framework is accessible to SMEs who may interested in conducting business with lowered exchange rate risks due to the wide choice of transaction currencies. Furthermore, information on preferential settlement currencies between firms and regular surveys for local currency usage in investments and trade are the key to promote greater use of the LCS within the region, as it would increase the numbers of direct transaction markets and create an ASEAN foreign exchange market to reduce local currencies transaction costs further.[18]Similarly, there is a lot of hope that cross-border QR payments would contribute towards economic recovery and the future of digital payments and finance, as an integrated cross-border QR initiative could spearhead the development of standardized financial technologies and infrastructure, which could hopefully expand for cross-border remittance payment and stock market sales. This initiative may hold great prospects to increase efficiency within international wholesale and retail trade and promotes investments digitalization.[19] Additionally, it has the potential to increase SMEs added values in conducting online direct transactions and boosting tourism recovery.[20]

However, for any of these initiatives to work regionally, ASEAN member states’ central banks need to expand efforts in digitalizing financial sectors in order to create an inclusive environment for an integrated financial market. Greater access and awareness on digital finance would not only drive the regional economy, but also reduce cash dependence, financial exclusion, and further realizing the AEC’s investment and trade liberalization. In this sense, the Qualified ASEAN Banks Framework should be utilized to help banks carry out the appropriate financial services and work together with stakeholders in ensuring the provision of digital financial technologies and e-platform services are accessible to many ASEAN member states, particularly for the CLMV (Cambodia, Laos, Myanmar, and Vietnam) where there is a cash-based market dominance and limited finance technological readiness.[21] The LCS and cross-border QR initiative have already operated under the principles of non-intervention and interacts with the ASEAN Way in regards to monetary power and autonomy through currency deterritorialization.[22] Hence, cooperation in fostering the political will and domestic readiness between ASEAN member states needs to happen to secure the future of ASEAN financial integration.


[1] ASEAN, “Finance Integration,” asean.org, n.d., https://asean.org/our-communities/economic-community/finance-integration/.

[2] ASEAN Briefing, “Understanding Financial Integration in ASEAN,” ASEAN Business News, April 27, 2016, https://www.aseanbriefing.com/news/financial-integration-in-asean/.

[3] ASEAN Briefing, “Understanding Financial Integration in ASEAN,” ASEAN Business News, April 27, 2016, https://www.aseanbriefing.com/news/financial-integration-in-asean/.

[4] J Shimizu, “Exploring Local Currency Usage to Reduce Exchange Rate Risks in Asia,” AMRO ASIA, January 30, 2019, https://www.amro-asia.org/exploring-local-currency-usage-to-reduce-exchange-rate-risks-in-asia/.

[5] A. Y. Widyastuti, “Gubernur BI Yakin Transaksi Local Currency Settlement Tahun Ini Naik 10 Persen,” Tempo (TEMPO.CO, February 16, 2022), https://bisnis.tempo.co/read/1561500/gubernur-bi-yakin-transaksi-local-currency-settlement-tahun-ini-naik-10-persen?page_num=3.

[6] Jalin, “Understanding Local Currency Settlement in Bilateral Transactions,” jalin.co.id, October 22, 2021, https://www.jalin.co.id/en/understanding-local-currency-settlement-in-bilateral-transactions/.

[7] Bank Indonesia, “Bank Indonesia Committed to Local Currency Settlement in ASEAN Region,” www.bi.go.id, 2019, https://www.bi.go.id/en/publikasi/ruang-media/news-release/Pages/Bank-Indonesia-Terus-Berkomitmen-Dukung-Implementasi-Penggunaan-Local-Currency-Settlement-di-Kawasan-ASEAN.aspx

[8] Jalin, “Understanding Local Currency Settlement in Bilateral Transactions,” jalin.co.id, October 22, 2021, https://www.jalin.co.id/en/understanding-local-currency-settlement-in-bilateral-transactions/.

[9] Bank Indonesia, “Bank Indonesia Committed to Local Currency Settlement in ASEAN Region,” www.bi.go.id, 2019, https://www.bi.go.id/en/publikasi/ruang-media/news-release/Pages/Bank-Indonesia-Terus-Berkomitmen-Dukung-Implementasi-Penggunaan-Local-Currency-Settlement-di-Kawasan-ASEAN.aspx

[10]The Jakarta Post, “ASEAN Local Currency Deals,” The Jakarta Post, 2019, https://www.thejakartapost.com/academia/2019/04/10/asean-local-currency-deals.html.

[11] Jalin, “Understanding Local Currency Settlement in Bilateral Transactions,” jalin.co.id, October 22, 2021, https://www.jalin.co.id/en/understanding-local-currency-settlement-in-bilateral-transactions/. 

[12] A. Y. Widyastuti, “Gubernur BI Yakin Transaksi Local Currency Settlement Tahun Ini Naik 10 Persen,” Tempo (TEMPO.CO, February 16, 2022), https://bisnis.tempo.co/read/1561500/gubernur-bi-yakin-transaksi-local-currency-settlement-tahun-ini-naik-10-persen?page_num=3.

[13] ASEAN, “ASEAN Economic Community Council Endorses Roadmap to Accelerate Economic Recovery, Digital Economy Integration,” asean.org, 2021, https://asean.org/asean-economic-community-council-endorses-roadmap-to-accelerate-economic-recovery-digital-economy-integration/.

[14] Monetary Authority of Singapore, “Joint Statement of the 8th ASEAN Finance Ministers’ and Central Bank Governors’ Meeting (AFMGM),” www.mas.gov.sg, 2022, https://www.mas.gov.sg/news/media-releases/2022/joint-statement-of-the-8th-asean-finance-ministers-and-central-bank-governors-meeting

[15] E Haryono, “Cross-Border QR Transactions Support ASEAN Financial Integration,” www.bi.go.id, 2022, https://www.bi.go.id/en/publikasi/ruang-media/news-release/Pages/sp_245022.aspx.

[16] IDN Financials, “BI: Cross Border QR Transactions Support ASEAN Financial Integration | IDNFinancials,” www.idnfinancials.com, 2022, https://www.idnfinancials.com/news/42210/bi-cross-border-qr-transactions-support-asean-financial-integration

[17] H Supadi, “The Use of Local Currency Settlement in Trade among Indonesia, Malaysia, and Thailand,” JOM FISIP 8, no. 2 (2021), https://jom.unri.ac.id/index.php/JOMFSIP/article/download/30945/29808

[18] N. Laoli and B. Pink, “BI Berencana Perluas Kerja Sama Local Currency Settlement Di Sejumlah Negara Ini,” PT. Kontan Grahanusa Mediatama, September 9, 2021, https://newssetup.kontan.co.id/news/bi-berencana-perluas-kerja-sama-local-currency-settlement-di-sejumlah-negara-ini.

[19] N. Ihsan and A. Olivia, “Cross-Border QR Code Bolsters Financial Integration in ASEAN Region,” Antara News, 2022, https://en.antaranews.com/news/215325/cross-border-qr-code-bolsters-financial-integration-in-asean-region.

[20] E Haryono, “Cross-Border QR Transactions Support ASEAN Financial Integration,” www.bi.go.id, 2022, https://www.bi.go.id/en/publikasi/ruang-media/news-release/Pages/sp_245022.aspx.

[21] P. Chuasakulvanich and P. Srimanote, “ASEAN – the Significance of Financial Inclusion by Qualified Financial Institutions,” Trade Finance Global, September 19, 2019, https://www.tradefinanceglobal.com/posts/asean-significance-of-financial-inclusion-by-qualified-financial-institutions/.

[22] Adinda Mardania and Mohtar Mas’oed, “Local Currency Settlement (LCS) Framework and the ASEAN Way: Implementation of Regional Monetary Agenda,” etd.repository.ugm.ac.id, 2018, http://etd.repository.ugm.ac.id/penelitian/detail/159989.

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