The ambition to create a seamless economic bloc in Southeast Asia under the ASEAN Economic Community (AEC) faces a critical challenge: banking integration. Since the launch of the ASEAN Banking Integration Framework (ABIF) in 2014, progress has been painstakingly slow. Indonesia, the region's largest economy, offers a lens to understand why this vision remains elusive and what it reveals about the limits of regionalism in ASEAN.

The ABIF was designed to harmonize banking regulations, encourage cross-border operations, and reduce barriers for regional banks. By creating a unified market, ASEAN hoped to bolster economic growth, lower transaction costs, and enhance financial inclusion. Yet, a decade later, only a handful of bilateral agreements have been signed, and even fewer banks operate seamlessly across borders.

Indonesia exemplifies the challenges inherent in this initiative. Despite its enthusiasm for ABIF, the country's domestic political economy has constrained its ability to lead the charge. The competing interests of technocratic elites, nationalist politicians, and the private banking sector have shaped an integration process fraught with compromises and contradictions.

Indonesia’s Nationalist Banking Agenda

Indonesian technocrats in the Financial Services Authority (OJK) and Bank Indonesia (BI) have framed ABIF as an opportunity to internationalize Indonesian banks, allowing them to compete regionally. However, domestic political forces have pulled in a different direction. Lawmakers argue that Indonesia's open banking sector—where foreign banks can own up to 99% of local institutions—is not reciprocated by other ASEAN countries, where protectionist policies dominate.

This nationalist rhetoric has led to the framing of regional banking integration as a strategic move to level the playing field. Yet, even state-owned giants like Bank Mandiri have struggled to expand abroad, constrained by political considerations, regulatory hurdles, and a lack of sufficient capital. Domestic banks, including the largest private lender, Bank Central Asia (BCA), often choose to focus on lucrative domestic opportunities rather than pursuing the riskier path of regional expansion.

The nationalist agenda within Indonesia further complicates ABIF’s goals. Nationalist politicians push back against liberalization, citing concerns about foreign dominance in Indonesia’s financial sector. Their influence has pressured technocratic elites to adopt a cautious approach to banking integration, ensuring that foreign competition is balanced with domestic interests.

The Politicization of Banking Integration

ASEAN’s approach to banking integration relies heavily on bilateral agreements rather than a centralized regulatory authority. While this reflects the bloc's adherence to sovereignty and non-interference, it has also led to fragmented outcomes. Negotiations often cater to domestic political agendas rather than regional objectives, with Indonesia’s agreements emphasizing reciprocal benefits over broader integration goals.

For instance, the Qualified ASEAN Bank (QAB) designation—intended to streamline cross-border banking—has been criticized for its vagueness. Without clear and binding criteria, QAB status becomes a political bargaining chip rather than a functional regulatory tool. This has created a system where only a select few banks meet the requirements, further limiting the scope of integration. Moreover, bilateral agreements have served more as instruments for securing national interests than as frameworks for broader financial harmonization.

ASEAN's lack of binding mechanisms also results in varying levels of commitment among its member states. Indonesia has been one of the most active proponents of banking integration, yet its efforts have yielded limited results. For instance, bilateral agreements with Malaysia and the Philippines have facilitated some cross-border activities, but these have not created a cohesive regional framework.

Structural Challenges in ASEAN Regionalism

Indonesia's experience underscores a broader issue with regionalism in Southeast Asia: the tension between national sovereignty and collective ambition. Unlike the European Union, where supranational institutions enforce compliance, ASEAN’s soft-law approach leaves member states free to prioritize national interests. As a result, regional projects like ABIF often serve as rhetorical commitments rather than actionable frameworks.

These structural challenges are further exacerbated by the disparity in economic development among ASEAN member states. Countries like Singapore, with its globally competitive banking sector, have little incentive to adopt regional frameworks that may dilute their advantages. In contrast, emerging economies like Indonesia view banking integration as a means of leveling the playing field. This fundamental misalignment complicates efforts to create a unified regional banking system.

The Domestic Dilemma

For Indonesia, the slow progress of banking integration also reflects internal challenges. The country's banking sector is fragmented, with state-owned banks, private banks, and foreign banks pursuing divergent strategies. State-owned banks, such as Bank Mandiri and Bank Rakyat Indonesia, are often seen as vehicles for advancing national development goals, which can limit their ability to compete internationally. Meanwhile, private banks prioritize domestic markets, where opportunities remain abundant.

Technocratic elites within OJK and BI have sought to navigate these competing interests by emphasizing gradualism. This approach aims to build trust and reduce resistance from domestic stakeholders, but it has also slowed the pace of integration. For instance, the absence of clear guidelines for QAB status reflects a deliberate effort to maintain flexibility, allowing Indonesia to negotiate terms that align with its domestic priorities.

Lessons Beyond ASEAN

Indonesia’s experience with ABIF illustrates the complexities of regional integration in a politically fragmented landscape. It highlights the limitations of soft-law regionalism, where voluntary commitments often give way to national priorities. It also underscores the importance of aligning domestic and regional interests to achieve meaningful progress.

For ASEAN, the path forward requires addressing the structural disparities that hinder cooperation. A more binding and transparent framework could help bridge the gap between ambition and implementation. For Indonesia, this means balancing its nationalist aspirations with the realities of regional interdependence. The success of ASEAN banking integration ultimately depends on its ability to reconcile these competing forces.

The slow progress of ASEAN banking integration is not just a technical issue; it is a reflection of deeper socio-political dynamics. To move forward, ASEAN must address the structural disparities between member states and create more binding frameworks that incentivize cooperation. For Indonesia, this means reconciling its nationalist aspirations with the realities of regional interdependence.

The case of ASEAN banking integration offers valuable insights into the limits of regional governance in Southeast Asia. If ASEAN is to realize its vision of a cohesive economic community, it must find ways to bridge these divides—both within and between its member states. Only then can the region unlock the full potential of its economic integration agenda.

Note: This piece is an excerpt from the full article published in Asian Journal of Political Science and can be accessed here