MPFD Working Paper on Strengthening Financial Interlinkages among the SPECA Countries

Working paper16 Jun 2020

Financial integration brings much benefits but at the same time some associated costs. In developing country context, such trade-off is even more pronounced for policy consideration. This paper aims to systematically analyze financial landscape in SPECA countries as well as its financial integration potential, drawing on the experience of ASEAN. It is one of the first paper on financial integration to critically analyze SPECA financial landscape in this context. The paper finds that Financial interlinkages among SPECA financial systems remain very weak due to low economic interlinkages. As economic integration and strong domestic financial sector are fundamental preconditions for any successful financial integration, the highest priority for some SPECA countries are to complete the rehabilitation of weak banks, strengthen supervisory practices, and improve the legal frameworks in order to foster the development of strong banking sectors. A key lesson learned from ASEAN experience is that regional integration is a very long process which requires highest political commitment and appropriate sequencing of financial liberalization. Given the current stage of economic development of the SPECA countries, and particularly in the wake of weak banks, one of the priority areas for enhancing financial interlinkages among SPECA countries should be in facilitating the expansion of financially strong and well-managed banks, as the cross-border presence of strong regional banks can help improve the banking and credit culture in countries where it has been weakest. In this context, lessons could be drawn from ASEAN banking integration and seek capacity building for actual implementation.