The role of finance and banking in the prosperity of Asia 

According to the latest IMF World Economic Outlook, emerging and developing Asia is expected to grow at 6.4 per cent in 2017, making it the fastest growing region and contributor of almost half the world’s output growth.
The financial system has played a significant role through the entire journey. Having a smooth-functioning financial system is a necessary condition for growth as finance is the lifeblood of the economy. If the blood is infected, it can lead to severe malfunctions of the body and serious adverse consequences. 
However, against the backdrop of the increasingly volatile, uncertain, complex and ambiguous world we live in today, it is vital that we are prepared to deal with challenges that still lie ahead for Asian financial systems. 
Firstly, the persistent low-growth and low-yield environment has affected Asian banks through various channels. Deteriorating asset quality with higher credit costs tends to outweigh benefits of the lower funding costs, thereby squeezing profit margins. Meanwhile credit demand has been hampered by the low-growth prospect and more attractive funding sources in the capital markets. Corporate and household debt overhangs have also undermined investment and consumption. The latest concern, over trade protectionism and geopolitical tension, could jeopardise the overall growth and stability.
Secondly, technology advancement is fast redesigning the financial and business landscape. While the sharing economy and cross-border payment will become more widespread, FinTech firms have offered financial products unbundled from the longstanding value chain of banks. Having economies of scale and scope might not gain advantages without agility and economies of speed to keep up with customers’ new lifestyles and competitors’ new business practices. And one should not forget that new forms of technology also bring new forms of cyber-risk.  
Thirdly, the role of Asian banks as intermediaries could be diminished on the back of the growing capital markets and shadow banking, which includes not only asset management companies and savings cooperatives, but also crowd-funding and peer-to-peer lending. Technology could fragment our financial systems in an unprecedented way. Regulatory arbitrage could lead to pockets of vulnerability, particularly in the less-regulated or unregulated areas of shadow banking.
Lastly, rising income inequality could pose more threats. The income gap in many Asian countries will widen further and threaten social and economic stability, as those with higher capital can more easily reap benefits from economic growth and new technology, leaving those without access or know-how further behind. Rising income inequality has raised social polarisation as witnessed in Asian politics even before the Brexit vote and the US presidential election. 
Faced with these challenges, and aspiring to achieve a sustainable and prosperous Asia for many more years to come, financial systems must, at the very least, help with three key areas – productivity, immunity and inclusion.
1. Productivity: Banks should embrace technology advancement and employ digitisation to enhance productivity, not only to improve their own competitiveness, but also to provide more efficient and lower-cost financial services. In Thailand, the national e-payment programme has initiatives such as “PromptPay”, an electronic government payment scheme that will reduce overall financial transaction costs and provide foundations for further improving productivity in the future.
Financial connectivity will also play a key role in enhancing productivity. Regional cooperation among Asian countries, not only in trade and investment, but also in finance, has a potential to expand much further, and we could step up our joint efforts in various ways to further improve financial connectivity in Asia, which will be mutually beneficial to all. 
2. Immunity: As the financial system is the artery of the economy, immunity needs to start from safeguarding against blood infection by ensuring that banks have adequate capital and provisioning cushion to be able to withstand swings of economic cycle and financial volatility. To complement ongoing reform of financial regulations, we also need to ensure that culture and behaviour of banks contributes towards building a better immune system that is strong and resilient through any cyclical or structural shocks. A culture of risk awareness, good governance and transparency along with proper checks and balances would contribute towards a solid foundation for banks’ immune system. Furthermore, the underlying banks’ risk-reward system needs to place more emphasis on long-term gains rather than short-term profits. 
The other key area is immunity against cybersecurity risks. Everyone, every bank and every system must be prepared to prevent and respond effectively to cybersecurity risks. 
3. Inclusion: The economic benefit of growth has to be inclusive to be sustainable and banks can play significant roles in promoting inclusive growth, starting with financial inclusion. The public at large must have access to basic financial products including payment, savings, credit and insurance. The pricing has to be lower, choices wider and access better. Despite a relatively high level of financial access in Thailand, Thai authorities, in collaboration with both banks and non-banks, continue to make efforts to promote financial access in many areas, such as SMEs’ credit guarantee scheme, free-of-charge transfer via PromptPay of amounts up to Bt5,000, and the new Business Securities Act. Moreover, the unsecured debt restructuring scheme for individual borrowers with multi-creditors will be launched soon.
To ensure good-quality financial inclusion, financial literacy and financial technology literacy are crucial life skills for everyone.  Effective financial literacy would help increase consumers’ financial discipline and understanding of financial products and their risks. It would thus help guard vulnerable businesses and households against severe debt or being stuck with unsuitable financial contracts. Also, if we could ensure that households and small businesses – which make up the majority of our economic agents – can practically apply and benefit from the new technology while being aware of its associated risks, then we could significantly raise their standard of living.  
To help build better standards of living for all citizens in Asia, banks and financial institutions, as the blood vessels of our economy, have important roles to play in preventing the blood from becoming infected as well as ensuring the proper functioning of its circulation for better productivity, better immunity and more inclusive economies.

Veerathai Santiprabhob is Governor of the Bank of Thailand.