Asia’s bank-heavy funding model constrains capital growth

Deloitte says deeper domestic investment markets are needed to channel Asia’s growing savings into businesses and future growth.

Asia Pacific’s financial services sector could reach US$4.8t by 2035, but its reliance on bank balance-sheet lending could limit how effectively regional capital funds the next generation of businesses.

Stuart Johnston, Financial Services Leader for Asia Pacific at Deloitte, said the region has developed strong trade integration but has yet to achieve the same depth across financial services. Bank lending has supported a manufacturing-led growth model, but a more diversified business base will require different investment vehicles.

“We're going to need to see a rebalancing across the region of the investment vehicles that our businesses have access to,” Johnston said.

The funding challenge persists despite Asia holding substantial capital. Johnston said the region is a net exporter of savings, whilst businesses often access alternative sources of funding through international markets rather than domestic channels.

“Asia today is a net exporter of savings, but we don't see the same capital flow back in necessarily into this region,” he said.

Building deeper capital markets will require changes across regulation, financial institutions and investor behaviour. Johnston said Asia’s market depth currently stands at about 50% of that of the US, requiring policy and regulatory settings that support a wider range of investment options.

Financial institutions will also need products and platforms capable of deploying capital, whilst consumers may need to allocate more of their savings towards investments.

Beyond capital markets, Johnston said financial firms must prepare for growing middle-class demand and rethink business models as artificial intelligence and other technologies develop.

The US$4.8t opportunity could place Asia Pacific ahead of the US, he said, but capturing it will depend on whether the region can connect its capital more effectively with businesses requiring investment.

Asia has the opportunity “to become the center of gravity for the global financial markets,” Johnston said.