CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
In a number of developing countries of the world the financial system is highly regulated. This is because of the pivotal position the financial industry occupies in these economies. An efficient system, it is widely accepted, is a sine qua non for economic growth and efficient functioning of a nation’s economy. Thus, for the industry to be efficient, it must be regulated in view of the failure of the market system to recognize social rationality and the tendency for market participants to take undue risks which could impair the stability and solvency of their institutions.
However, the highly controlled state of the financial system in developing countries pulled the private sector back from playing an active role in the economy. The government controlled the interest rates and credit ceilings, owned banks and other financial institutions, and framed regulations with a view to making it easy for the government to acquire financial resources at a low cost. Since the nominal interest rate was controlled and the real interest rate mostly remained negative, savings could not be encouraged. As a result, investment could not increase to the desired level. This ultimately slowed economic growth.
In 1973, McKinnon (1973) and Shaw (1973) identified this problem of financial repression in developing countries and argued for a liberalization of the financial system. The standard economic theory suggests that liberalization strengthens financial development, leads to a more efficient allocation of resources, higher level of investment and higher long-run economic growth of the economy (Levine, 2001; Bonfiglioli and Meadicino, 2004). On the other hand, financial repression forces financial institutions to pay low and often negative real interest rates, reduces private financial savings thereby reducing the resources available to finance capital accumulation.
The World Bank and the International Monetary Fund (IMF), since the mid-1980s, started to prescribe financial liberalization as a basic framework for member developing countries to foster their economic growth (The World Bank Group, 2005). With this, the era of financial liberalization started in the developing countries with the technical and financial assistance of the World Bank and the IMF. The initial liberalization measures taken by some developing countries in the early 1980s showed
| Review project details | Comments |
|---|---|
| Number of Pages | 116 pages |
| Chapter one (1) | Yes Introduction |
| Chapter two (2) | Yes Literature review |
| Chapter three (3) | Yes methodology |
| Chapter four (4) | Yes Data analysis |
| Chapter five (5) | Yes Summary,discussion & recommendations |
| Reference | Yes Reference |
| Questionnaire | Yes Questionnaire |
| Appendix | yes Appendix |
| Chapter summary | yes 1 to 5 chapters |
| Available document | PDF and MS-word format |
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