I.Essence of financial liberalization1.What is financial liberalization?
Financial liberalization can be defined as a set of reforms and policy measuresdesigned to deregulate and transform the financial system and its structure with aview to achieving a liberalised market-oriented system within an appropriateregulatory framework.Specifically, the objective of financial liberalization is to promote the role of themarket and to minimize the role of the state in determining who gets and gives creditand at what price, or as stated by McKinnon (1973), the primary objective of financialliberalization is to eliminate financial sectors from “financial repression.”The success of financial sector reform throughout the world has seen the introductionof market-based procedures for monetary control, the promotion of competition in thefinancial sector, and the relaxation of restrictions on capital flows. Specifically, themove away from a tightly controlled financial sector to a deregulated one results ingreater flexibility in interest rates, enhancement of the role of markets in credit andforeign exchange allocation, increased autonomy for commercial banks, greater depth of money, securities, and foreign exchange markets, and a significant increasein cross-border capital flows.
In details, the key components of financial liberalization are the following: (a)deregulation of interest rates; (b) removal of credit control; (c) privatisation of government banks and financial institutions; (d) liberalization of restrictions on theentry of private sector and/or foreign banks and financial institution into domesticfinancial markets; (e) introduction of market based instruments of monetary control;and (f) capital account liberalization (Singh, 2000).Based on the above six components, the scope of financial liberalization can be seeneasily. Operationally financial liberalization does not only consist of the tightbudgetary policy and the removal of subsidies but also includes the privatisation of state owned enterprices. For example, the removal of credit control has a direct