Financial Liberalization: The Theories Of Financial Liberalization?

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Literature Review The theory of financial liberalization is greatly explained by the works of MacKinnon (1973) and Shaw (1973). Financial liberalization refers to the removal of government ceilings on interest rates and of other controls on financial intermediaries. It is concerned with macroeconomic aggregates (interest rates, savings and investment) and conditions in formal financial markets (Baden, 1996). It refers to the removal of all constraints in the financial sector. In contrast, financial repression refers to distortions of financial prices such as interest rates. Financial liberalization as used here refers to the deliberate and systematic removal of regulatory controls, structures, and operational guidelines that may be considered …show more content…

The banking sub-sector in the opinion of the experts can assist in the break away from a depressed economic performance to an accelerated growth if and only if, the sector is not repressed and distorted with inappropriate and inflexible regulations (Oluyemi, 1995) Smith (1776) (Jhinghan, 2005) believed in the doctrine of natural law in economic affairs. He regarded every person as the best judge of his own interest who should be left to pursue it to his own advantage. Since every individual if left free, will maximized his own wealth, therefore all individuals if left free, maximized aggregate wealth. Smith was naturally opposed to any government intervention in industry and commerce. He believed in the doctrine of laissez faire (no government). Rose (1988) noted that bankers are entrepreneurs, who when freed from constraints of regulations, will readily pursue new opportunities for better services, stronger growth and improved earnings whenever these opportunities appear. Too much regulation, especially the inflexible and dogmatic ones deny banks of their innovation and incentive to take risk and invest in business enterprise. It could also result in problems such as loss of competitiveness and …show more content…

They observed that the stage of development of the financial sector of a group of countries in 1960 made it possible to foresee economic growth over the following thirty years. They find that higher levels of financial development are associated with faster economic growth and conclude that finance seems to lead to

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