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V. A. Jafarey

Abstract

Financial sector reforms are policy measures designed to deregulate the financial system and transform its structure with the view to achieving a liberalized market-oriented system within an appropriate regulatory framework. The pace of financial sector reform and innovation began to accelerate in the late 1970s in many industrial countries and in the early 1980s in a number of developing countries of the Pacific Basin and Latin America. Currently, major financial reforms are under way in many African countries and in Eastern Europe. The initial situation in many developing countries and in the formerly centrally planned economies of Europe was characterized by direct controls on interest rates and credit allocation, the absence of well–developed money and securities markets, and underdeveloped and highly regulated banking systems. With reform of the financial sector, this situation is giving way to a greater flexibility in interest rates, an enhanced role for market forces in credit allocation, a gradual deepening of money and securities markets, and increased autonomy for commercial banks. Alongside these developments, the framework of monetary policy is also undergoing major changes. Bank-specific credit ceilings and selective credit allocations are being replaced by market-based instruments for implementing monetary policy, and prudential supervision systems are being put into place to foster sound credit decisions.