Abstract
Financial liberalization, a widely-accepted policy paradigm since the 1980s, aims to remove financial repression and thus establish an efficient financial sector as a pre-requisite for financial development. Interest rate convergence is one of the obvious outcomes of the interest rate liberalization, a crucial part of financial liberalization. Uniformity of interest rate should be there in a free and competitive financial market. This paper examines the state of interest rate convergence by measuring the degree of convergence in the financial market of Bangladesh, a success case of financial liberalization initiated in the 1990s.
Highlights
The financial liberalization programs appeared in the developing countries in the 1980s and 1990s as part of the worldwide approach toward giving markets a greater role in development through strengthening the financial sector: see Ariff and Khalid (2005)
This study investigates whether interest rate liberalization has been able to create a competitive environment in the financial market through the convergence of interest rate, which can be used as an indicator of a more efficient financial market leading to more efficient allocation of financial resources
We examine convergence in different ways on the formal credit market comprised with four players: the nationalized commercial banks (NCBs), the private commercial banks (PCBs), the specialized banks (SBs) and the foreign commercial banks (FCBs)
Summary
The financial liberalization programs appeared in the developing countries in the 1980s and 1990s as part of the worldwide approach toward giving markets a greater role in development through strengthening the financial sector: see Ariff and Khalid (2005). One of the objectives of this was to provide better return on deposits and thereby allocate credits efficiently in the financial market by moving towards a market based interest rate regime from the administered interest rate regime, hoping thereby to promote economic growth through increased investment spending. This implementation of FSRP should lead to a more competitive credit market and convergence of interest rate will occur with the passage of time.
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