Review of financial liberalisation policies in developing countries from 1986 to 2016

Abstract

By the late 1980s, most sub-Saharan African (SSA) countries had undertaken policy reforms to abolish financial sector controls. While studies have produced several liberalization indices, available measures are limited in scope and time coverage. The purpose of this research is to address this limitation by constructing a new set of indicators that tracks the magnitude, pace, and timing of reform aspects in 26 countries between 1986 and 2016. The paper uses questions and coding rules from a framework developed by Detragiache, Abiad, and Tressel (2008) to collect and analyse data on seven liberalization policies: credit controls, interest rate controls, entry barriers, state ownership of banks, capital account restrictions, prudential regulation and supervision, and securities market policy. Results indicate that interest rate liberalization is the most advanced dimension, followed by the abolition of entry restrictions. The least advanced dimension is bank supervision and prudential regulation. An aggregate liberalization index constructed using principal component analysis (PCA) confirms advancements in financial liberalization over time. This study is significant as it provides indicators critical for policy formulation in developing economies whose performance hinges on sufficiently developed and stable financial sectors. The study recommends implementing further reforms to update and modernise prudential regulation and supervision of banks in line with good governance.