ABSTRACT
In a large number of low-and middle-income countries, entry into the banking sector was for a long time tightly controlled by regulatory boards that limited the ability of providers to offer a full range of banking services and limited market access. In those countries, banks were the main source of domestic financing for governments. Many developing countries had high reserve, liquidity and portfolio requirements that necessitated significant holdings of cash and government bonds. Banks were used to finance government expenditures directly and to direct credit to preferred ends, which often included the political supporters of government circles. Lately, objectives such as boosting economic development, preventing and mitigating costly crises and protecting consumers became important policy goals, and the liberalization of banking services is considered an essential tool to achieve these objectives. We emphasize that an efficient and well-regulated banking sector leads to the efficient transformation of savings to investment, ensuring that resources are deployed wherever they have the highest returns, and facilitates better risk sharing in the economy. It also enhances efficient capital reallocation, bringing tremendous benefits to consumers.
