Reforms of Financial Policies

Economic Policy Paper on REFORM OF FINANCIAL POLICIES FOR ECONOMIC DEVELOPMENT

Reform Leverage: In the financial sector particular, there needs to be a delicate balance between regulation and entrepreneurial freedom. Much of the persistent malaise in our financial sector can be attributed to the fact that we went for liberalization without providing for adequate regulation and supervision. The end 1996 episode of phenomenal boom and bust that did great damage to the country’s nascent stock market was mainly created by the machinations of some unscrupulous share-traders who took advantage of the laxity in regulation It needs to be mentioned that, although the private banks now account for nearly a half of the country’s banking business, the state- owned banks still play the major role in rural banking and in providing term loans for industrial investment. The banking sector generally suffers from weaknesses in investment appraisal capability. Although there is a need for reviving the stock market, there is a misplaced belief that the stock market can and should replace commercial banking as the major source of raising funds. Fit and Proper Test: A “fit and proper test” has been introduced for qualifying to be a bank director in fact, most countries impose restrictions on owning a bank, so as to ensure that the owner-director should have a minimum level of expertise and should not be a person who has a record of abusing trust. Unfortunately political affiliation rather than the professional track record of sponsor-directors has been the criterion for obtainig permission to open new banks. Role of Audit: Reliable external auditing is supposed to be the main vehicle of independent oversight on management by the company boards. The owner-directors of banks should therefore demand such auditing in their own interest, unless they have things to hide. It seems curious that some bank boards have been rather negligent in ensuring a sound system of internal and external...