Financial Sector Reform and Its Impact on Investment and Economic Growth: An Econometric Approach

M. Aynul Hasan, Ashfaque H. Khan, S. Sajid Ali


The financial sector is central to economic development as it
serves the role of intermediary by mobilising savings and subsequently
allocating credit for productive activities. However, in many developing
countries including Pakistan, administered interest rate, domestic
credit controls, high reserve requirements, use of captive banking
system to finance large budgetary requirements of the government and
controls on international capital inflows have remained the main
features of the monetary policy. These repressive policies had their
repercussions in the form of excess liquidity with the banking system,
disintermediation of cash flows, segmentation of financial markets,
underdeveloped money and capital markets, etc. [McKinnon (1973) and Shaw
(1973)], therefore, argued that low interest rate ceilings unduly
restrict the real flow of loanable funds, thus depressing the quantity
of productive investment.

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