Financial Liberalization: What has really been achieved in Bangladesh

There has been considerable controversy over the role of financial liberalization policy, particularly in developing country experiences. This paper explores the consequences of financial liberalization policy execution in the banking sector in Bangladesh. Applying both exploratory and econometric techniques with time series data for the period, FY1981-2008 the study suggests that the main objective of the financial liberalization thesis to promote domestic private savings by raising real interest rate has not been achieved so far. No significant positive correlation has been observed between domestic private savings and real deposit interest rate. On the other hand, financial liberalization has not improved the efficiency of the banking institutions since a high intermediation cost (interest rate spread) is still persisting with allocating financial resources to short-term speculative lending rather than long term productive investment. However, insufficient time series data might limit the significance of the econometric results of the study.