A review of banking sector reforms in transition economies

Ruziev, Kobil; Dow, Sheila

Abstract

This study critically analyses the intended and unintended consequences of financial sector policy implemented in transition economies (TEs) of Eastern Europe and the Commonwealth of Independent States. Following the policy recommendations of international financial institution, all TEs abolished the distinction between cash money and non-cash money and gradually modernised their payments systems, starting with corporate banking and then extending the process to retail banking. They established two-tier banking sectors, liberalised interest rates, restructured their commercial banks, and gradually removed capital controls. Under normal circumstances, these policies would have improved the general public’s trust in banks and facilitated banking sector development. However, the impact of these developments was overshadowed by the ill thought-out and uncoordinated policies pursued in the early 1990s. The shock-therapy type of policy recommendations promoted under the Washington Consensus and pursued in most TEs in the early 1990s resulted in unexpected and unintended consequences, such as persistent inflation, macroeconomic chaos, and the general public’s loss of trust in money and banks, which had clear implications for credit creation, and thus for production, output, and employment.

• Working Paper Type: Working Paper
• Publicly Available Date: Jun 7, 2019
• Peer Reviewed: Not Peer Reviewed
• ISBN: NA
• Keywords: review, banking sector, reforms, transition economies
• Public URL: https://uwe-repository.worktribe.com/output/940219