n AfricaGrowth Agenda - Financial liberalization and financial intermediation In Lesotho

Volume 2013, Issue 1
  • ISSN : 1811-5187


Financial liberalization refers to the removal of restrictions on the financial institutions in an economy. This can be done either domestically by interest rates liberalization or externally through the removal of restrictions on international capital transactions. The latter has been welcomed as a growth opportunity if well implemented, but may trigger financial instability and banking crises if mismanaged (Bonfiglioli and Mendicino, 2004). Liberalization of interest rates can play an important role in the growth of the economy however; it can also slow down growth if not properly managed. Leite and Sundararajan (1991) states that the experience of many countries that took the interest rate liberalization put on view that the transition process from rigid interest rates to flexible and market determined rates can be traumatic if not properly administered. Under financial repression, the government can help stimulate investment by reducing interest rates below the market rate. Özdemir and Erbil (2008:3) supports this by postulating that "...it is believed that financial repression creates a better control over money supply and a lower interest rate (usually below market rate) which can induce a higher investment". Nonetheless, financial repression restricts smooth functionality of banks. The aspiration of this article is to investigate whether financial liberalization stimulated financial intermediation in Lesotho.

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