Information about Asia and the Pacific Asia y el Pacífico
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Appendix I. Financial Liberalization in Asian Countries During the 1980s—Summary

Author(s):
Robert Corker, and Wanda Tseng
Published Date:
March 1991
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Information about Asia and the Pacific Asia y el Pacífico
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I. Financial System Reforms

Deregulation and CompetitionFinancial Market DevelopmentManagement and Supervision
IndonesiaDeregulations in June 1983 and October 1988. Since 1986, there has been some easing of restrictions on the scope of allowed business activities. In 1988, licensing and branching requirements were relaxed and public enterprises were allowed to place deposits with nonstate banks. Gross assets of the organized financial sector grew by more than fourfold during 1983–89. At end-1989, Bank Indonesia (BI) and deposit money banks (DMBs) held over 95 percent of the total assets of the financial sector.Money and capital markets expanded, particularly with issuance of central bank and private papers, but remained small relative to financial institutions. In 1988, there was progress toward more uniform tax treatment of various financial assets. A new private stock exchange was licensed in 1988.In 1988, prudential regulations (lending limits for single borrowers) were strengthened, the components of capital and foreign exchange activities were defined, and capital adequacy requirements were extended to all banks. In 1989, the Bank Supervision Department of BI was expanded and reorganized. The supervision of nonbank financial institutions (NBFIs) was centralized in BI. A Bank Indonesia Supervisory Monifory System (BISMS) was established to recommend corrective measures and sound banking practices—e.g., improving the asset evaluation processes, strengthening capital adequacy requirements, and training supervisory personnel.
KoreaThe formal sector (comprising DMBs and NBFIs) is highly regulated and segmented; DMBs are much more restricted compared with NBFIs. The entry of new institutions and the types of services provided are extensively regulated. In 1981–83, commercial banks were privatized nationwide; the use of directed credit was reduced; banks were granted greater managerial autonomy; the scope of business activities allowed for DMBs and NBFIs was expanded; and the entry of new institutions was permitted. Restrictions on foreign banks were eased. At end-1989, commercial banks held 29 percent of the total assets of the financial sector, specialized banks held 23 percent, and NBFIs held 48 percent.The unorganized money market (curb market), which provides credit to small enterprises that are unable to get funds in the formal sector, gradually declined in importance. The money market has expanded rapidly. Various financial instruments, e.g., monetary stabilization bonds, certificates of deposits (CDs), and various commercial papers of cash management and bond management accounts, have been introduced. Since the revision of capital market laws in 1987, the outstanding capital value of stocks and bonds has increased substantially.With the reform of supervisory procedures, the focus has shifted from moniforing routine operations to credit analysis, examining bank portfolios, and the enforcement of prudential ratios.
MalaysiaDeregulations since 1985 have allowed finance companies to participate in the interbank market and merchant banks to issue nonnegotiable CDs. At end-1987, the banking system held 69 percent of the total assets of the financial sector, while NBFIs held 31 percent.The volume of transactions in new financial instruments has risen rapidly. These include negotiable CDs and bankers acceptances, central bank certificates, government investment certificates, mortgage-backed bonds, and floating rate negotiable CDs. Since the mid-1980s, technotogical innovations have been introduced to facilitate financial transactions. Reforms in 1989 promoted active secondary markets in government securities. Capital market development was encouraged by means of guidelines for the issuance of securities, codes on stock trading, and by improving stock market regulations and the moniforing of stock markets.Supervisory functions were strengthened and ailing institutions were restructured. The Banking and Financial Institutions Act of 1989 provided a unified regulatory system to supervise all financial institutions. A uniform risk-based capital adequacy framework was also adopted in 1989. New guidelines were issued on reserve requirements and on debtequity swaps to create uniform competitive conditions.
MyanmarThe formal banking system consists of the Central Bank of Myanmar, and four specialized banks, the Myanmar Economic Bank, the Myanmar Foreign Trade Bank, the Myanmar Investment and Commercial Bank, and the Myanmar Agriculture Bank. All are government owned.The informal credit market is extensive.
NepalThe banking system consists of the Central Bank, two partly or wholly government-owned banks, and three joint-venture banks. Two government banks—Nepal Bank Limited (NBL) and Rastriya Banijya Bank (RBB)—account for more than 90 percent of bank deposits.The range of government securities was broadened in 1988/89.Beginning in 1987/88, measures were implemented to strengthen NBL and RBB (e.g., loan recovery program, external evaluation of loan portfolio, and credit evaluation procedures).
PhilippinesFinancial liberalizations in 1980–84. Segmentation and entry barriers were reduced, functional distinctions between different types of financial institutions were removed, and the scope of allowed activities was expanded. Additional reforms were implemented in 1989, when restrictions on the establishment of new banks and the opening of new branthes were lifted. In 1985, 30 commercial banks held about three fifths of total financial system assets; of these the government-owned Philippine National Bank was the largest, with about 30 percent of commercial bank assets; 4 foreign-owned banks held 15 percent, thrifts about 3 percent, and rural banks 2 percent.Investment houses and finance companies participate in the relatively sophisticated and extensive money market. Deposit substitutes, commercial paper, and treasury bills are traded. In contrast, the securities market is underdeveloped and speculative.Restructuring programs for two major commercial banks have been under way since 1986. A reform program was initiated in 1989 to strengthen the regulatory and supervisory framework for commercial banks and improve institutional arrangements for deposifor protection. Legislations were submitted to amend the Central Bank Act and the Philippine Deposit Insurance Corporation Act.
SingaporeThe well-developed financial sector is closely integrated with international financial markets. Competition is encouraged by attracting foreign banks. At end-1988, locally incorporated banks held 12 percent of total bank assets, foreign banks 27 percent, and offshore banks 62 percent.Well-developed markets in government securities, equities, foreign exchange, and financial and currency futures. The Stock Exchange of Singapore is being actively developed after formal separation from the Kuala Lumpur Stock Exchange in 1989.The Monetary Authority of Singapore has extensive regulatory and supervisory responsibilities.
Sri LankaFinancial deregulations since 1977. Entry restrictions have been eased and foreign banks have been allowed since 1979. The financial sector comprises the Central Bank of Sri Lanka, 25 commercial banks, and 3 development banks and other financial institutions, including Foreign Currency Banking Units. Competition is constrained by the dominance of two state-owned banks, which account for about 70 percent of commercial bank assets. Of the others, two are medium-sized domestically owned banks and the rest are small foreign-owned banks.The interbank market is thin; the capital market is underdeveloped; and intermediation costs are high.In 1988, supervisory responsibilities of the Central Bank were extended to cover finance companies. Additional measures to strengthen bank supervision are under consideration, including more vigorous loan classification and provisioning guidelines.
ThailandSome measures have been implemented to reduce concentration and increase competition among commercial banks. In 1979, the Banking Act was amended to impose restrictions on ownership and asset concentration. Foreign banks were allowed in the mid-1980s. At end-1989, commercial banks accounted for about 70 percent of the total assets of financial institutions, and finance companies largely accounted for the remainder. There were 30 commercial banks, of which 16 were domestic and 14 were branthes of foreign banks. Domestic (but not foreign) banks have extensive branch networks. Assets of local banks accounted for about 95 percent of total commercial bank assets and deposits. The 3 largest banks held almost 60 percent of total bank assets.The interbank market is well developed; a securities repurchase market was established in 1979. With the introduction of new financial instruments, the capital market (the Securities Exchange of Thailand) expanded rapidly. Sizable unorganized markets exist.The restructuring of finance companies has been under way since 1983. Supervisory arrangements of the Bank of Thailand were strengthened in 1983 and 1985.

II. Exchange Controls, International Capital Flows, and Exchange Rate Arrangements

Capital and Exchange ControlsExchange Rate Arrangement
IndonesiaVirtually no restrictions on capital flows. Residents are free to engage in short-term external lending and borrowing and can maintain deposit accounts denominated in foreign currency. No exchange restrictions on current account transactions.Managed float. System modified in October 1989 to permit greater market determination of exchange rate.
KoreaCapital flows restricted; some liberalization in the second half of the 1980s, mainly in the areas of indirect portfolio investment by foreigners and overseas investment by Korean residents. No exchange restriction on current account transactions.Formal peg of the Korean won to the U.S. dollar changed to a managed float in January 1980. The won/U.S. dollar rate was set taking into account movements in a currency basket and developments ni Korea’s external position.1
MalaysiaVirtually no restrictions on capital flows. No restrictions on current account transactions.Exchange rate pegged to an undisclosed basket of currencies of Malaysia’s major trading partners.
MyanmarCapital flows are restricted. A highly restrictive exchange control system administered by the Exchange Control Board, through the Myanmar Foreign Trade Bank, with instructions from the Ministry of Planning and Finance.The kyat has been pegged to the SDR at K 8.50847 per SDR 1 since May 1977.
NepalCapital flows are restricted. Some exchange restrictions on current account transactions.The Nepalese rupee has been pegged to a basket of currencies since May 1986. The exchange rate with the Indian rupee has been kept unchanged since June 1, 1986, and convertibility is allowed.
NepleCapital flows are resticted. Some exchange restrictions on currenr account teansactionsThe Nepalese rupee has been pegged to a basket of currencies since May 1986. The exchange rate with the Indian rupee has been kept unchanged since June 1, 1986, and convertibility is allowed.
PhilippinesCapital flows are largely unrestricted. Some restrictioons on current account transactions.Since October 15, 1984, the value of the peso has been determined freely in the foreign exchange market. The Central Bank, however, has been a major participant.
SingaporeCspital account transactions liberalized completely in 1978. No exchange restrictions on current aecount transactions.Managed float. Value of Singapore dollar is determined with reference to an undisclosed basket of currencies.
Sri LankaCapital flows are restrieted. Some restictions on current account transactions.Managed float. The exchange rate of the rupee is adjusted periodically by the Central Bank, taking into account domestic price developments relative to those of Sri Lanka’s major trading partners and competifor countries.2
ThailandRelatively free capital movements, although certian private capital outflows are restricted. No restaintions on current account transactions.Since November 1984, the baht has been pegged to a basket of currencies.

In March 1990, this system was replaced by a market-average exchange rate system under which the exchange rate floats subject to limits on daily movements.

In August 1990, a new exchange rate system was introduced under which the exchange rate floats subject to limits on daily movements.

In March 1990, this system was replaced by a market-average exchange rate system under which the exchange rate floats subject to limits on daily movements.

In August 1990, a new exchange rate system was introduced under which the exchange rate floats subject to limits on daily movements.

III. Monetary Policy Reforms

Open Market OperationsReserve RequirementsCredit ControlsCentral Bank RefinancingLiberalization of Interest Rates
IndonesiaAuctions of central bank bills (SBIs) introduced in 1984. Issuance of repurchase agreements (SBPUs) began in 1985. Investment house (FICORINVEST) created in 1985 to intermediate in money market.Reduced from 15 percent to 2 percent of deposit liabilities in 1988.Largely lifted as part of the 1983 reforms.Liquidity credit facility, subsidizing priority sectors, reformed in 1983. General rediscount facilities introduced in 1984 to complement open market operations.Direct controls lifted in 1983.
KoreaIncreased use of open market operations mainly through sales of monetary stabilization bonds.Reserve requirements were lowered from 20–27 percent in the late 1970s to 10–20 percent in 1980, 5.5 percent in 1981, and 4.5 percent in 1984 and were subsequently raised to 10 percent in 1988. Marginal reserve requirements were introduced in 1989.Reduced reliance on directed credit for industrial policy objectives. Occasional resort to informal direct controls.Preferential rates on export financing abolished in 1982. Scope of preferential rediscounting, especially for export industries, reduced in 1988 and 1989; rediscount rates increased.Some liberalization in early 1980—reduced differential between general bank loan rates and preferential loan rates; banks allowed to vary lending rates within margins; and ceilings on certain rates eliminated. Significant reform in December 1988, when lending rates, rates on some bank and nonbank deposits, and money market instruments were liberalized.
MalaysiaUntil 1987, the main instruments were foreign exchange swaps and “recycling” of government deposits. Since 1987, sales and purchases of government and central bank securities have become increasingly important.Reserve requirement was lowered from 10 percent in 1974 to 5 percent in 1979. Subsequently, there were active changes in statutory reserve ratios: lowered to 4 percent in April 1985 and to 3.5 percent in October 1986, raised to 4.5 percent in May 1989, and to 6.5 percent in 1990. Adopted averaging of reserves for liquidity ratios in 1987 and bands for statutory ratios in 1989. Primary liquidity ratios were abolished in 1989–90.Greatly reduced in importance. Moral suasion by the Central Bank exercised from time to time; guidelines are applied to lending ratios to promote some eco nomic sectors and to achieve social goals.A general discount window is available to financial institutions. The export refinance facility is available only to commercial banks.Liberalized in 1978; financial institutions set lending rates with reference to base lending rates (BLR), based on cost of funds. In 1987, the pegging of deposit rates to those of two lead banks was discontinued. Ceilings exist on rates for loans to priority sectors.
MyanmarNo independent monetary policy. Central Bank carries out treasury functions and the credit plan.Four state-owned banks and an extensive informal credit market. No role for reserve requirements.Annual credit plan determines the allocation and growth of credits by sector and a subceiling for each state economic enterprise.Interest rates remained unchanged from 1977 to late 1989 when they were increased.
NepalRegular auctions of treasury bills introduced in 1988/89 (July–July).Liquidity ratio lifted in 1986. Statutory reserve ratio in place. Reserve requirement system modified in 1988/89 to allow banks greaterflexibilityin maintaining reserves.Until 1988/89, moral suasion and the imposition of bank-specific credit ceilings were the primary tool of monetary policy. Withfinancialre-forms in 1988/89, indirect instruments were introduced.Rediscount facilities were redesigned in 1988/89 to offer three windows: basic refinancing, priority sector, and lender-of-last-resort. Rediscount rate and refinance limits are adjusted in accordance with market conditions.Most interest rates have been freed since the reform of May 1986; remaining controls on bank lending and deposit rates were lifted in 1988/89.
PhilippinesDuring 1984–86, open market operations mainly through sales of central bank securities. Since 1987, replaced by auctions of treasury securities, with proceeds deposited at the Central Bank. Purchase and reverse repurchase of the bills by the Central Bank. Foreign exchange swaps.Reserve requirement ratios for different deposit liabilities were equalized across banks and NBFIs in early 1980s. Actively varied. Interest paid on bank reserves deposited with the Central Bank in early 1980s.Selective allocation of credit to priority activities continued.Since late 1985, the Central Bank operates a single rediscounting facility for various purposes. Rediscount rate is linked to market interest rates.Interest rates liberalized in early 1980s.
SingaporeForeign exchange swap transactions; short-term borrowing and lending in the interbank market; and overnight repurchase agreements in government securities.At end-1988, theminimum cash balance and liquid assets ratio were 6 percent and 18 percent, respectively, of a bank’s liability base.None.Rediscounting facilities for various securities, treasury bills, bills of exchange, and government securities, as well as for export and preexport bills under a rediscounting scheme.Nominal domestic interest rates are virtually identical to Eurodollar rates adjusted for the foreign exchange premium.
Sri LankaDuring 1984–86, auctions of central bank securities were introduced. Since 1987, these have been largely replaced by auctions of treasury bills. Repurchase/reverse repurchases; foreign exchange swaps; secondary window for sale and purchase of treasury bills.Simplification and unification in 1987. Actively varied.A number of controls were removed in 1986, and remaining quantitative controls were not strictly enforced. Selective credit controls were reimposed in 1989.Several available, including subsidized facilities.Interest rates were liberalized in 1977. Treasury bill rates increasingly important in influencing structure of interest rates.
ThailandRepurchase market for government bonds was established in 1979, but not actively used. Since 1986, the Central Bank became active in the government bond repurchase market and began to issue central bank bonds.Not actively varied.Overall ceiling on domestic credit expansion abandoned in 1984. Selective credit policy in effect.Several facilities, including preferential refinancing of credits to priority sectors (exports and agriculture).Gradual liberalization—in 1980, lending rates of financial institutions were raised by 3 percentage points from the statutory limit imposed since 1924 and the ceiling on deposit rates was increased correspondingly. Since then ceilings have been adjusted frequently. Ceilings on deposit rates (on more than one-year deposits) were lifted in 1989–90.

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