Financial reforms and financial development in Arab countries

Abstract EN

This paper examines the development of financial sectors in Arab countries initiated in the 1980s after more than a decade of reforms.

Overall, in spite of reforms, progresses have been limited in the countries surveyed.

One theoretical explanation of this observation is that there are multiple equilibriums in financial development.

After many years of financial repression, Arab countries which have started liberalizing their financial sectors, were initially trapped in a low-level equilibrium, and this may explain why progress so far obtained, have been minimal.

A critical mass of change was needed to escape the financial underdevelopment equilibrium.

This critical mass of change implies deep structural changes in the financial sector, including in particular, the de-controlling and privatization of the banking activity.

However, such financial liberalization could not be successfully implemented without improvement in the institutional setting, through improved financial infrastructure and legal framework.

In addition, for lack of deep or fast enough strengthening of the prudential requirements and supervision, authorities have been confronted with a trade-off between financial liberalization and financial stability, and therefore, as a consequence, delayed and mitigated liberalization measures.