Abstract:-

In the last few decades, most of the emerging market economies (EMEs) have adopted financial liberalization. Evidence shows that the financial sectors /institutions in emerging economies were either underdeveloped or functioning with inefficiencies under inadequate regulation. The paper examines whether liberalization in the financial sector, has led to financial development for a group of EMEs including BRICS. The paper differs from the existing literature in its approach of dealing with the measurements of financial development and considering financial liberalization as a gradual process. Panel regressions are estimated for 9 countries based on 22 years’ data for four aspects of financial development, viz. depth, efficiency, stability and competition. Results indicate that financial liberalization in terms of freedom in capital markets has a positive effect on financial depth and competition, whereas liberalization from government interference in the banks and other financial institutions has a positive impact on the stability of the financial sector. Trade openness has a role in enhancing the efficiency of the financial sector. Also, evidence suggests that capital account openness leads to increased depth and does not destabilize the financial sector. GDP, political stability, regulatory quality and government effectiveness are also important factors in influencing more than one aspect of financial development in a country. Further, a related issue is to examine whether the pace of the financial development across emerging economies is the same or depends on the initial level of financial development. Is there an observable ‘convergence’ in the overall growth process in the financial sector, especially after liberalization, Based on a panel dataset from 1980 to 2018 for BRICS economies, beta convergence is tested for financial markets and financial institutions, and the role of financial liberalization is explored. The results suggest the existence of both unconditional and conditional beta convergence for overall financial development and development of financial institutions and markets. The convergence is the fastest in the case of financial markets, more specifically, access to financial markets followed by depth and efficiency of financial markets. Convergence is slowest in the case of access to financial institutions. Notably, the effect of financial liberalization on financial development is found to be negative when it comes to capital account openness, but trade openness has a positive impact. Most interestingly, results imply that India, the only lower middle-income country among BRICS, is catching up quite fast with the rest of them in terms of financial development, more through the development of financial markets, rather than institutions.