The effects of interest rate liberalization to the risk of commercial Literature review

The effects of interest rate liberalization to the risk of commercial banks in china - Literature review Example Under such method levying of extra charges of loan is not allowed. Researchers say during 1974-1978 Development Plans, the government of different countries felt the need to review the interest rate in order to encourage the savings through the bank and to create disincentive to eradicate the speculation and uneconomic use of savings by the borrowers. During 1980 the interest rate policy was used to achieve the following objectives. Firstly interest rate policy was aimed to keep the general level of interest rate positive so that savings can be encouraged and contribute to the maintenance of financial stability in real terms. Secondly it was framed to allow greater flexibility and greater competition amongst the banks and non banking financing institution in order to enhance the effective and efficient allocation of financial resources. Thirdly the policy was objected to reduce the differential and to maximize the lending’s of banks. After 1974 a review on the interest rate li beralization was done during 1980 which allowed commercials banks to get a better room to complete and to have a better flexibility to meet the need of the customers (Ngugi and Kabubo, March 1998, pp. - 9-10). As per to Feyzioglu, Porter and Takas (2009); interest rate liberalization provide with many benefits. ... On contrary interest rate liberalization also exert a negative impact on the financial sector (Feyzioglu, Porter and Takas, 2009). Again according to Shih (2011), interest rate liberalization reduces the cost of governance for central bankers. He added that interest rate liberalization gets affected with short term political incentives. But in long term liberalization of lending interest rates reduces the need for central bank official to ration the credit (Shih, September 2011, pp. – 437-438). The Current Researches on the Interest Rate Liberalization The researchers Bekaert, Harvey and Lundblad (April 2001) demonstrated that interest liberalization increase growth. They observed that the interest rate liberalization lead to a percent increase in the annual per capita GDP growth. They also added that they did find this growth to be statistically significant. Based on the researches the interest liberalization was also economically important. They examined the same by using a classic growth framework of regression for certain developing countries. They assumed that the human capital variables move from 25th percentile to the median of all countries in consideration. They also moved the size of the government sector and population growth from 75th percentile to the cross sectional median. Then a positive impact on growth was calculated given the changes in these four variables. Next a comparison with liberalization was made. The liberalization indicator added 1.1%. This liberalization contributed 40% of the total growth increment. Researchers also made a keen observation on channels where liberalization had an impact on increased