How To Understand Banking Sector Reforms

The banking sector includes the financial institutions that primarily deal with monetary transactions. The banking sector is usually in charge of borrowing and lending money. They also play an important role in the financial sector and marketing sector of a given country. Since a country’s economy changes over time, so does the banking policy. Governments in countries like Cuba, India, and the Republic of Bulgaria decided to change their banking policy. This kind of change in the banking system is known as banking sector reform.

Here are some things you should know to be able to understand banking sector reform:

1.    Objectives. To be able to fully understand why some countries choose to undergo banking sector reform, you need to realize that it is geared towards banking development. Its major objective is to restructure the whole banking process in order to achieve a better banking system by enhancing the operations of banks, improve banking supervision and risk management.

2.    Issues. Another thing to understand about banking sector reform are the issues involved with the existing banking policy of your country. Since countries all over the world face different kinds of problems, here are the main functions of banks that your country might have problems with.

  • They are in charge of credit transactions and extensions of credit in the form of deposits, acceptances, and notes. In simpler terms, banks are in charge of credit intermediation and improvement in the quality of credit.
  • They handle different types of loans for people who want them.
  • They are responsible for the safekeeping of important documents and other items in their safe deposits or vaults.
  • Banking institutions also buy and sell money from different nations.
  • They sell bonds and other forms of investments to different clients.
  • Banks also handle settlement of payments by collecting and paying agents for clients and participating in different settlement systems.

3.     Action taken. The next step in understanding banking sector reform is to know the actions your government is taking in order to resolve anomalies in the functions of the banking system. For instance, in Cuba some actions taken into consideration are: the expansion of banking policies in their central bank, the raising of funds and extension of financing terms for capital projects by cooperating with the private sector in establishing an investment bank, and lastly, opening their insurance division for foreign investors.  

4.    Results. The most important part of any reform is the end result. The government and people should focus more on this part, since it is an indication whether or not the reform truly improved the banking system. After any reform, banks should have increased their returns as compared with previously. Probably the most significant question to ask is: were the objectives of the reform met?

Banking sector reform is indeed a very complex topic to discuss. The pointers mentioned above must serve as a guide in having an understanding about the difficult processes in banks. 


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