Financial Sector in South Asia: Recent Developments and Challenges

This issue of the South Asia Economic Report (SAER) is the fourth in a series of reports on economic and development issues in South Asia. It aims to provide information to policy makers, academics, and Asian Development Bank management and staff. It highlights issues that help promote debate and foster appropriate policies and greater cooperation and integration in the region. The themes of the first, second, and third issues of the SAER were, respectively, 'Banking, Governance, and the Investment Climate', 'Social Sectors in Transition: Accelerating Inclusive Growth and Human Development', and 'Foreign Direct Investment in South Asia'. This issue's theme is 'Financial Sector in South Asia: Recent Developments and Challenges'.

The key messages of this fourth SAER are:

• Sustaining high economic growth depends in large part on developing an enabling environment for increasing domestic savings and investment efficiency in the region.
• Development of financial markets is a vital component of robust economic growth and poverty reduction.
• Liberalization and reform have led to the deepening of domestic financial markets in the region.
• Challenges to further deepening and development of financial markets in the region include the absence of some basic government infrastructure for financial services and commercial transactions; a lack of macroeconomic stability; costs of doing business; and issues with rule of law, transparency and governance, and limited financial inclusion.
• To address challenges, the following actions are recommended:
  1. creating prudent fiscal policies;
  2. strengthening the legal foundation and government infrastructure;
  3. lifting nonprudential restrictions;
  4. reforming and privatizing state-owned financial institutions;
  5. removing remaining capital account restrictions; and
  6. improving the quality and application of accounting standards.