Financial Sector Liberalization and its Challenges to the Local Banks: The Experience of Singapore

Swee Liang TAN, Singapore Management University
Gilbert Y. W. TAN, Singapore Management University


The main theme of the paper is about the challenges that financial sector liberalization poses to local banks. It reviews the experience of Singapore. We begin by explaining the unique circumstances surrounding Singapore. A small city-state controlled by a single party with about 65% majority in Parliament, Singapore has a paternalistic government that can be protective of industries that are strategic to the development of the country. Yet its government is also pragmatic, forward looking and pro-reformists. Because of its unique circumstances, the Singapore experience with liberalization is worth studying. Three key ideas will emerge in the paper. First, the results of our econometric studies illustrate the extent of influence that financial sector reforms have on integrating the domestic stock market in Singapore with major markets in US and Japan. The results confirm strong statistical evidence of financial market integrations. The second idea studies the impact that liberalization poses to the management strategy of the local banks. We saw a range of responses such as consolidation, regional expansion, search for efficiency, best risk management practices to adoption of technology. The third idea is to gain insights on the prospects of financial intermediation activities as a result of market liberalization. The findings in the paper are reinforced by the results of a market survey we conducted. The survey was conducted to review how reforms have influenced the perception of market players on banking environment.