ABSTRACT" "This study focuses on financial sector reform-it?s impacts on banking sector in CLMV during 1990s. The objective of this study are (a) to provide an overview of the major financial reform and the impacts of interest rate deregulation on financial sector development in the CLMV countries; (b) to examine fiscal imbalances financed by monetary expansion that increases inflation and thus represses the banking system; (c) to evaluate the impact of high reserve requirements on banking sector; and (d) to analyze the effect of capital flight and dollarization on banking sector. One of the major financial reforms in CLMV is interest rate liberalization together with controlling inflation, this results in a positive real interest rate that contributes to financial deepening. Financial depth, as measured by broad money to Gross Domestic Product appears to increase in these economies, especially in Cambodia, Laos, and Viet Nam. The growth of broad money was mainly contributed by foreign currency deposit particularly in Cambodia and Laos. Viet Nam, however, local currency deposit was the main contributor of growth. While in Myanmar, the growth of broad money started to decline as a result of real ii negative interest rate. In some of CLMV, banks? lending portfolios have been weakening because of direct lending to the priority sector. Apart from that the major factor that weakens the financial intermediation is the inflation acceleration particularly in Laos and Myanmar. Inflation is a consequence of budget deficit financed by borrowing from financial system since these countries are at the early stage of financial market development. Laos and Myanmar pursued credit expansionary policy particularly providing loans to public sector that often results in increased fiscal deficit. By expanding public sector borrowing, government invested in the long term infrastructure projects and provides the subsidized loans to SOEs or SEEs who exhibited weak financial performance and loss making. The greater amount of public sector loans, the more non performing loans occur in the banking system, eventually discouraging financial intermediation. Another factor discouraging the financial intermediation is high reserve requirements in Cambodia, Laos, and Myanmar. The high reserve requirements imposed by central bank raised the margin between lending rate and deposit rate. As a result, this has reduced the amount of loanable fund for the expansion of productive investment projects, creating hindrance to the financial intermediation functions. Financial liberalization together with inflationary finance induce capital flight, dollarization and misallocation of resources. In the situation, when a country has underdeveloped financial market, there could be capital flight or dollarization; as a result, this leads to financial disintermediation. The banking system in Myanmar is not allowed to offer foreign currency deposits; the response is increase in foreign currency holding outside banking system or holding durable assets. Myanmar maintains interest rate ceiling lower than the market determined rate and the overvaluation of fixed exchange rate that encourages the capital flight To avoid capital flight, the governments allow commercial banks to offer foreign currency deposits in Cambodia, Laos, and Viet Nam. The result is that foreign currency deposits grow rapidly and there has limited opportunities for lending in foreign currency. The option available for banks is to transfer the excessive fund in foreign currency to deposit in foreign banks and this lead to a so called capital flight and final outcome is hindrance to the financial depth."