In the pre-reform period, the banking sector in many countries, especially those with centrally planned economies, functioned in a highly regulated environment. This means that the government imposed strict regulations and control over the banking sector's operations and activities.

The highly regulated environment can be understood through the following points:

1. Government control: The pre-reform banking sector was predominantly state-owned, and the government exercised significant control over the banking institutions. The government set interest rates, determined lending and investment priorities, and regulated the overall functioning of banks.

2. Limited competition: In a regulated environment, the number of banks was limited, and there were restrictions on new entrants into the banking industry. This lack of competition reduced the efficiency and innovation in the sector.

3. Credit allocation: The government played a central role in determining the allocation of credit to different sectors of the economy. It directed banks to lend to specific industries or projects based on government priorities. This allocation of credit was often influenced by political considerations rather than market demand and efficiency.

4. Interest rate controls: The government set interest rates, including deposit and lending rates, which constrained the ability of banks to respond to market forces. This resulted in inefficient allocation of capital and distorted credit markets.

5. Lack of autonomy: Banks operated under the direct supervision and control of the government, limiting their autonomy in decision-making. This led to a slower response to market changes and inhibited the development of a competitive and dynamic banking sector.

Overall, the highly regulated environment in the pre-reform period aimed to prioritize the government's objectives over market forces. While this approach may have provided stability and control, it often stifled innovation, efficiency, and competition in the banking sector. The regulatory environment also limited the sector's ability to serve the general public effectively and cater to the diverse financial needs of the economy.