The paper examines the effects of financial liberalization through Malaysia. Over the past couple of decades since the establishment of the WTO, trade borders to the service industry have also been opened; this has caused a strong global trend towards financial liberalization.Many countries have liberalized its financial markets and have shown the benefits and risks that arise from financial liberalization. But, the effects of financial liberalization have been a topic of heated debate among researchers and policy makers, because financial liberalization does not only come with benefits, it is also accompanied by commensurate risks. Therefore, it is important to comprehensively understand the benefits and risks of financial liberalization and the underlying causes. Literature regarding the effects of financial liberalization has shown conflicting results. The conflicting results are caused by the focus on direct effects of financial globalization and the overlooking of the indirect effects. Also, the cross country approach to examine the effects of financial liberalization makes it difficult to fully examine each countries liberalization procedure, regulatory framework and enforcement and macroeconomic policies. By examining the direct and indirect effects of Malaysia’s financial liberalization, we have found that a gradual wellplanned process of liberalization, prudent and judicious regulation and strong macroeconomic policies lead to a positive impact on economic growth. Also, the factors that make financial liberalization successful also lead to efficient recovery from a financial crisis. Countries should recognize the benefits and risks of financial liberalization and take a precautious approach in the process of financial liberalization.