The financial sector liberalization is one of the most dramatic changes in transition economies. It is commonly associated with measures designed to create greater openess of financial system and independence of central bank, elimination of financial repression and stimulation of development of banking and financial institutions in developing countries. Although the process of financial liberalization were considered to have positive effects on transition economies, there are also many arguments in favor of negative economic and social consequences. One of the most important negative effect is greater financial fragility that also leads to greater propensity to financial and banking crisis. In the case of Croatia, financial sector liberalization is mostly connected with foreign bank entry that caused the development of financial system in terms of liquidity and profitability. On the other hand, greater liquidity in banking system has led to credit expansion that is considered to be one of the most dramatic issues of financial liberalization in Croatia. Statistical analyses in the empirical part shows great influence of financial sector liberalization on BDP and unemployment rate in Croatia, while the influence on inflation rate is not statistically significant.