Effect of Financial Liberalization on Credit Allocation Amongst East African Community Countries

Abstract

The world‟s financial system remains weak and policies in the major advanced economies have not been sufficient to rebuild confidence. Financial liberalization is expected to allow for positive real interest rates, and to stimulate the mobilization and efficient allocation of domestic financial resources. At the same time, as the market becomes competitive the costs of intermediation go down, an indication of efficiency in the intermediation of financial assets. In EAC, the fore most structural obstacle in each EAC country is a poor legal system that does not adequately protect property and creditor rights and to liberalise the financial sector operations in each of the country. To achieve this, knowledge on the capital market and interest rates and credit allocation is crucial. This study was motivated by the need to investigate the relationship between financial liberalization and credit allocation in East African Community countries. The study used secondary data from the Capital Markets reports, The Central Banks Publications such as annual reports and statistical abstracts of the bureaus of statistics of the individual countries. World Bank development reports among others. The data was analysed through descriptive statics and inferential statistics. The study found that interest rate spread had insignificant negative effect on the amount of credit allocated while supply of credit to the private sector and financial development directly improved credit allocation among the countries. It was recommended that capital markets authorities and economic policy makers of the EAC countries formulate guidelines on the lending rates and deposit rates so as to provide favourable interest rates which boosts credit accessibility and overall economic growth through increased credit allocation. However, given that the countries fall under almost same ecological zone with almost same economic activities. The findings may be different in other countries with different way of governance and economic activities. It is thus recommended a similar study be done in other countries with other economic powers and with different ecological zones.