Capital market integration in EAC progress ahead of the monetary union formation

Abstract

The East African Community countries Kenya, Uganda, Tanzania, Rwanda and Burundi have increased efforts towards achieving regional integration which is expected to address the liquidity and capitalization challenges and increase the regions competitiveness. The integration involves the formation of a Custom Union, a Common Market, a Monetary Union and ultimately a Political Federation. Currently, the EAC has been able to achieve the formation of a Customs union and is working towards the Common Market requirements. Capital Market integration; involving liberalization of Capital Accounts and Harmonization of Market infrastructure through taxation, accounting, regulations, trading systems and cross listings is an aspect of the Common Market through Capital Mobility; it is an important pre-condition for formation of a successful Monetary Union. The study sought to assess the level of capital market integration and establish if there is long run equilibrium among the returns for the EAC debt markets for the period 2005 to 2012. The study employed Beta and Sigma convergence to analyze financial integration meaning assets having identical risks and returns should be priced identically. The findings suggest low financial integration in the region is due to number of reasons including laxity by the countries and lack of government commitment.