The Determinants of financial cohesion and integration in East Africa: the case of Kenya and Uganda

Abstract

This study examines the determinants of financial cohesion and integration within the East African Community (EAC), focusing on Kenya and Uganda. Using a quantitative research design, secondary data from 2010 to 2022 was analyzed, with a Financial Cohesion and Integration (FIC) Index developed through Principal Component Analysis (PCA) and a fixed-effects panel regression model applied to identify key drivers. The findings reveal that capital account openness and weak governance negatively impact financial cohesion, while FDI inflows, trade activities, and domestic credit availability positively influence integration. Kenya exhibited higher financial cohesion than Uganda due to stronger governance and developed financial systems. The study recommends harmonizing financial regulations, strengthening governance, boosting trade and investment, and narrowing interest rate spreads to enhance financial cohesion and integration in the region.