Journal of Finance and Investment Analysis

When Does Financial Regulation Deepen Finance? Macroeconomic Moderation in East African Community Countries

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• Abstract

   

  This study determines whether inflation, lending interest rates and exchange-rate conditions moderate the relationship between financial regulation and financial development in East African Community countries. A balanced panel of 120 country-year observations for Burundi, the Democratic Republic of the Congo, Kenya, Rwanda, Tanzania and Uganda over 2005-2024 was analysed. Financial development was measured as domestic credit to the private sector relative to gross domestic product, and financial regulation by a composite index. Diagnostic-led country fixed-effects models used panel-corrected standard errors and a common AR(1) disturbance. The moderated model was significant (Wald chi-square(12) = 19,210.35, p < .001; R-squared = .9640). Inflation strengthened the regulation slope (b = 0.35192, p = .019), lending rates weakened it (b = -1.36222, p = .024), and the logged exchange rate strengthened it (b = 0.05932, p < .001). Conditional effects show regulation was positively associated with financial depth at low and median lending rates but not high rates; it was significant at median and high exchange-rate values. Inflation changed the slope, although selected conditional effects were not significant at 5%. Regulatory effectiveness is state dependent. EAC authorities should combine common safeguards with country-sensitive calibration, reduce avoidable lending costs, and strengthen liquidity and foreign-exchange risk oversight.

   

  JEL classification numbers: E31, E43, F31, G18, O16.

  Keywords: Financial regulation; Financial development; Moderation; Inflation; Lending interest rate; Exchange rate; East African Community.