Lyimo, Anna Gustav2024-10-172024-10-172021Lyimo, Anna Gustav. (2021). Financial System Stability in the East African Community: Prospects and Constraints [PhD thesis, University of the Witwatersrand, Johannesburg]. WireDSpace. https://hdl.handle.net/10539/41668https://hdl.handle.net/10539/41668Doctoral Thesis Submitted in Fulfillment of the Requirements for the Award of Doctor of Philosophy in Financial Economics The Graduate School of Business Administration (Wits Business School), University of the Witwatersrand, Johannesburg,This thesis examines the EAC financial system stability, focusing on the system’s prospects and constraints for the period 2000 - 2018. The primary agenda is divided into four objectives. The first objective is to investigate the evolution of the financial system and the kind of environment that it has been operating in. The relevant findings in respect of this objective indicate that the EAC financial systems have experienced both positive and adverse developments that have led to the initiation of several macro-economic and financial sector reforms. Credit risk is one of the major factors affecting the EAC financial system stability. The second objective is to conduct an empirical examination of the determinants of credit risk in the EAC financial sector. The associated results show that credit risk is responsive to the dynamics of member-countries’ macroeconomic and macro-financial variables. We found that prudent macroeconomic policies intended to stabilize inflation and exchange rates — which stimulate economic growth and increases the capacity to borrow – influence credit growth. And credit growth (with less prudent lending standards) increases the ratio of non-performing loans as well as raises credit risk during recessions. The third objective is to measure and forecast financial systems’ resilience in the EAC. Findings here suggest that EAC financial systems have remained relatively resilient, albeit vulnerable to shocks. Despite the differences in financial instability characteristics across the region, countries have reflected similar financial stability (or instability) patterns. The forecast results indicate that the EAC continues to experience financial system stability for the period 2018 -2020, other factors held constant. The last part (objective) examined the potential systemic risk contribution of individual banks to national financial systems. Here, the banking industries’ interconnectedness is shown to have increased significantly, especially during economic downturns, which poses a potential for spill-over of shocks (vulnerability) across the region during times of crisis. Each bank’s connectedness and potential systemic risk contribution is time varying. Also, there is a significant positive correlation between bank size and systemic risk contribution. Based on the above findings, and other findings of the study, the EAC region should monitor credit expansion to ensure it is consistent with economic and market realities; optimize benefits from linkages in the EAC financial system structure; and enhance effective policy formulation for more robust financial system regulation and supervision. There is also a need to conduct effective periodic risk assessments to identify and mitigate potential systemic risk, as to ensure regional financial system stabilityen© 2021 University of the Witwatersrand, Johannesburg. All rights reserved. The copyright in this work vests in the University of the Witwatersrand, Johannesburg. No part of this work may be reproduced or transmitted in any form or by any means, without the prior written permission of University of the Witwatersrand, Johannesburg.East African Community (EAC)Financial System StabilitySystemic RiskEarly Warning SystemCredit RiskARDLCoVaRUCTDSDG-8: Decent work and economic growthDissertationUniversity of the Witwatersrand, Johannesburg