Foreign Capital Inflows and Financial Development Nexus: Case of EAC Countries

A well-developed financial system is considered fundamental to achieving viable and sustainable economic growth (Esso, 2010). However, the literature available on the role played by the foreign capital inflows on financial development of receiving countries shows inconclusive results. Given the importance of FCIs in East African Community, this study seeks to examine the effect of FCIs on financial development in EAC countries. It applies the autoregressive distributed lag model (ARDL) using annual data from 1990 to 2020. The results from estimation reveal that FDI affects positively the financial development in Kenya and Tanzania. However, FDI negatively effects Burundi's financial development and no effect is found for Rwanda and Uganda. The results for external debts indicate that debts have significant and negative effects on financial development in Kenya, Rwanda, and Uganda, while no effect is detected for Burundi and Tanzania. Furthermore, remittances do not have an effect on financial development in Rwanda, but they have a positive effect in Kenya.