Financial integration and stability in the Southern African development community

Abstract

One of the benefits of financial integration is that it enhances financial stability because openness to international competition requires that countries conform to international standards of reporting and financial regulation. Moreover, financial integration facilitates transfer of technology and know-how that improves efficiency and stability in the domestic financial sector. However, a significant threat of financial integration is the risk of financial instability. This study tests the hypothesis that deeper financial integration causes financial instability in the domestic financial systems. The study performs a panel causality test based on feasible generalised least squares (FGLS) technique to test the validity of this hypothesis in the Southern African Development Community (SADC). The findings validate the hypothesis and reveal the importance of effective monetary policy, real interest rate and exchange rate policies to curb financial instability and achieve a narrow financial intermediation spread.