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.
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