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Financial integration and the risk of financial contagion in Africa: Empirical Review| Abstract

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Journal of Research in International Business and Management

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Financial integration and the risk of financial contagion in Africa: Empirical Review

Abstract

Oscar Chiwira, Ruramayi Tadu

The process of integration was warmly welcomed around the world since it was believed that financial integration allows capital to travel to its most attractive destination. The concept refers to the degree to which financial systems are interconnected with each other. The degree of financial markets integration across the world has varied from country to country and as well as from region to region. Africa, being a developing region, has not been an exception to movement towards full financial integration being experienced across the developing world. Financial integration has several benefits and as well as costs. The most significant cost of financial integration is the risk of financial contagion. Financial contagion may be defined as a systematic effect on the likelihood of speculative activity in one country’s financial markets arising from similar activity in another country’s financial markets. The fact that financial integration can foster financial stability and as well as propagate a financial crisis through financial contagion effects means that it is a double edged sword. For most regions, the model of financial integration to follow has been the European Union. A model proposed for Africa prioritizes financial development and financial regulation policies, as it moves towards achieving full financial integration. Policy efforts should focus on harmonizing market rules and practices, fostering financial market developments at a multilateral platform and developing institutions more generally. This will ensure that countries maximize the benefits of financial integration whilst minimizing the contagion risk.

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