Political Stability and Ease of Doing Business: Implications for Financial Sector Development in East Africa
Abstract
This study analyses the influence of political stability and ease of doing business on financial sector development in six East African countries. Focusing specifically on foreign direct investment inflows and domestic credit to the private sector, the research examines how established conditions shape financial deepening in a region characterized by dynamic yet uneven economic progress. A panel dataset that covering from 2008 to 2024 was collected, utilizing pooled OLS, fixed effects, and random effects strategies for quantitative examination. The Hausman test informed model selection to ensure robustness and address country-specific heterogeneity. The findings indicates that political stability significantly attracts FDI in cross-country comparisons, though its effect diminishes within countries over time. Conversely, it positively influences domestic credit extension when controlling for unobserved country effects. Ease of doing business robustly promotes FDI across all models, but its effect on domestic credit is inconsistent, suggesting deeper structural constraints in local financial systems. The results highlight the importance of political stability as a precondition for attracting foreign investment and of regulatory reforms in lowering transaction costs, while also underscoring the structural limitations of East Africa’s domestic credit markets. The study contributes to the finance and development literature by contextualizing institutional and regulatory drivers of financial deepening in low-income, high-potential economies and offers policy recommendations for strengthening governance and financial intermediation. This study extends the finance governance nexus by providing new empirical evidence on how political stability and regulatory quality jointly shape financial deepening in East Africa an under-explored institutional context.
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