THE EAST AFRICAN COMMUNITY

The East African Community

The East African Community

Introduction 

Kenya, Tanzania and Uganda are the countries in The East African Community (EAC, these there countries have the same history and political conditions and this history date back to the colonial period. British ruled these three countries after the world's war I, a common currency was formed among these three countries. It was an attempt to mange supply and exchange of currency. In this research paper we are going to discuss how effective was EAC in economical improvement of these three countries.

Financial Sectors before Reforms

When the three East African countries gained their political independence in early 1960s, they all inherited financial systems dominated by foreign commercial banks. The financial sectors in these countries were integrated through the East African Currency Board (EACB) which provided for and controlled the supply of currency to the three states. However, the EACB was dissolved a few years after political independence of the three nations and the national central banks were established to take up its functions. The central bank of Uganda was established under the Bank of Uganda Act on 1966 while that of Tanzania and Kenya were established by the Acts of Parliament in June and May of the same year, respectively. After the formation of independent central banks, the three nations adopted somehow different approaches towards developing their financial sectors. Tanzania adopted a socialist ideology that favored central planning as opposed to market forces. Following this ideology, the entire financial system was placed under state ownership and control. In 1967, all 12 private commercial banks, which were operating in the country, were nationalized and consolidated to form a new state owned commercial bank - National Bank of Commerce (NBC). There were also two more state owned commercial banks, namely, People's Bank of Zanzibar (PBZ) and Cooperative and Rural Development Bank (CRDB). Until 1991, the financial system in Tanzania was extremely narrow comprising of the central bank at the apex, the three commercial

banks, two insurance compames and two social security institutions. However, the national bank of commerce (NBC) was the only commercial bank of any significance, with about 90 percent of all deposit liabilities of deposit-taking institutions.

Unlike Tanzania, Kenya adopted a more liberal financial sector policy, where private banks, both local and foreign, were allowed to operate along with government owned banks. Kenyan government encouraged local participation in the banking sector through issuing new banking licenses to indigenous, but also foreign banks were allowed to operate and they accounted for substantial part of the financial system. (Gujarati 1995)

Ugandan financial sector during the early years of independence was more similar to that of Tanzania as compared to that of Kenya. However, due to civil disturbances in Uganda during most of 1970s and 1980s, financial services became concentrated only in few commercial banks in the capital of the country. For example, until late 1980s, the two largest state owned commercial banks, Uganda Commercial Bank and Cooperative Bank, controlled about 70 percent ...