• Winnie Kaabaga Mugasia University of Nairobi
  • Dr. Duncan Elly ’ Ochieng University of Nairobi


Purpose of the study: The objective of the study was to examine the impacts of domestic public debt on the capital market development in East Africa community member countries. The study variables used were domestic public debt, inflation rates and interest rate on capital markets development.

Problem statement: In many ways, the capital market is symmetrical to the country’s public debt.  In many developing countries, governments have given much attention to domestic debt compared to external indebtedness. Despite the fact that domestic borrowing has many advantages; it also has negative impacts especially when it goes beyond a sustainable amount. Domestic debt affects a country’s inflation rates, interest rates among many other factors. Through this study of how various concepts are affected by domestic borrowing, various governments will clearly understand the effects of domestic borrowing on their capital market development and align their domestic debts from the capital market institutions that will finally promote the development of the capital markets.

Study methodology: The study used a descriptive research, which involved the measurement, classification, analysis, This study adopted the descriptive study design. This study used 5 EAC capital markets as its population. The countries that include Kenya, Uganda, Burundi, Rwanda and Tanzania were chosen as the population since they have similar regulations in relation to domestic public debt. Due to the small population, no sampling was conducted. This data was obtained from various sources that include East African Countries Central Banks, World Bank information, National Treasury Public Debt Department and Kenya Bureau of Statistics.

Results of the study: Regression of coefficients results showed that domestic public debt and capital markets development are positive and significantly related (r=-4.518, p=0.030). The results further indicated that inflation and capital markets development are negatively and not statistically significant (r=-0.093, p=0.116). It was further established that interest rate and capital markets development were positively and significantly related (r=0.345, p=0.003).

Conclusion: The study concluded that there is a positive relationship between high domestic public debt and capital market development, an increase in domestic debt causes the capital market development to decrease. When a country borrows more domestic, debt and less external debt it promotes capital markets development in the long run. The regression model used in the study was statistically significant in explaining the effect of domestic public debt on capital markets development in East African Community. The study further concluded that inflation rate has a negative impact on financial market development this implies that inflation had a negative impact on capital markets development. It also conclude that an increase in interest rate impact positively the capital markets development.

Recommendations: The study recommends on continued deepening of the capital markets to lengthen further the maturity profile of domestic debt and diversification of the investor base. The study further recommends on continued implementation of policies to support macroeconomic stability and faster economic growth. This includes restructuring public debt towards external borrowing which is comparably cheaper than domestic debt, and rationalization of recurrent expenditures to contain the widening deficit in the primary balance would be necessary in the medium-term to ensure that public debt remains on a sustainable path to allow for capital markets development.

Keywords: Domestic Borrowing, Capital Market Development & EAC Member Countries.

Author Biographies

Winnie Kaabaga Mugasia, University of Nairobi

Postgraduate Candidate, School of Business, University of Nairobi

Dr. Duncan Elly ’ Ochieng, University of Nairobi

Lecturer, Department of Finance and Accounting, School of Business, University of Nairobi.


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How to Cite
Mugasia, W. K., & Ochieng, D. D. E. ’. (2019). THE EFFECT OF DOMESTIC BORROWING ON CAPITAL MARKET DEVELOPMENT IN EAC MEMBER COUNTRIES. African Journal of Emerging Issues, 1(3), 1 - 20. Retrieved from