ABSTRACT
Introduction Financial integration is an important element of any regional integration process, especially for a monetary union. According to Wakeman-Linn and Wagh (2008), “regional financial integration refers to a process, market driven and/or institutionalized, that broadens and deepens financial links within a region”. The financial sector must be adequately prepared to promote financial inclusion1 and to sustain a changeover to a new currency. The sector itself is at the heart of the market economy, playing a major role in intermediating savings and investments. This can be facilitated by “eliminating barriers to cross-border investments and differential treatment of foreign investors” (Wakeman-Linn and Wagh, 2008, p. 2). The depth and quality of an integrated financial market can also enhance a broad range of choices for savings, investments, thereby facilitating economic growth within the currency area. Integration of the financial markets in the WAMZ, in particular, would allow adjustment to asymmetric shocks.2 In other words, as noted by De Grauwe (2000), an integrated market provides a risk-sharing mechanism for risks occasioned by a negative shock. Negative shocks in one area of the Zone could be mitigated by a compensating variation in the other parts. The financial sector, in particular the money market, is also an important transmission mechanism for implementing monetary policies. An integrated financial market is, therefore, essential for an efficient and effective monetary policy, as it ensures an even distribution of liquidity and similar levels of shortterm interest rates across the currency zone. A well-integrated financial market could also promote financial stability, since financial risks could become easily shared. However, on the side of caution, financial integration poses the challenge of engendering financial contagion arising from the pass-through effect of an external shock (Wakeman-Linn and Wagh, 2008). Anecdotal evidence suggests that the economies of WAMZ member countries were anything but insulated from the impact of the 2007-2009 global financial crisis.3
