FINANCIAL INTEGRATION OF SOUTH ASIA: AN EXPLORATORY STUDY

Financial integration, which implies elimination of barriers between and across countries for foreign institutions, is advocated to access capital; low funding costs, increase investment; stable macroeconomic policies, greater regional stability and above all, for greater economic growth (Belaisch & Zanello 2006; De Gregorio 1996). Integration of financial markets also leads to efficient allocation of capital (De Nicolò & Ivaschenko 2008; Schularick & Steger 2006). At the regional level, financial integration “would (is expected to) pool resources available for investment and trade, promote the development of domestic financial systems, enhance risk sharing, and lead ultimately to faster-growing and more resilient economies” (Tahari et al. 2007, p.39). It also provides opportunities to expand scale of financial intermediation and makes available large amount of funds for infrastructure projects and also reduce poverty (Wakeman-Linn & Wagh 2008). Furthermore, it leads to the upgrading of financial infrastructure, increase in efficiency; and emergence of banks and non-bank financial intermediaries. The regional pooling of resources also provides a comfort cushion to fall back on in case of external shocks and speculative attacks. It also speeds up institutional development and leads to the adoption of international best practices.1