Investment in loans and treasury bills and the overall profitability of commercial banks: a case of Uganda
Ndagire, Speciosa Kimera
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Investigating the determinants of profitability of commercial banks has been one of the more popular topics among researchers in banking studies. Hence, to contribute to the existing knowledge, this study sought to analyze the extent to which investment in loans and treasury bills influence the overall profitability of commercial banks in Uganda, using a data set comprising 95 observations for 15 commercial banks over the period 1998-2005. The study used a longitudinal research design, based on quantitative data generated through document analysis of commercial banks’ monthly reports and returns to Bank of Uganda (BOU). Overall Profitability was measured using two profitability ratios namely: Return on Assets (ROA) and Return on Equity (ROE) while the independent variables included: volume of loans, volume of TBs, lending rates and yield on TBs. The study found Volume of Loans and TBs having a positive correlation while Lending Rates and yield on TBs revealed negative correlation with ROA as an element of the dependent variable. With regard to ROE, Volume of Loans, Lending rates and Volume of TBs showed a positive relationship while yield on TBs indicated a negative correlation with this element of the dependent variable. However, the results of the two analyses showed that the only variable that had a statistically significant influence in accounting for commercial banks profitability in Uganda was Volume of loans, with ROE as a measure of profitability. On the basis of the findings, it was recommended that commercial Banks in Uganda should aim at committing themselves to the implementation of strategies that would enhance credit creation and disbursement while ensuring adequate recovery mechanisms. It was also proposed that additional efforts should be put in educating the clientele about the banks’ loan products and prudent borrowing practices in order to increase demand and hence volume of loans.