Relationship lending, transaction costs and the lending interest rates of Commercial Banks in Uganda

Abstract

Lending has been, and is still the mainstay of banking business in emerging economies like Uganda. The commercial bank lending interest rates in Uganda have persistently remained high. The study aimed at understanding the relationship between relationship lending, transaction costs and lending interest rates. To achieve this aim, a transactional cost approach in terms of opportunism, assets specificity, frequency, uncertainty, governance set-up costs and relational lending technology in terms of duration, multiple banking, pre-existence and trust were examined to determine their effect on lending interest rates.

Primary data was collected from 14 commercial banks in Uganda and their borrowers. A sample of 225 was drawn from the population of 566 medium and large sized borrowing enterprises and bank employees of credit departments. A total of 151 questionnaires were returned answered and data was analyzed using SPSS.

The study findings reveal that relationship lending has a significant negative effect on lending interest rates and transaction costs. They further reveal that transaction costs have a significant positive effect on the lending interest rates charged by commercial banks in Uganda. Therefore the study draws a conclusion that relationship lending and transaction costs have a role in commercial bank loan pricing and contracting process or decision making.

Since the findings indicate that loan interest rates are more sensitive to transaction costs than relationship lending, the study recommends that commercial banks consider employing relational governance structures coupled with greater borrower-lender interactions to eliminate opportunism and thus minimize transaction costs incurred.