Determinants of bank credit growth in Uganda (1993 – 2016)

Abstract

This study investigated determinants of bank credit growth in Uganda using quarterly data for the period 1993 to 2016. The main approach used was the Autoregressive Distributed Lag (ARDL) to test for both the long and short-run relationship between the variables. The variables that were investigated in this study included bank credit growth, private demand deposits, inflation, real effective exchange rate, telephone line per 100 people, and lending interest rates.

In the long run, the significant determinants of bank credit growth rate in Uganda are; previous bank credit growth lagged by one quarter, two quarters and four quarters respectively, current telephone lines per 100 people, previous telephone lines per 100 people lagged by one quarter and two quarters respectively, current lending interest rates, lending interest rates lagged by one quarter and two quarters respectively and current inflation at 5 percent level. On the other hand, the short run significant determinants of bank credit growth in Uganda are; previous bank credit growth lagged by one quarter, two quarters and four quarters respectively, current telephone lines per 100 people, telephone lines per 100 people lagged by one quarter, current lending interest rates, lending interest rates lagged by one quarter and current inflation at 5 percent level rate. Furthermore, the ECT in the model was correctly signed that is, negative as expected and significant at the 5 percent level. The ECT coefficient of -0.514 implied that in each quarter, bank credit growth to the private sector adjusts by 51.4 percent between the current level and the long run equilibrium level. It was also established that there was Uni-directional causality between bank credit growth and real effective exchange rates; between telephone lines per 100 people and bank credit growth; between private demand deposits and bank credit growth and, between bank credit growth and inflation both at 5 percent level while a bi-directional causality was found between lending interest rates and bank credit growth at 5 percent level. This study therefore recommends increasing telephone penetration in the country to tap into the non-banked population who can access financial services like mobile money through their mobile phones as one way through which to increase bank credit growth in the country. It is further recommended that efforts should be geared towards keeping the inflation rate low and stable.