Financial market development, market sensitivity and economic growth in Uganda

Abstract

This study examined the effect of financial market development, market sensitivity on economic growth in Uganda from 1980 to 2024. It focused on three key indicators of financial market development, including banking sector efficiency, capital market development, and financial inclusion. The goal was to determine how these indicators influence GDP growth and to explore how market sensitivity shapes this relationship. Secondary data were collected from the World Bank’s World Development Indicators and the IMF’s Financial Market Index, then analyzed using descriptive statistics, multiple linear regression, diagnostic tests, and moderation analysis with Hayes’ Process macro model I in STATA. Normality tests, including Skewness & Kurtosis, confirmed the data followed a normal distribution, while Shapiro-Wilk tests verified the suitability of the regression and correlation analyses. Results showed that financial market development had a statistically significant positive effect on Uganda’s economic growth. Market sensitivity also played a strong moderating role, indicating that stable currency behavior and adaptable consumer financial habits enhance the positive impact of financial market reforms on growth. The findings support the Financial Intermediation Theory and the Supply-Leading Hypothesis, emphasizing that effective credit allocation and investment are essential for sustainable long-term growth. It is recommended that policymakers focus on boosting banking efficiency, promoting investment incentives, and expanding nationwide financial literacy programs to enhance productive financial inclusion and support inclusive, sustainable growth aligned with Vision 2040 and the National Development Plan III.

Keywords: Financial Market Development, Banking Sector Efficiency, Capital Market Development, Financial Inclusion, Economic Growth, Uganda.