Effect of trade finance on the performance of commercial banks in Uganda

Abstract

Trade finance is increasingly an important source of non-interest income for commercial banks in many countries including Uganda. This may be attributed to the fact that commercial bank traditional sources of income are increasingly being eroded due to competition from both bank and non-banking entities providing similar interest-based financial products and services as well as existence of mandatory and non-mandatory regulations imposed on bank interest charges by regulators. Numerous researchers have investigated trade finance and its relationship to various firm outcomes; however, the effect of trade finance on the performance of commercial banks has not received sufficient empirical attention more so, in Uganda. The objective of this study was to examine the effect of trade finance on the performance of commercial banks in Uganda. The profitability ratio of Return on Assets was used as the measure of commercial bank performance, while fees and commissions income as well as foreign exchange trading income were used as measures for trade finance. There were also bank-specific variables such as management efficiency, credit risk, asset quality, operational efficiency, and liquidity as well as macro-economic factors such economic growth that were incorporated as control variables. Accordingly, the study relied on panel secondary data obtained from six commercial banks covering the period 2015 – 2019, which was analyzed descriptively using means and standard deviations and inferentially using random effects model estimation. The results have shown no significant effect of all trade finance components on the performance of commercial banks in Uganda. Only credit risk among the control variables has shown a positive and significant relationship with bank performance across the three regression models.