Macroeconomic determinants of non-performing loans evidence from Uganda (1999-2019)

Abstract

The overall objective was to assess the macroeconomic determinants of non-performing loans in Uganda. It specifically found out GDP growth rate, lending rate, real effective exchange rate and return on assets affects non-performing loans in Uganda. Study findings indicated that on average, Uganda has been recording an annual growth rate in GDP of about 4.72% from 1999 to 2019. The average lending interest rate for the period under study was found to be 21.27%. The average return on assets as a measure of profitability was found to be 3.3%. The average real effective exchange rate for the period under study was found to be 103.55%. The average annual NPLs were found to be 2.72% of the total deposits. Since Absolute values of ADF test statistics for NPLs, GDPR, LR, ROA and REER are all greater than the absolute five percent critical values, then there is stationarity in all the variables. Pairwise correlation results between non-performing loans and GDP growth rate indicated a slight negative relationship (R-value = -0.4229).Pairwise correlation results between non-performing loans and lending interest rate indicated a positive relationship (R-value = 0.6073), indicated a slight negative relationship (R-value = -0.4272) for return on assets and a chance positive relationship (R-value = 0.1244) for real effective exchange rate. The lending rate and return on assets were found to be statistically significant predictors of non-performing loans in Uganda (p-value<0.05) in the long run at five percent level of significance. This implies that a percentage increase in lending rate increases non-performing loans by 0.440% and a percentage increase in return on assets decreases non-performing loans by 0.687%.The GDP growth rate was found to have a negative impact on non-performing loans nut not statistically significant (p-value>0.05). Also, the real effective exchange rate rate was found to have a positive impact on non-performing loans nut not statistically significant (p-value>0.05). The study concluded that that return on assets had a statistically significant negative effect on non-performing loans, GDP growth rate had a statistically not significant negative effect on non-performing loans. The study recommended that Uganda should work on strategies aimed at fueling industrialization and agricultural industrialization in order to increase the volume of exports as well as the GDP and that Uganda should work on liberalization strategies to encourage multilateral trade.