Bank Specific Factors on the Financial Performance of Commercial Banks Using Monthly Data for the Period 2000-2019: Evidence of Uganda

Abstract

Uganda’s banking system is very sound and strong. All banks are comfortably meeting their minimum core capital requirements of 8% risk weighted assets. There are a number of studies which tested the factors that affected the profitability of banks. The mostly used proxy for profitability is ROA & ROE. In this study, ROA was considered as a dependent variable indicating profitability. This study therefore sought to investigate the performance of banks and their various determinants namely; Loans to total capital, Capital Adequacy, non-performing loans to total gross loans, Leverage ratio and Operating Costs of commercial banks. This study relied purely on secondary data whose validity and reliability were based on similarity and sameness of the facts and figures from the multiple sources like Ministry of Finance and Economic Development. The annual data used in this study and was downloaded from Bank of Uganda Data website. The results of the study revealed that the ratio of loans to total capital, capital adequacy, the ratio of non-performing loans to gross loans and Operating costs significantly predicted banks’ profitability and it further showed that there was no statistically significant relationship between the leverage ratio and profitability of banks. The study revealed that higher profitability levels are instigated by higher loans lent to the public at lower interest rates. The more liquidated the bank is in terms of capital, the more profits they reap in return. On the other hand, the study found out that the ratio of non-performing loans and profitability have an inverse relationship, the higher the ratio of non-performing loans, the lower the profitability of the banks. In order to improve on the financial performance, banks need to increase their portfolios by lending out more loans at minimal interest rates