Analysis of macroeconomic factors affecting the performance of the financial sector in Uganda

Abstract

This study made an analysis of macroeconomic factors affecting the performance of the financial sector in Uganda. Secondary data was used for this study. The data set of annual observations spanning from 1991 to 2018 was obtained from the Bank of Uganda Website. The STATA version 15.0 was used to analyze the data. Shapiro Wilks Test was used to test for Normality; Econometric analysis was made to check for the stationarity of study variables using unit root test (ADF);Regression analysis was done using the Ordinary Least Squares (OLS) since almost all the variables of interest were linear and had minimum variance.The OLS model was tested for normality, serial correlation, specification test, heteroscedasticity and Multicollinearity to test for the collinearity existing between variables. The study revealed a positive and significant effect of money supply on financial performance of commercial banks as well as a negative and significant effect of Cash Reserve Ratio on financial performance of commercial banks. The model revealed that an increase in private sector credit weakened the financial performance of the financial institutions. This exposed the risky nature of the Ugandan borrowers which has inhibited financial performance and frustrated economic development in the country. Banks in Uganda should avail themselves with additional benefit of profit enhancement component of the minimum bank rate for better implementation rather than hedging the risk of borrowing from BOU.