Macroeconomic determinants of financial stability in Uganda

Abstract

This study focused on the determinants of financial stability among commercial banks of Uganda using monthly observations spanning from 1991 to 2020. The study was based on secondary data methodology and necessary tests will be performed to ascertain the nature of the time series. Particularly, the data set of annual observations spanning from 1991 to 2018 was obtained from the Bank of Uganda Website, this data is updated and released by BOU every year before the reading of the National Budget in July.

Several tests were performed prior the model specification, such as normality assumption tests using the Shapiro Wilks test, Unit Root test using the Augmented Dickey Fuller test to see if the series were plausible for economic analysis and lastly the regression model.

Results showed that financial stability for the period spanning 1990 and 2019 was stationary, that is to say, the financial stability did not significantly vary, in other words, it was observed to appear about the same on the average.

More money supply if backed with the level of economic activity stabilizes the economy. A higher exchange rate in the country causes higher the financial stability. Also, higher Net Foreign Assets (NFA) (UGX billion) causes higher the financial stability. Similar to foreign assets, an increase in the domestic assets automatically translates into higher financial stability. Some of the macroeconomic aggregates do not significantly affect financial stability, management of banks should look beyond monetary policy targets and macroeconomic aggregates to enhance their stability. There is need for bank of Uganda to look beyond approval and focus on management of operation standards for most of the commercial banks as they play a key role in the financial inclusion and private sector development in the country.