Factors that determine the demand for domestic credit to the private sector of Uganda

Abstract

According to Uganda Economic Outlook report 2019, domestic demand supported by healthy private sector credit (PSC), as well as investments in public infrastructure together with Foreign Direct Investment (FDI) inflows are also expected to drive growth of the economy in FY19/20 (PwC, 2019). Therefore, this study carried out an analysis of the factors that affect the demand for private sector credit in Uganda. Specifically, the study sought to find out the influence of inflation rate, money supply (M2 in billions UGX), central bank rate (%), exchange rate, lending rate (%) and deposit rate (%) on demand for private sector credit in Uganda. Secondary monthly time series covering the period of June 1998-April 2020 was used. This data was downloaded from Bank of Uganda website. In this study, the dependent variable was demand for credit by the private sector was predicted to be affected by lending rate, deposit rates, exchange rates, money supply, inflation and the central bank rate for the period of June 1998-April 2020. Except for lending rate and central bank rate, fluctuations in the exchange rate, deposit rate, money supply and inflationary tendencies escalate the demand for private sector credit in Uganda. There is need to have mild inflation in the economy which can act as catalysts for hard work thus instigating the demand for private credit for investment and not consumption. Furthermore, Bank of Uganda needs to inspect, monitor and direct the interests charged or given by the commercial banks otherwise financial inclusion factor is prone to be dragged down completely.