Bank-level analysis of the determinants of lending rate stickiness in Uganda
Date
2021-07-15
Authors
Nampewo, Dorothy
Journal Title
Journal ISSN
Volume Title
Publisher
African Economic Research Consortium
Abstract
This study determines the existence and drivers of the asymmetrical response of
lending rates to policy rate changes in Uganda’s banking sector. Uganda’s banking
system seems to be faced with sticky adjustments of lending rates following changes
in policy rates. Whereas interbank money-market rates have tended to track the
evolution of the policy rate, bank lending rates have been stickier, only responding
partially to changes in the policy rate, with lags. These lag periods appear to be longer
when the policy rate is reduced than when it is raised, which has created challenges
for monetary policy implementation. The analysis is based on bank-level data
covering 17 commercial banks for the period 2009–2017. The econometric approach
is based on panel error-correction methods. Results show that downward stickiness
exists in bank-level lending rates. The factors identified as causing the asymmetrical
response of interest rates to policy rates include: risk, cost, bank capability, banking
sector concentration and government borrowing. These results provide new insights
necessary for the design of appropriate policy measures to reduce high and sticky
lending rates in order to, among other things, reduce the cost of finance and ensure
effective implementation of monetary policy. In particular, the study recommends
policies that improve cost efficiency, reduce government borrowing and support
mostly small and indigenous banks to compete and penetrate the market, as well
as measures towards minimizing credit risks that could help to achieve symmetric
adjustment.