Bank-level Analysis of the Determinants of Lending Rate Stickiness in Uganda
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Date
2020-11-15
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 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.