TITLE:
Monetary Policy and Profitability of Commercial Banks in Uganda
AUTHORS:
Robert Ndyanabo Mbabazize, Dickson Turyareeba, Peter Ainomugisha, Peter Rumanzi
KEYWORDS:
Monetary Policy, Commercial Bank Profitability, Return on Assets, Uganda
JOURNAL NAME:
Open Journal of Applied Sciences,
Vol.10 No.10,
October
19,
2020
ABSTRACT: Background: Economic theory suggests that monetary policy through interest rates
affects bank profitability. There is limited empirical evidence on the
relationship between monetary policy and profitability of commercial banks in
Uganda. Objective: This study seeks to examine the effect of monetary
policy on the profitability of commercial banks in Uganda. Methodology: The study adopts a causal relationship research design. Data, covering 9 years from 2010-2018, was collected from all the
registered commercial banks which were in operation over the study period.
Various monetary policy variables are included in the empirical model as
predictor variables. Return on Assets is used as a measure of bank profitability. A dynamic two-step System Generalized Method of Moments panel
estimator is applied to estimate the empirical model. Findings: Estimates show that monetary policy in terms of its link to the lending rate has a significant causal
effect on Return on Assets, suggesting that interest rate changes predict bank
profitability of commercial banks in Uganda. Further, results show that a rise in core inflation has a significant
negative causal effect on the banks’ profitability and that there is a
significant lagged effect of Return on Assets. The 91-day treasury bill rate and money supply were insignificant in predicting bank profitability. Originality: Unlike previous related studies which have focused on major advanced economies
and a limited number of studies which have considered only a few developing
countries like Nigeria and Kenya, the current study provides empirical evidence
on the link between monetary policy and commercial bank profitability in
Uganda. Practical Implications: Policy makers in the financial sector
may use the study results as a basis of implementation of appropriate monetary
policy actions that enhance the profitability of Uganda’s commercial banks. For
instance, the central bank
should promote low and stable core inflation in order to enhance bank
profitability, and should ensure that the monetary policy transmission to
interest rates is efficient.