Determinants of Non-Performing Loans in Uganda’s Commercial Banking Sector

Abstract

Over the past decade, Non-Performing Loans (NPLs) in Uganda’s commercial banking industry have exhibited a positive trend, in spite of the reforms undertaken in the industry. The continued increase in NPLs has not only affected credit growth, but also resulted in the collapse and closure of some commercial banks. Against this backdrop, it was necessary to understand the determinants of NPLs in Uganda’s commercial banking sector. To execute the study, quarterly data for the period 2002q1 to 2017q2 was analyzed using ARDL and bounds test techniques while controlling for both bank-specific and macroeconomic factors. The findings of the study indicate that NPLs increase with increase in lending rates, real effective exchange rate and unemployment rate while increase in returns on assets and GDP growth rate lower NPLs. Based on the findings, commercial banks are advised to diversify their asset portfolio by holding other income earning assets such as governments bonds, equity so as to reduce on credit risk exposure. In addition, commercial banks need to focus more on internationally competitive sectors. Measure that reduce lending rates, promote GDP growth, reduce unemployment would also serve to reduce NPLs.