The Market Risk and Financial Performance of Selected Commercial Banks in Uganda

ABSTRACT This study was carried out to examine the relationship between interest rates, inflation rate, exchange rate, income distribution and financial performance, in relation to customer loans within commercial banks in Uganda. The researcher focused on the savings mobilization by commercial banks in Uganda and the impact of macro-economic factors on customer’s demand and deposits. A longitudinal design was developed to compile secondary data from; Bank of Uganda reports, Uganda Bureau of Statistics, World bank annual reports, Uganda Institute of Bankers’ library, and Ministry of finance Publications, among others from 2001 — 2005. The data was analyzed using the SPSS package and Pearson’s correlation Co-efficient, which measured the strengths and direction between the independent and dependent variables The findings showed that due to the high risks commercial banks encounter in extending loans to the private sector, there was a decline in retaliation of their assets over the five years. The results showed a positive significant relationship between exchange rate, interest rate, access to finance, and loans availed to customers between 2001 and 2005. The results also showed a high relationship between the risks and financial performance of the commercial banks. The study concluded that high interest rates, exchange rates, lack of collateral securities and inflation have a significant role in accessing loans. Commercial banks should concentrate on these variables and other incentives to woe customer access to credit for long term financing. The study therefore recommended that for banks to avail credit facilities to their customers, the banks should ensure that the customers have fixed assets and equity securities.

ABSTRACT tiE

CHAPTER ONE

1.0 INTRODUCTION i

1,! Background I

1.2 Problem Statement_______________________________________________________________ 3

1.3 Purpose ofthe Study. _____________________________________________________________ S

1.4 Research objectives. ___________________________ ________________________________________ S

1.5 Research questions._________________________________________________________________ S

1.6 Scope ofStudy.

Subject Scope. S

Time Scope. 6

Geographical Scope. 6

Organisation ~fthe study. 6

1. 7 Sign~ficance ofthe study._____________________________________________________________ 6

1.8 Conceptual Framework._________________________________________________________________ 7

CHAPTER TWO 8

2.0 LITERATURE REVIEW 8

2.1 Introduction ________________________________ _________________________________________________- 8

2.2 Market Risk~ 10

2.3 Value at Risk (VARY). ___________________________ _________________________ 12

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2.4 Importance of VAR __________________________________________________________ 13

2.5 Risk Adjusted Return on Capital (RAROC’,) _________________________________________ 14

C’alculation ofRAROC _____________________________________________________________ 15

2.6 Financial Performance ofC’oinmerciaj Banks______________________________________ 16

Profitability _________________________________ 17

Efficiency 18

Net Interest Income + Non interest income _____________________________________________________ 18

Capital adequacy 20

2.7 Market risk exposure and Financial Performance____________________________________ 21

Relationship between risk and Return _________________________________________________________ 22

Relationship between risk, C~apital and Efficiency ____________________________________________ 23

A related question is the potential role of corporate governance and markets in disciplining financial

intermediaries 25

CHAPTER THREE 25

3.0 METHODOLOGY 25

3.1 Introduction. 25

3.2 Research Design. 25

3.3 Survey Population.______________________________________________________________ 25

3.4 Sample size and sampling procedure__________________________________________________ 25

3.5 Source ofData 26

3.6 Methods ofData C~ollection 26

3.7 Data Quality €~ontroL _________________________________________________________ 27

3.8 Measurement of Variables. __________________________________________________________ 27

Market Risk. - 27

Financial Peformance. 27

3.9 Data Processing Analysis.___________________________________________________________ 28

correlation coefficient analysis.______________________________________________________________ 28

3.10 Limitations ofthe study _____________________________________ _________________________________ 28

CHAPTER FOUR 29

4.0 PRESENTA TION, ANAL YSIS AND INTERPRETATION OF FINDINGS: 29

4.1 Introduction ________________________________________________ 29

Sample Features: 29

4.2MARKETRISKOFCOMMERCML BANKS. _________________________ 30

VALUEATRISK. 30

RISKADJUSTED RETURN ON CAPITAL:________________________________ 32

4.3 FINANCIAL PERFORMANCE OF COMMERCIAL BANKS. __________________ 34

PROFITABILITY: 34

EFFICIENCY: 36

CAPITAL ADEQUACY:__________________________________________ 38

4.3 RELATIONSHIP BETWEEN MARKET RISK AND FINANCIAL PERFORMANCE OF

COMMERCIAL BANKS. ________________________________________ 39

REGRESSIONANAL YSIS: _________________________________________ 40

T-TESTS 41

CHAPTER FIVE 44

5.0 DISCUSSION, CONCLUSIONS AND RECOMMENDATIONS: 44

5.1 INTRODUCTION. 44

5.2 DISCUSSION OF FINDINGS: ___________________________________ 44

5.3 CONCLUSION: 46

5.4 RE(’OMMENDA T1ONS: _____________________________________ 47

5.5 AREAS FOR FURTHER RESEARCH -________________________________ 48

REFERENCES 49