The determinants of interest rate spreads in the Uganda banking system: Results from a new analysis of banking system data

  • There have long been concerns about high-interest rates charged by banks in Uganda and wide spreads between deposit and lending rates. This makes it difficult for firms to borrow for the productive investment that is required to achieve high rates of economic growth.
  • This study investigates the determinants of interest rate spreads in the Uganda banking system, using three different analytical approaches. It uses data on individual banks, the banking sector, and the macro-economy.
  • The findings confirm that interest rate spreads are relatively high in Uganda for a variety of reasons including: high overhead costs, high-interest rates on government bonds, and high levels of bank capitalisation and profits.
  • A variety of policy actions could help to reduce spreads, including encouraging the consolidation of smaller banks, sharing of infrastructure, reducing government borrowing, and improving risk assessment. In the longer term, promoting regional financial integration across the East African Community would also help.