What Drives Interest Rate Spreads in Uganda’s Banking Sector?

This paper investigated the main causes of the continuously large interest rate spreads in Uganda’s banking sector for the 1995 to 2010 period. The main approach used was the test for cointegration where the Engle and Granger (1987) two-step procedure was applied to test for the long-run relationship. The error correction model was applied for short run relationship with the error correction term to determine the speed of adjustment between the short-run and the long-run. The variables that were investigated in this study included the bank rate, the treasury bill rate, exchange rate volatilities (XRTV), M2/GDP and the proportion of non-performing loans to total private sector credit. The empirical results show that the bank rate, treasury bill rate, and non performing loans significantly and positively affect the interest rate spreads, M2/GDP and real GDP were significant and negatively influence interest rate spreads both in the short and long-run period.