Interest rates and financial performance of commercial Banks in Uganda

Abstract

The study was undertaken to examine the effect of interest rates and financial performance of commercial banks in Uganda. It was guided by the following objectives namely; to determine the relationship between the interest rates and performance of commercial banks in Uganda, to assess the interest rates variations on the financial performance of commercial banks in Uganda, to determine how the rise of interest rates affect commercial banks in Uganda. The study was guided by three theories that is Keynes’s liquidity preference theory which states that the supply of money is determined by the monetary authority (the central bank) by the tending of commercial banks and by the public preference for holding cash (were, kamau, sichei, kiptu 2013). Micro economic theory which assumes that growing the money supply in excess of real growth causes interest rates to rise. This is also a result from the Harberger, (1963) model, the Schumpeter economic theory which calls those fluctuations/cyclical processes in economic life business cycle. Schumpeter shows the intermediary role of financial sector between those who save and invest through a process referred to as credit creation by bank financing that leads to economic growth and development. The study was guided by stratified random sampling case study research design. The researcher used simple random sampling for the employees of Stanbic Masaka Branch. The researcher selected 44 participants as the sample for the study. The study found but that, there is a positive and moderate linear relationship between financial performance and interest rates charged by commercial bank. The study supports the dynamic and constant update of the credit policy guidelines it also found out that proper management of working capital management components helps in reducing the liquidity risk of the firm and this highly contributes in reducing the liquidity risk of the firm and thus mitigating financial losses that might be attributed to lack of finances to take advantage of profitable investments.