Public Domestic Borrowing and its Effect on Deposit Growth, Private Sector Credit and Interest Rate; Evidence From Uganda, Sulait Tumwine, Bruno Muramuzi, Prof. Twaha Kawaase, Zuraika Nakabuye, Prof. Joseph. M. Ntayi
Prof. Twaha Kigongo Kawaase
Department of accounting, Makerere University Business School, Kampala
Prof. Joseph. M. Ntayi
Faculty of Economics, Energy and Management Science, Makerere University Business School, Kampala
Purpose: This paper investigates the effect of public domestic borrowing (PDB) on deposit growth (DG), private sector credit (PC) and interest rate (IR) among commercial banks in Uganda.
Design/methodology/approach: Three equations are formulated to allow the application of the system Generalized Methods Moment (GMM) approach to estimate the equations while controlling for bank internal factors, industry level and macroeconomic indicators. Data for commercial banks were drawn from annual reports provided by Bank of Uganda Depository Corporation survey (2008-2019).
Findings: The study finds a significant negative relationship between PDB and IR. Although this result is not consistent with the behavioral expectations, it suggests that an increase in PDB would lower IR and increase savings and deposits. The study further finds evidence to support the fact that high PDB facilitates business undertaking and improves deposit growth in the banking sector. Lastly, the study result reveals that banks create more loans to the private sector and households when PDB reduces.
Practical implications: Our results contribute to the academia and policy on the effective use of public domestic borrowing to harness deposit growth, private sector credit and interest rate. The results suggest that efficient and effective utilization of public borrowed funds would ease the cost of doing business, boost labour productivity, output, employment, savings and taxes; all these are associated with improved GDP and deposit growth that causes a reduction in lending rate charged by banks.
Originality/value: Existing literature has not paid enough attention to the effect of public domestic borrowing on the three specific outcomes – deposit growth, private sector credit and interest rate, mostly in the African context.
Keywords: Public Domestic Borrowing, Deposit Growth, Private Sector Credit, Interest Rate.