DECLARATION ................................................................................................................... ii
APPROVAL .......................................................................................................................... iii
DEDICATION ...................................................................................................................... iv
ACKNOWLEDGEMENT.....................................................................................................v
TABLE OF CONTENTS .................................................................................................... vi
LIST OF TABLES ............................................................................................................... ix
ABSTRACT .............................................................................................................................x
CHAPTER ONE .....................................................................................................................1
INTRODUCTION ..................................................................................................................1
1.1 Background to the study ....................................................................................................1
1.2 Statement of the problem ...................................................................................................5
1.3 Purpose of the study ...........................................................................................................6
1.4 Objectives of the study.......................................................................................................6
1.5 Hypotheses ..........................................................................................................................6
1.6 Scope of the study ..............................................................................................................7
1.6.1 Subject scope ...................................................................................................................7
1.6.2 Geographical scope .........................................................................................................7
1.6.3 Time scope .......................................................................................................................7
1.7 Significance of the study....................................................................................................8
1.8 Conceptual framework .......................................................................................................9
1.10 Structure of the study .................................................................................................... 10
CHAPTER TWO ................................................................................................................. 12
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LITERATURE REVIEW .................................................................................................. 12
2.0 Introduction ..................................................................................................................... 12
2.1 Volume of investment in loans and profitability of commercial banks ....................... 12
2.2 Relationship between lending rates and the profitability of commercial banks.......... 17
2.3 Relationship between investment in Treasury bills and commercial banks’
profitability ............................................................................................................................ 21
2.4 Yield on TBs and commercial banks profitability ........................................................ 25
2.5 Commercial banks Profitability...................................................................................... 26
METHODOLOGY .............................................................................................................. 30
4.0 Introduction ..................................................................................................................... 30
4.1 Research design ............................................................................................................... 30
4.2 Population and Sample ................................................................................................... 30
4.3 Data source and collection .............................................................................................. 31
4.4 Measurement of variables ............................................................................................... 31
4.5 Empirical Estimation Model and analysis ..................................................................... 32
4.6 Problems encountered during data collection................................................................ 33
CHAPTER FOUR ............................................................................................................... 34
DATA PRESENTATION AND DISCUSSION OF FINDINGS .................................. 34
4.0 Introduction ..................................................................................................................... 34
Table 4.2: Estimation results using ROA as the dependent variable ................................. 37
4.2.1 Relationship between the volume of commercial banks’ investment in loans and
their overall profitability in terms of ROA and ROE .......................................................... 37
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4.2.2 Relationship between commercial banks’ lending rates and their overall profitability
in terms of ROA and ROE .................................................................................................... 39
4.2.3 Relationship between the volume of commercial banks’ investment in TBs and their
overall profitability in terms of ROA and ROE .................................................................. 42
4.2.4 Relationship between commercial banks’ yields from TBs and their overall
profitability in terms of ROA and ROE ............................................................................... 43
4.2.5 Model Prediction .......................................................................................................... 43
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS .................................. 45
5.0 Introduction ..................................................................................................................... 45
5.1 Summary……………………………………………………………………………. 45
52. Conclusion…………………………………………………………………………...46
5.3 Recommendations ........................................................................................................... 47
5.4 Areas for further research ............................................................................................... 47
REFERENCES .................................................................................................................... 49
APPENDICES ...................................................................................................................... 56
Appendix A: Introductory letters.......................................................................................... 56
Appendix B: Dataset ............................................................................................................. 58
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LIST OF TABLES
Table 4.1: Descriptive Statistics ........................................................................................... 35
Table 4.2: Estimation results using ROA as the dependent variable ................................. 37
Table 4.3: Estimation results using ROE as the dependent variable .................................. 37
x
ABSTRACT
Investigating the determinants of profitability of commercial banks has been one of the
more popular topics among researchers in banking studies. Hence, to contribute to the
existing knowledge, this study sought to analyze the extent to which investment in loans
and treasury bills influence the overall profitability of commercial banks in Uganda,
using a data set comprising 95 observations for 15 commercial banks over the period
1998-2005. The study used a longitudinal research design, based on quantitative data
generated through document analysis of commercial banks’ monthly reports and returns
to Bank of Uganda. Overall Profitability was measured using two profitability ratios
namely: Return on Assets (ROA) and Return on Equity (ROE) while the independent
variables included: volume of loans, volume of TBs, lending rates and yield on TBs.
The study found Volume of Loans and TBs having a positive correlation while Lending
Rates and average yields on TBs revealed negative correlation with ROA as an element
of the dependent variable. With regard to ROE, Loan Volume, Lending rates and Volume
of TBs showed a positive relationship while average yields on TBs indicated a negative
correlation with this element of the dependent variable. However, in the two analyses,
commercial banks’ investment volume in loans was found to be the only variable that had
a statistically significant influence in accounting for profitability of commercial banks in
