Services Sector Development in Uganda: An Analysis of the Role of the Financial Services Sector

This study reviews the reforms undertaken in the financial sector with respect to regulation and access widening polices. The developments at the macro and micro level of the banking system are also assessed. Empirical analysis of the effects of financial liberalisation on growth by augmenting an aggregate production function with different measures of financial liberalisation. To account for the sources of the effects of financial liberalisation on growth, additional empirical analysis was conducted using panel data analysis of bank level data. Bank level data assists in investigating the effect of financial liberalisation on intermediation spreads, non-performing loans and non-financial costs. The empirical findings do not indicate a positive effect of financial liberalisation on growth. However, they suggest that there was improved efficiency among banks. The critical issue for Uganda appears to be that the efficiency improvements may not have been translated into increased credit to the private sector. There are possible policy choices to ensure that financial liberalisation exerts positive knock on effects to output and subsequently poverty reduction. Some of the proposed policies include the reduction of credit risk to banks through information availability via the credit reference bureau, promotion of further competition in the sector through increased bank entry and more robust loan recovery procedures in cases of default.