COVID 19 and Bank Profitability in Low Income Countries: The Case of Uganda

Abstract

This study investigates the impact of the COVID-19 pandemic on banking sector profitability in Uganda for the period spanning Q1 2000 to Q1 2021, using the autoregressive distributed lag (ARDL Bound) testing approach to co-integration while controlling for bank specific and macroeconomic determinants of bank profitability. Bank profitability is proxied by return on assets (ROA), return on equity (ROE), and net interest margin (NIM). The study finds that the COVID 19 pandemic has a significant negative effect on bank profitability only in the long run. Generally, the explanatory variables used in the study have short run and long run effects on bank profitability, although the impact is not uniform across the different measures of bank profitability. In the short run, bank profitability is generally negatively and significantly affected by the non-performing loans ratio, liquidity ratio, and market sensitivity risk, while the Treasury Bill interest rate and lending rate have a significant positive effect on bank profitability. In addition, the study finds that bank profitability has a tendency to persist in the short run, although persistence is only moderate, suggesting that the Ugandan banking sector may not have large deviations from a perfectly competitive market structure. In the long run, bank profitability is broadly positively and significantly affected by the non-performing loan ratio;, real GDP, lending rate and Treasury Bill interest rate while market sensitivity risk and the exchange rate significantly and negatively affect bank profitability. Surprisingly, the study finds inflation does not significantly affect bank profitability over both the short- and long-term.

Impact of COVID-19 on Financial Performance and Profitability of Banking Sector in Special Reference to Private Commercial Banks: Empirical Evidence from Bangladesh

“…Ref. [47] investigated a low-income country like Uganda, where the COVID-19 pandemic negatively affected the banking sector's profitability, considering the bank-specific variables with the macroeconomic factors.…”

“…Formula: LATAR = Liquid Assets/Total Assets [80] +/− Loan-to-deposit ratio LDR Loan-to-deposit ratio is a ratio that measures a bank's liquidity position by comparing the loan amount a bank disburses with the deposit amount it receives [81] Formula: ROA = Total Loans/Total Deposits [81] +/− Non-performing loan rate NPLR Non-performing loan rate is used as a tool for measuring the credit risk of banks, where a higher ratio indicates a higher chance of losses due to the loan default by the borrowers [82]. Formula: NPLR = Total Non-performing Loans/Total Loans [47] − Bank size Size Bank size is the natural logarithm form of a bank's total assets [83]. Formula: Size = {ln(Total Bank Assets)} [ Components of banks that influence their profitability: Most researchers use ROA, ROE, and NIMR as the proxy variables to measure the profitability of banks as well as represent the impact of bank-specific variables, financial indicators of the market, and macroeconomic variables on bank profitability [47,71,[84][85][86].…”

“…Formula: NPLR = Total Non-performing Loans/Total Loans [47] − Bank size Size Bank size is the natural logarithm form of a bank's total assets [83]. Formula: Size = {ln(Total Bank Assets)} [ Components of banks that influence their profitability: Most researchers use ROA, ROE, and NIMR as the proxy variables to measure the profitability of banks as well as represent the impact of bank-specific variables, financial indicators of the market, and macroeconomic variables on bank profitability [47,71,[84][85][86].…”

Factors Affecting Firm Performance in Commercial Iraqi Banks

“…Due to the critical role banks play in a country's economic welfare, growth, and development, banking performance continues to draw the attention of industrial experts, politicians, and academics. The most common indication of bank performance is profitability, which is measured by profit ratios such as return on assets (ROA), return on equity (ROE) (Katusiime, 2021;Abdullah and Tursoy, 2021a).…”

The impact of access to financial services on mitigating COVID-19 mortality globally

“…Because health is such a complex socio-economic phenomenon, and financial access is only one (perhaps minor) element among many confounding factors, teasing out the health effects of expanding financial services has proven remarkably challenging. The unfortunately stark and broad natural experiment of COVID-19 might have strengthened the signal-to-noise ratio enough to present a unique opportunity to deepen understanding of the role of access to financial services in health outcomes.Most of the literature to date linking COVID-19 and financial services has focused on how the pandemic has challenged the financial security of financial sector institutions (e.g., [12][13][14]), of businesses [15][16][17], and of households [18][19][20]. Similarly, the public health literature beyond COVID-19 has focused on how health Population density, 2019 ln(population per sq.…”