Relationship Lending, Transaction Costs And The Lending Interest Rates Of Commercial Banks In Uganda

ABSTRACT

Lending has been, and is still the mainstay of banking business in emerging economies like Uganda. The commercial bank lending interest rates in Uganda have persistently remained high. The study aimed at understanding the relationship between relationship lending, transaction costs and lending interest rates. To achieve this aim, a transactional cost approach in terms of opportunism, assets specificity, frequency, uncertainty, governance set-up costs and relational lending technology in terms of duration, multiple banking, pre-existence and trust were examined to determine their effect on lending interest rates. Primary data was collected from 14 commercial banks in Uganda and their bo1rnwers. A sample of 225 was drawn from the population of 566 medium and large sized borrowing enterprises and bank employees of credit departments. A total of 15 l questionnaires were returned answered and data was analyzed using SPSS. The study findings reveal that relationship lending has a significant negative effect on lending interest rates and transaction costs. They further reveal that transaction costs have a significant positive effect on the lending interest rates charged by commercial banks in Uganda. Therefore the study draws a conclusion that relationship lending and transaction costs have a role in commercial bank loan pricing and contracting process or decision making. Since the findings indicate that loan interest rates are more sensitive to transaction costs than relationship lending, the study recommends that commercial banks consider employing relational governance structures coupled with greater borrower-lender interactions to eliminate opportunism and thus minimize transaction costs incurred. 

TABLE OF CONTENTS 

Declaration .............................................................................................. i 

Approval. ................................................................................................ ii 

Dedication ............................................................................................... iii 

Acknowledgement ..................................................................................... .iv 

Table of contents ........................................................................................ vi 

List of tables ............................................................................................. x 

List of figures ........................................................................................... xi 

Acronyms ................................................................................................ xii 

Abstract ................................................................................................... xiii 

Chapter One: Introduction 

1.1 Background of the study . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 

1.2 Statement of the problem ......................................................................... 3 

1.3 Purpose of the Study .............................................................................. 4 

1.4 Objectives of the Study................................................................................................. 4 

1.5 Research Questions............................................................................. 5 

1.6 Scope of the Study.... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 

1.7 Significance of the Study ........................................................................ 6 

1.8 Conceptual Framework.......................................................................... 7 

1. 9 Organisation of the Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 

Chapter Two: Literature Review 

2.1 Introduction ......................................................................................... 9 

2.2 Relationship Lending... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 

2.3 Transaction Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 

2.4 Lending Interest Rates ........................................................................... 21 

2.5 Relationship lending and lending interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 

2.6 Transaction costs and relationship lending................................................... 24 

2.7 Transaction costs and Lending Interest Rates ................................................ 26 

2.8 Conclusion......................................................................................... 28 

Chapter Three: Methodology 

3.1 Introduction...................................................................................... 30 

3.2 Research Design and Procedure................................................................ 30 

3.3 Target Population................................................................................ 30 

3.4 Sample Size ........................................................................................ 31 

3.5 Sampling Design and Procedure ................................................................... 32 

3.6 Data Sources and Data types ...................................................................... 33 

3.7 Data Collection Methods ........................................................................................ 33 

3. 8 Measurement of Variables .......................................................................... 34 

3.8.1 Transaction cost ................................................................................ 35 

3 .8.2 Relationship lending ........................................................................... 35 

3.8.3 Lending interest rate ........................................................................... 35 

3.9 Validity ofinstruments.................................................. ... . . . . . . . . . . . . . . . . . . . . 35 

3.10 Reliability ofinstruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................ 36 

3. IO Data Analysis . . . . . . . . . . . . . . . . . . . . . . . . .  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 7 

3 .11 Problems encountered .......................................................................... 3 7 

Chapter Four: Presentation and Interpretation of Findings 

4.1 Introduction . . . . . . .. . . .. . . .. . .. .. .. . .. .. . . .. .. . . .. . .. . . . . . . . . . . . . . . . .. . . . . . . . . . . . . .. . . . . . . . . . . . . 38 

4 .2 Background characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  . . . . . . . . . . .. . . . . . . . . . . . . . 3 9 

4.2.1 Gender by respondent category . . . . . .. . . . .. . .. . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 

4.2.2 Number of employees of borrowing firm by sector . . .. .. . . . . . . . .. . . . .. ... . . .. .. .. . . .. . 40 

4.2.3 Number of banks holding accounts for each borrowing firm by annual turnover... 42 

4.2.4 The facilities offered by bank(s) to borrowers by company age ......................... 43 

4.2.5 Duration of banking relationship by category of the borrowing firms . . . . . . . . . . . . . . . 44 

4.2.6 Education Background by Respondent Category .......................................... 45 

4.2.7 Number of customers by institution ......................................................... 46 

4.2.8 Criteria for selecting bank of category ...................................................... 4 7 

4.2.9 Type of firm by ownership ................................................................... 48 

4.2.10 Nature of the Ownership in the film by category of the firm ........................... 49 

4.2.11 Duration of banking relationship and company age .. . . . . . . . . . . . . . .. . . . . . . . . . . .. . .. . . . . 50 

4.2.12 Age group of bank staff by management level . . . .. . . . . . . . . . . . . . .. . . . . . . . .. . . .. . . . . . . . .. 5 I 

4.2.13 Titles of bank staff and age group ......................................................... 52 

4.2.14 Transaction costs of lending in banks by bank age ....................................... 53 

4.2.15 Lending techniques in banks by category of customers extended to relationship lending ... 54 

4.3 Relationship lending factor analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . .. . . . . . . . . . . .. . . . . . . 55 

4.4 Transaction costs factor analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  . . . . . . . . . . . . . ... . . . . . 57 

4.5 The relationship among the variables ......................................................... 59 

4.5.1 The relationship between relationship lending and lending interest rates of commercial 

banks ................................................................................................... 59 

4.5.2 The relationship between the transaction costs and relationship lending in commercial 

banks................................................................................................ 60 

4.5.3 The relationship between the transaction costs and lending interest rates and commercial 

banks ................................................................................................... 60 

4.6 The prediction model . .  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 

4.7 The prediction model of the variable dimensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 

Chapter Five: Discussion, Conclusions and Recommendations 

5. I Introduction ....................................................................................... 64 

5.2 Discussion of findings ........................................................................... 64 

5.2.1 Sample characteristics ........................................................................ 64 

5.2.2 Constituents ofrelationship lending of commercial banks in Uganda . . . . . . . .. . . . . . . 65 

5 .2.3 Constituents of transaction costs of commercial banks in Uganda . . . . . . . . . . . . . . . . . . . . . 66 

5.2.4 The relationship between relationship lending and lending interest rates of commercial 

banks ................................................................................................... 67 

5.2.5 The relationship between the transaction costs and relationship lending in commercial 

banks ................................................................................................... 67 

5.2.6 The relationship between the transaction costs and lending interest rates and commercial 

banks ..................................................................................................... 68 

5 .3 Conclusions ....................................................................................... 69 

5.4 Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 

5.5 Areas for further research..................................................................... 74 

References ............................................................................................. 75 

Appendix 1: Commercial Banks' Weighted Interest Rates 2008.............................. 84 

Appendix 2: Commercial Banks' Weighted Interest Rates 2007 ............................... 84 

Appendix 3: Lending interest rates of commercial banks in Uganda........................ 85 

Appendix 4: Questionnaire guide to Commercial Bank staff. ................................... 86 

Appendix 5: Questionnaire guide to bank borrowers ............................................. 94