Financial liberalization and its implications for the domestic financial system: The case of Uganda

Abstract

This paper presents an analysis of the impact of financial liberalization on the conduct of banking business and its impact on the real sector. Survey results show that the overall assessment by commercial banks of financial sector liberalization is positive. Financial sector reforms and interest rate deregulation appear to have engendered efficiency gains in the banking industry and consequently growth of credit to the private sector is increasing. The econometric results also reveal that increased credit to the private sector appears to be leading economic growth. However, increased credit allocation to the private sector should not compromise monetary policy objectives. The study also recognizes the dualistic nature of the financial system in Uganda and proposes as a policy recommendation the linkages of the banking system with micro-credit institutions as one way of enhancing financial intermediation in order to promote economic growth.