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

  vii

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