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The bank lending channel in a frontier economy:

Evidence from loan-level data


Charles Abuka

Ronnie K. Alinda
Camelia Minoiu
Andrea F. Presbiterok

Jose-Luis Peydro

March 5, 2015
Preliminary draft Comments welcome

Abstract: The transmission of monetary policy to credit aggregates can be impaired by weaknesses in the contracting environment, shallow financial markets, and a concentrated banking system. We empirically assess the bank lending channel in Uganda using a supervisory
dataset of loan applications and granted loans. Our analysis focuses on 20102014, a period of
significant variation in the monetary policy stance. We find that an increase in interest rates
reduces the supply of bank credit both on the extensive and intensive margins. However,
the coefficient magnitudes indicate a moderate degree of transmission compared to advanced
economies. Furthermore, we find evidence of different transmission for domestic vs. foreign currency loans. Finally, our results lend support to the presence of a strong bank capital
channel, as banks with higher capital buffers transmit changes in the monetary policy stance
significantly less than other banks.
JEL Codes: E42; E44; E52; E58
Keywords: Bank lending channel; Bank balance sheet channel; Monetary policy transmission;
Frontier economies

We

thank the Bank of Uganda and Compuscan for providing the confidential data used in this study and
responding to our queries. We thank Andrew Berg and Catherine Pattillo for support and advice at all stages of
this project, and Olivier Blanchard, Stelios Michalopoulos, Peter Montiel, Steven Ongena, Tomasz Wieladek, staff
at the Financial Stability and Research Departments at the Bank of Uganda, and seminar participants at the IMF for
useful comments and discussions. Additional material is available in an Online Appendix available for download
on: https://sites.google.com/site/presbitero/homepage/wp. The views expressed in this paper are those of the
authors and do not necessarily represent those of the Bank of Uganda, IMF, or IMF policy.
Bank of Uganda. E-mail: cabuka@bou.or.ug.
Bank of Uganda. E-mail: ralinda@bou.or.ug.
Corresponding author, International Monetary Fund. E-mail: cminoiu@imf.org.
ICREA-Universitat Pompeu Fabra, Cass, CREI, Barcelona GSE and CEPR. E-mail: jose.peydro@upf.edu.
k International Monetary Fund and MoFiR. E-mail: apresbitero@imf.org.

Introduction

A key question for policymakers is the extent to which monetary policy can effectively influence real economic activity through its impact on credit aggregates. A large literature argues
that the transmission of monetary policy to the real economythe so-called monetary transmission mechanism (MTM)can be hampered by several factors. These include small and
shallow financial markets, oligopolistic banking systems, excess bank liquidity, monetary policy frameworks with limited ability to anchor inflation expectations, and poor institutional
and legal environments that raise the costs of lending. Such features are more often found in
developing and emerging market economies. The quantitative evidence on the strength of the
MTM in these economies remains mixed, leaving open the question of how effective the MTM
is, and how it compares with bank-based advanced economies where structural impediments
are less present.
To shed light on this question we examine the bank lending channel in Uganda, a fastgrowing East African frontier economy. Uganda provides the ideal setting for this analysis because it is representative of other developing economies and it recently overhauled its
monetary policy framework, introducing inflation targeting. In addition, the monetary policy
stance changed significantly during the period of analysis, ranging from highly contractionary
after the introduction of the new framework to highly expansionary subsequently. During
20102014 the Bank of Uganda raised the policy rate by a cumulative 1,000 basis points (bps)
during the tightening phase and cut it by a total of 1,200 bps during the loosening phase. The
relatively short period over which these changes occurred alleviates the possibility that unobserved structural changes were occurring in the economy.
We face two empirical challenges in assessing the transmission of interest rate changes to
credit aggregates. The first challenge stems from the fact that monetary policy is determined
by economic conditions, which makes it endogenous. This problem is difficult to resolve as
instances of truly exogenous monetary policy stance are extremely rare. In our case, too, monetary conditions respond to the macroeconomic environment, but we argue that there is an
exogenous element in the extent of interest rate variation observed during the tightening period, which is unusually large.
The second challenge comes from the fact that aggregate shocks affect equilibrium bank
credit through both the bank lending (supply) and the firm borrowing (demand) channels.
Since supply and demand shocks often occur simultaneously, we need to separate changes
in loan supply from changes in loan demand. To address this issue, we use highly granular
data that are well suited for controlling for demand effects, and hence for isolating the im2

pact of interest rates on credit supply and for testing the bank lending channel. Specifically,
we exploit a unique supervisory dataset provided by Compuscan, a credit reference bureau
(CRB) in Uganda. The dataset has information on individual loan applications (with acceptance/rejection decision) and loans granted to non-financial firms by the 15 largest Ugandan
banks during 2010:Q12014:Q2, which represent 95 percent of total banking assets.
The novelty of our dataset allows us to expand the literature on monetary policy transmission by being the first to study the bank lending and balance sheet channels in a frontier
economy using loan-level data. The availability of micro data make it possible to control for
changes in loan demand at a level of granularity higher than in previous studies on developing
countries, and hence more convincingly isolate credit supply from credit demand effects. In all
lending regressions, which quantify the economy-wide effects of changes in interest rates, we
add borrower and bank effects to control for unobserved time-invariant firm and bank heterogeneity. When we test for the bank balance sheet channel by interacting interest rate changes
with bank characteristics, we also include industry-district-quarter fixed effects. These fixed
effects allow us to identify the effect of monetary policy on credit supply under the assumption
that all firms within the same industry and district experience the same credit demand shifts
in a given quarter.
We proceed as follows. First, we test the standard bank lending channel (Bernanke and
Gertler, 1989, 1995; Bernanke and Blinder, 1988) by relating changes in the short-term interest
rate to the probability of loan granting by banks (extensive margin) and, for loans granted,
their volume (intensive margin). Then we look for evidence that the strength of the lending
channel depends on banking sector conditions, which would suggest that a bank balance sheet
channel is at work (Van den Heuvel, 2012; Bernanke, 2007). This channel predicts that weaker
banks, that have lower capital, are more effective at transmitting changes in the monetary
policy stance.
We find evidence for loan supply adjustment on both the extensive and intensive margins.
For the extensive margin we find that an increase in interest rates by 100 bps reduce the average
probability of loan granting by 0.9 percentage points. For the intensive margin, our findings
indicate that an increase in interest rates by 100 bps reduces the volume of local currency loans
extended to borrowers in district-specific industries by close to 2 percent. We then test for
a bank balance sheet channel and find that less well capitalized banks transmit changes in
monetary policy significantly more than other banks. Finally, our results are suggestive of a
different response of loan supply to monetary conditions for domestic vs. foreign currency
loans. While all loan supply adjusts on both the extensive and intensive margins, foreign

currency loans react more strongly than domestic currency loans, especially on the extensive
margin.
Our work is closely related to recent studies that use credit register data to examine the
bank lending channel for advanced economies. Focusing on Spain, Jimnez et al. (2012) show
that a 100 basis point increase in the short-term interest rate by the European Central Bank
(ECB) reduces the probability of loan granting by 1.4 percentage points, which is larger than
our baseline estimates. There is also evidence of a bank balance sheet channel. Jimnez et al.
(2014) look at bank risk-taking behavior and show that when monetary policy is accommodative in the Eurozone, weakly capitalized banks are more likely to grant loans to riskier firms,
and these loans are larger and longer-term. These studies provide a useful reference point for
our coefficient estimates. Our empirical strategy is similar but our goal is to assess the strength
of the bank lending channel in a frontier economy where monetary policy transmission is likely
impaired by structural factors. The magnitude of our results suggests weaker monetary policy
transmission than in advanced economies.
We also contribute to the literature on the MTM in developing countries, which finds mixed
evidence of transmission of monetary policy to credit aggregates and lending rates (see Mishra
and Montiel (2013) and Davoodi et al. (2013) for reviews). Mishra and Montiel (2013) argue that
this is not merely the result of methodological limitations. In a sample of countries at different
levels of development, Mishra et al. (2014) find that the relationship between policy rates and
lending rates is stronger for countries with better institutions, deeper financial markets, and
less concentrated banking systems. Saxegaard (2009) shows that banks in sub-Saharan Africa
hold reserves in excess of the level consistent with a precautionary savings motive, and argues
that excess liquidity in the banking system weakens the MTM.
In a study of the MTM in four East African economies (Kenya, Rwanda, Tanzania, and
Uganda) during 2010-2012, Berg et al. (2013) examine the evolution of economic indicators
before, during, and after the mid-2011 monetary policy tightening that occurred simultaneously in these countries. Using a narrative approach, they present suggestive evidence for
several transmission channels during 2010-2012, including interest rate, credit, and exchange
rate channels. Our results complement these findings, but we zoom in on the bank lending
channel in Uganda and employ several identification strategies to control for concurrent credit
demand shifts. Furthermore, we extend the period of analysis to mid-2014 to capture not only
the tightening but also the subsequent expansionary phase, which was of equally dramatic
magnitude.
Finally, our study expands on a growing literature on the transmission of financial sector

shocks to credit and the real economy in developing countries. Khwaja and Mian (2008) exploit
a liquidity shock in Pakistan caused by the unanticipated freeze on banks dollar deposits.
They show that a one percentage point decrease in bank liquidity, measured by the availability
of dollar deposits, leads to a reduction in the supply of loans by 0.6 percent. By comparison,
our coefficient estimates indicate that a one percent increase in banks exposure to the mid2011 monetary policy tightening, proxied by interbank liabilities, reduced the supply of credit
over the following six quarters by 0.3 percent. Farooq and Zaheer (2015) analyze the impact on
bank credit of a liquidity crunch caused by a bank run in Pakistan after the failure of Lehman
Brothers. We share with these studies the approach of employing loan-level data to examine
the transmission of shocks through the banking system in a developing economy.
Uganda provides the ideal setting for examining the bank lending channel as it has many
developing country features that can weaken the transmission of monetary policy to the real
economy, including illiquid financial markets, a concentrated banking industry, and a young
and untested monetary policy framework (Berg et al., 2013). In addition, the weak institutional
framework increases the cost of lending, prompting banks to invest primarily in government
securities and hold excess reserves (Mishra et al., 2012). As central banks in many developing countries are in the process of adopting forward-looking monetary policy frameworks to
enhance their credibility and effectiveness (Kasekende and Brownbridge, 2011; Khan, 2011),
Ugandas experience of making this transition, coupled with a short period of unusually large
swings in interest rates, provides for an informative case study.

Institutional background

Uganda is an East African frontier economy with a flexible exchange rate regime and a moderate level of dollarization. It is fairly representative of other sub-Saharan African economies
in that it relies heavily on commodity exports and foreign aid, has a large microfinance sector,
and significant agricultural employment. With a large share of food items in the CPI basket
(27 percent), price volatility is primarily driven by external food and fuel price shocks and
domestic supply shocks (especially weather-related) (Berg et al., 2013; Mugume, 2010).
Like other sub-Saharan African central banks, including those in East Africa, the Bank of
Uganda followed a de jure monetary aggregate targeting framework prior to 2011. This type of
framework has historically proven ineffective at anchoring inflation expectations and has led
to excess interest rate volatility (International Monetary Fund, 2008). In July 2011, the Bank
of Uganda moved to an inflation targeting-lite monetary policy framework, and introduced
a policy rate to set inflation expectations and signal the monetary policy stance. The explicit
5

inflation target was set at 5 percent (see Berg et al. (2013) for a detailed account of the regime
change and a comparison of monetary policy regimes in East Africa).

2.1

The tightening and expansionary phases

The 2010-2014 period was marked by a change of monetary policy regime and large swings
in interest rates. What explains these developments? Against the backdrop of the Bank of
Ugandas monetary aggregate targeting policy framework, a significant commodity price shock
occurred in 2010-2011. Coupled with strong credit growth, a weakening currency and an
accommodative monetary policy stance, the shock led to soaring inflation (Figure 1). This
phenomenon occurred to various degrees in four countries of the East African Community
(ECA)Kenya, Rwanda, Tanzania, and Uganda. In the second half of 2011 the four central
banks decided to tighten monetary policy in a coordinated effort to fight inflation.
The tightening phase began in July 2011, when the Bank of Uganda simultaneously switched
to an inflation targeting-lite monetary policy framework, introduced a policy rate, and stepped
up its communication efforts to enhance the credibility of the new framework. During JulyNovember 2011 the policy rate was raised by a cumulative 1,000 bps: 300 bps between July
and September and an additional 700 bps between September and November. These developments are illustrated in Figure 2, which shows year-on-year credit growth soaring to more
than 30 percent in early 2011, and market rates moving in tandem with the policy rate after the
regime change. Following this initial monetary policy tightening, credit growth collapsed to
negative rates by the second half of 2012.
While the monetary policy stance was endogenous to economic conditions, we argue that
the magnitude, and to some extent the timing of the tightening, were partly unanticipated by
economic agents. There are several reasons for this. First, the Bank of Uganda had reacted little
to an earlier commodity price shock, during 2007-2008, which had also sent inflation soaring.
Second, the Banks long-term track record suggests a dovish attitude and hence little reason
to anticipate a raise in interest rates as large as 700 bps in September on top of the initial 300
bps tightening in July 2011. Third, pre-tightening communication had emphasized the need
for the monetary authority to support strong economic activity rather than to address inflationary concerns. Fourth, the tightening phase occurred at the same time with the transition to
an entirely new monetary policy framework, leaving economic agents little time to form expectations about future central bank actions in line with the new inflation targeting mandate.
As of October 2011 the Bank of Uganda had not yet published a well-articulated intermediate
inflation trajectory (International Monetary Fund, 2011, 2012).

The expansionary phase began in December 2012, when it became apparent that credit
aggregates had suffered a significant adjustment and economic growth was taking a hit (Figure
1). Given that close to 60 percent of loans in Uganda have flexible interest rates, loan quality
deteriorated and banks non-performing loans rose (from 1.8 percent in 2011:Q2 to 4.9 percent
in 2013:Q1). From December 2012 the policy rate was gradually reduced over the following
three quarters from 23 percent to 11 percent.

2.2

The banking system in Uganda

Uganda has experienced increased financial deepening in the last decade, with bank credit
to the private sector more than doubling in percent of GDP terms to 15 percent during 20012013. This remains nonetheless low by international standards. There is also a large informal
financial sector. According to the Finscope survey, 74 percent of the Ugandan adult population
used the financial services of an informal lender in 2013 and 15 percent used the services of
both a formal and informal lender (Finscope, 2013).1
The banking system in Uganda comprises 25 (mostly foreign- and privately-owned) banks
during the period of analysis. Total banking assets represent 19 percent of GDP and the largest
5 banks account for 73 percent of total banking system assets (GFDD, 2011).2 Banks are highly
capitalized, with average Tier 1 capital ratios of 20 percent and average total regulatory capital
ratios of 24 percent. The typical bank funds its assets with 66 percent in deposits, 30 percent
shareholders equity, 11 percent market-based funding (from banks in Uganda and abroad),
and 6 percent other sources. The average bank holds 52 percent loans, 21 percent securities
(mostly government bonds), 10 percent reserves at the central bank, and 4 percent cash. As
a result, Ugandan banks are highly liquid, with average liquid-to-total assets ratio of 27 percent. Figure 3 shows the evolution of the cross-sectional distributions of regulatory capital and
liquidity, our key variables for assessing the bank balance sheet channel. We exploit heterogeneity in bank balance sheet characteristics in the empirical analysis to test for the presence
of a bank balance sheet channel.3

The Ugandan credit register

Uganda is one of the few developing countries with a fully functional and comprehensive
credit register. Other countries in sub-Saharan Africa (including Ghana, Kenya, and Malawi)
have also set up credit registers in recent years, but mainly collect loan default information.
1 There

is no comparable information for corporate borrowers.


are for 2011.
3 See Section A-I in the Online Appendixfor more details on the banking system in Uganda.
2 Estimates

The Ugandan CRB (Compuscan CRB Ltd.) was set up in 2008 and collects data on loan applications and granted loans, on a monthly basis, from all commercial banks, microfinance
deposit-taking institutions, and credit institutions, in accordance with the regulations set out
in Bank of Uganda (2005). Its coverage has continuously improved over time.
We use the credit register data for the largest 15 banks, which account for 95 percent of
total banking assets. The data refers to all loan applications and originations (both credit lines
and disbursed loans) granted by these banks to non-financial firms, with no restriction on the
minimum size of the loan. Importantly, banks make data submissions on loan applications and
granted loans separately (i.e., there is an applications dataset and a loans dataset). For this
reason, the coverage of the two datasets differs, and not all loans in the loans dataset can be
traced back as a successful application in the applications dataset.4 Therefore, we analyze
loan applications and granted loans separately. After initial cleaning, there are 31,178 loan
applications and 39,427 granted loans during the 2010:Q1-2014:Q2 period.
Firms are identified by a unique numerical code which allows tracking their activity over
time and across banks. We observe applications from 9,174 firms and loans granted to 9,391
firms. For each borrower we also have information on their location (across 74 districts) and
sector of activity (across 9 industries). However, we have no information on firm balance sheet
variables or other characteristics. The distribution of loan applications and granted loans by
industry is shown in Table 1.
Most firms have a lending relationship with just one bank. During the period of analysis,
83 percent of firms apply for a loan to only one bank, although they can do so multiple times.
Thirteen percent of firms apply to two banks, and the rest to 3 banks or more. In the granted
loans dataset, 87 firms borrow from one bank and 10 percent from two banks. The prevalence
of single-bank firms has important implications for the identification strategy, as discussed
further below.
The micro-data are merged with bank balance sheet variables and macroeconomic time
series (interest rates, GDP growth, inflation) on a monthly and quarterly basis. Variable definitions, sources, and descriptive statistics are shown in Tables 2 and 3.

Empirical strategy

A key empirical challenge in identifying the bank lending channel is to disentangle credit
demand from credit supply effects. A simple correlation between interest rates and credit
aggregates, as in Figure 2, is uninformative about the effectiveness of the MTM, because a
4 This prevents us from estimating the effects of interest rate changes on granted loan amounts using a two-stage

selection model.

contraction in credit could be the result of a credit supply shock, lower credit demand from
firms, or both. In this section we discuss our empirical strategies for disentangling supply
from demand effects.

4.1

Extensive margin

Each month, banks report to the CRB the status of loan applications received during the reporting period. For each loan application we know whether it was accepted (54.7 percent), rejected
(9.9 percent), pending at the time of submission to the CRB (35.2 percent), or cancelled by the
borrower (0.2 percent). We analyze only the loan applications that were either accepted or rejected and define an indicator for applications submitted by firm i to bank b at time t that were
accepted (LOAN GRANTED). The average acceptance rate during 2010-2014 is 84.6 percent.
To examine the link between monetary policy and the probability of loan grantingthe
extensive marginwe estimate a linear model for the probability of loan granting that broadly
follows Jimnez et al. (2012):
LOAN GRANTEDibt = hi + yb + a1 DIRt + b 1 DGDPt + g1 DCPIt +

+ d1 LIQU IDITYb,t

+ d2 CAPITALb,t

+ a2 DIRt LIQU IDITYb,t

+ a3 DIRt CAPITALb,t

+ b 2 DGDPt LIQU IDITYb,t


+ g2 DCPIt LIQU IDITYb,t

1+

1
1

(1)

1+

+ b 3 DGDPt CAPITALb,t

+ g3 DCPIt CAPITALb,t

1+

+ eibt

where LOAN GRANTEDibt is the probability of loan granting to firm i by bank b in quarter t.
In all baseline regressions we use the 7-day interbank rate as the short-term interest rate.5
To account for the fact that macroeconomic conditions may affect short-term interest rates, we
also add real GDP growth (DGDPt ) and inflation (DCPIt ) as controls. In the baseline specifications, time-invariant firm and bank heterogeneity is captured by firm (hi ) and bank (yb ) fixed
effects. Even though loan applications reflect credit demand vis-a-vis the banks in our sample,
we cannot interpret the correlation between the probability of loan granting and the change
in the interest rate (DIRt ) as a supply-side effect, as changes in monetary policy stance could
affect the number of discouraged borrowers in the economy. However, to the extent that the
change in monetary policy is unanticipated, the demand for bank loans should not vary, so
that we could interpret the coefficient a1 as the causal impact of changes in interest rates on
the extensive margin of lending.
As a second step we allow for time-varying bank heterogeneity in balance sheet strength
5 We

test the robustness of our findings to the use of other short-term interest rates, see Section 6 in the Online
Appendix.

to influence loan granting by including the ratio of liquid assets to total deposits as a measure
of bank liquidity (LIQU IDITYb,t

1)

and the ratio of total regulatory capital to risk-weighted

assets as a measure of bank net worth (CAPITALb,t

1 ).

Finally, we test for the possibility that

the bank lending channel is stronger for less well capitalized and less liquid banksthat is,
we test for a bank balance sheet channelby interacting DIRt with bank capital and liquidity,
while controlling for similar interactions with GDP growth and inflation. When testing the
bank balance sheet channel we can also add to the model quarter fixed effect to better capture
common demand shocks. In that case, macroeconomic variables drop out of the model but we
can still identify the coefficients on the interaction terms.
We estimate Equation 1 with Ordinary Least Squares (OLS) and we cluster the standard
errors at the district level to allow for serial correlation within districts.6

4.2

Intensive margin

For each granted loan we have information on volume, maturity, interest rate (level and type),
and currency. To separate demand from supply effects, ideally we would like to control for all
unobserved borrowertime heterogeneity where the borrower and time units are as granular
as possible.7 We run the intensive margin analysis at a higher level of aggregation than indi-

vidual firmsour borrowers are district-specific industries (that is, loan volumes are added
up across borrowers within each district-industry pair, for a total of 291 pairs)8 and the time
unit is quarters, but in this way we are able to identify the model under the assumption that
demand shocks are common in each quarter for all firms within the same district and industry.
The reason for aggregating the data at the district-industry level is twofold: first, to include
firmquarter fixed effects we need to see multiple loans granted to the same firm within a
quarter. However, in our dataset, almost half of the firms only borrow once per quarter, so
adding firmquarter fixed effects would significantly reduce the sample size. Second, we no-

tice that during the period of monetary tightening firms were more likely to be credit rationed
than to obtain smaller loans. Comparing the total number of borrowers and the average loan
size in the six quarters before and after July 2011, we find that the latter fell by 23 percent (from
244 to 187 million UGX) while the former fell by 46 percent (from 4,602 to 2,502 firms).
6 One

advantage of a linear probability model compared to a probit model is that the latter is unidentified if we
include a large set bank and firm fixed effects. Another advantage is the ease of interpretation of the interaction
terms (Ai and Norton, 2003). As a robustness exercise we allow for residual serial correlation in the error term
within industries and quarters. The results obtained with different clustering are reported in Section A-III of the
Online Appendix.
7 For instance, borrowers are firms and the time unit are months in Jimnez et al. (2014) and Ongena et al. (2014).
8 De Haas and Van Horen (2013) and Kapan and Minoiu (2013) adopt a similar strategy to identify changes in
the supply of international syndicated loans during the global financial crisis. Credit rationing at the individual
firm level created intensive margin adjustment at higher levels of aggregation, namely the borrowing country-level
and the borrowing country-specific industry level.

10

To examine the link between the monetary policy stance and the quantity of creditthe
intensive marginwe start by estimating the following parsimonious specification:
ln( LOAN AMOUNTjbt ) = aDIRt,t

(2)

+ fj + yb + eibt

where LOAN AMOUNTjbt is the volume of credit granted to firms in district-industry j by


bank b in quarter t. To separate supply from demand effects, we include district-industry
fixed effects fj , which assume that credit demand shocks are the same to firms in each districtindustry pair, but constant over time. We also include bank fixed effects.
The key variable of interest, is the change in the 7-day interbank rate (DIRt,t

z)

over dif-

ferent time horizons (z = 1, 2 quarters) which allows for the possibility that changes in the
monetary policy stance affect bank credit with a lag. The coefficient a measures the interest
rate elasticity of loan volumes supplied by individual banks to firms within the same district
and industry. These regressions are also estimated with OLS and standard errors are clustered
at the district level.9
Then we augment the specification in Equation 2 with macroeconomic and bank characteristics and interact DIRt,t

with the latter to test the bank balance sheet channel. The final

model we estimate is as follows:


ln( LOAN AMOUNTjbt ) = yb + fj + tt + a1 DIRt,t

+ d1 LIQU IDITYb,t
+ a2 DIRt,t

+ b 1 DGDPt + g1 DCPIt +

+ d2 CAPITALb,t

LIQU IDITYb,t

+ b 2 DGDPt LIQU IDITYb,t


+ g2 DCPIt LIQU IDITYb,t

1
1

1+

+ a3 DIRt,t

CAPITALb,t

+ b 3 DGDPt CAPITALb,t

+ g3 DCPIt CAPITALb,t

1+

(3)

1+

+ eibt

where macroeconomic and bank-level variables are as in Equation 1 and we add still districtindustry as well as bank fixed effects. Then, we include quarterly dummies to wash out any
common shocks affecting credit demand. In this model all macroeconomic variables drop out
and identification relies on the interaction terms (i.e. we can estimate the coefficients a2 and
a3 testing for the bank balance sheet channel). In our final specification we saturate the model
with industry-district-quarter dummies. Here, identification hinges on the assumption that
firms operating in the same industry and in the same district experience the same demand
shocks each quarter.
9 A set of robustness exercises done using alternative interest rates and imposing different structure to the correlation of the error term are reported in Sections A-II and A-III of the Online Appendix.

11

5
5.1

Results
Extensive margin

Tables 4 and 5 report the results for the extensive margin. We start with a simple specification
(Table 4, column 1) in which we include only bank and firm fixed effects. The coefficient estimate on DIR indicates that a 100 bps (less than a third of a standard deviation) increase in the
7-day interbank rate over a quarter leads to a 0.86 percentage point increase in the probability
that a loan application is accepted. Given that the average share of accepted loan application in our sample is 84.6 percent, this implies a semi-elasticity of 1 percent. Controlling for
macroeconomic conditions and bank time-varying characteristics such as capital and liquidity
reduces the coefficient on the change in the 7-day interbank interest rate (columns 2-3). The
point estimate of the coefficient on DIR in column 3 implies that an increase in the interest rate
by one standard deviation (i.e., 354 bps) is associated with a 1.45 percentage point increase in
the likelihood of loan granting.
In column 4 of Table 4 we test the bank balance sheet channel by including interaction
terms of capital and liquidity with DIR. We find that the effect of a rise in the interbank rate
by 100 bps over a quarter increases the probability of loan granting at the mean level of capital
(20.6 percent) and liquidity (37.7 percent) by 0.18 percentage point (p-value=0.11). In other
words, banks with with mean levels of capital and liquidity are not passing on increases in
the interest rate to the supply of credit. In particular, the presence of capital buffers mitigates
the effect of interest rates on loan granting (the coefficient a3 on the interaction term between
DIR and CAPITAL is positive). Decreasing the capital ratio by one standard deviation from
its mean (while holding liquidity at its mean) yields a reduction in the probability of loan
granting by 0.74 percentage points (p-value=0.00). These results highlight an important role
for capital in monetary policy transmission, consistent with the presence of an external finance
premium (Bernanke, 2007). By contrast, we observe that more liquid banks amplify the effect of
interest rates (a2 < 0); high liquidity could be an indicator of bank preference for government
bonds, so that an increase in interest rates would raise bank demand for safe and high-return
government assets, further crowding out private sector lending.
In columns 2-4 we account for macroeconomic conditions that may be correlated with interest rates by including GDP growth and inflation. Column 5 shows a specification in which
quarterly changes in the macroeconomic environment are absorbed by quarter fixed effects.
The coefficient estimates on bank characteristics and their interactions with the interest rate
remain statistically significant and have comparable magnitudes with those in column 4, confirming the presence of an economically significant bank balance sheet channel.
12

In Table 5 we explore differences in loan currency. One channel through which loan currency may influence the bank lending channel is through local banks cost of funding in different currencies. Ongena et al. (2014) show that the bank lending channel in Hungary operates
only for local currency loans, both on the extensive and intensive margin on account of domestic monetary conditions affecting banks funding costs in local currency, but not necessarily in
foreign currencies. Looking at the coefficients on DIR in Table 5 (columns 1-3 versus 4-6),
we find that the probability of loan granting for USD loans is more sensitive to interest rate
changes than for local currency loans, and the difference is statistically significant (the p-value
when testing the equality of the coefficients on DIR in columns 1 vs. 4 is 0.03).

5.2

Intensive margin

In Tables 6-7 we focus on the intensive margin of credit supply. We start by estimating Equation
2 and regress the log of loan volumes on DIRt,t

where z = 1, 2 quarters. In Table 6 we report

the results for local currency loans. The estimation of the parsimonious equation 2 shows
that the 7-day interbank rate affects the amount of loans after two quarters. The coefficient
on DIRt

in column 7 indicates that a 100 bps increase in the interest rate over two quarters

(around one sixth of a standard deviation) is associated with a decline in bank credit by 1.5
percent. This effect is smaller (but not statistically different) when controlling for the effect of
inflation and GDP growth (column 8), and is not statistically significant when the interest rate
changes are lagged one quarter.
We next add to the model bank balance sheet variables and their interactions with macroeconomic controls. Looking at columns 4 and 10 we still find evidence of a bank lending channel, as the coefficients on DIRt

remain statistically significant for either lags. In addition, our

results lend support to the presence of a strong bank capital channel, while there is no robust
evidence suggesting that more liquid banks can mitigate the effects of monetary policy on aggregate domestic currency lending. A 300 bps increase in the interest rate over two quarters
(half of a standard deviation) reduces the supply of loans by 0.72 percent for banks with median capital and liquidity levels (column 10). This effect is larger for less capitalized banks: for
instance, considering a bank with a capital ratio equal to the first quartile of the sample distribution implies a cut in the supply of loans by 4.2 percent, other things equal. The bank capital
channel is robust to the inclusion of quarterly dummies and of industry-district-quarter fixed
effects: even though we cannot identify the direct effect of DIR on lending, we can show that
the coefficients on the interaction term between interest rates and bank capital are remarkably
similar to the one obtained without time fixed effects, and the coefficient on the interaction

13

between bank capital and DIR is generally statistically significant at 1% level (columns 6 and
11-12). In addition, the R2 increases from 0.44 to 0.64 when adding industry-district-quarter
fixed effects, suggesting that they are capturing a large share of unobserved factors affecting
the variability of the loan supply
When considering foreign currency loans, we still find evidence that the bank balance sheet
and the bank capital channels are at work (Table 7). The estimated coefficient on the standalone
DIR variable (lagged either one or two quarters) is negative, but not statistically significant, in
the baseline model and when adding the macroeconomic controls, while it becomes significant
once we add the bank-level variables (columns 3 and 9). When looking at bank balance sheet
channels we observe that the effect of interest rate changes are smaller for more capitalized
banks. Bank liquidity, instead, is not robustly associated with the bank lending channel. In
the specification with DIRt

we find that more liquid banks mitigate the effect of monetary

policy on aggregate lending (column 10); however, this results is not robust to the inclusion of
time dummies (column 11) and it changes in sign when adding industry-district-quarter fixed
effects (column 12). By contrast, the coefficients on the interaction terms between bank capital
and changes in interest rates remain positive and significant even when we saturate the model
with quarterly and industry-district-quarter fixed effects (columns 5-6 and 11-12). Considering
the point estimate of column 4, a 164 bps increase in the interest rate over one quarter (half of a
standard deviation) reduces the supply of loans by 2.35 percent for banks with median capital
and liquidity levels and by 5.16 percent for banks with a capital ratio at the first quartile of
the sample distribution. These effects are somewhat larger than the ones on local currency
lending: considering column 4 of Table 6 an increase in interest rate over one quarter equal to
half of a standard deviation (170 bps) reduces lending by 1 percent for the median bank and
by 3.35 percent for a bank with a capital ratio at the first quartile of the sample distribution.

Robustness tests

We subject our baseline results to a number of robustness tests. First, we estimate our main
regressions for the extensive margin including additional bank-level controls and splitting the
sample along some relevant dimensions. Second, we re-examine the effects of changes in the
monetary policy stance on the quantity of bank credit using the Khwaja and Mian (2008) identification strategy. This alternative identification strategy aims to address concerns over the
causal interpretation of our baseline results. Although we face sample and data limitations,
and no identification strategy is completely foolproof given the endogeneity of any policy
shocks, a second set of results that slice the data in a completely different way would help
14

strengthen our confidence in our main results. Third, we replicate our baseline results: 1) using four alternative interest rates, 2) making different assumption about the correlation structure of the errors, and 3) assessing the stability of our key coefficients to the possible presence
of outliers. We discuss our first two exercises in what follows and the third set of robustness
checks is reported in the Online Appendix.

6.1

Extensive margin: Additional tests

The results of additional tests for the extensive margin are reported in Table 8. In column 1
we take our most comprehensive specifications (with bank controls and interaction terms) and
further add bank balance sheet variables (such as size, return on assets, and non-performing
loans) that may influence banks ability to extend credit. We also add a district-level measure
of availability of financial servicesthe number of bank branches. Adding these controls does
not materially impact the coefficient estimates for the key variables, and the only additional regressor that has a statistically significant coefficient is NPLs, which suggests that riskier banks,
which have a higher share of non-performing loans, are more likely to grant loans.
In columns 2-3 we split the sample in applications for credit lines and applications for disbursed loans (each accounting roughly for half of the sample) and find that our baseline results
are driven by disbursed loans. The coefficient on DIR for credit lines is negative but statistically insignificant. This is not surprising given that credit lines may not be drawn immediately
or fully and can remain as off balance-sheet exposures, while disbursed loans require immediate liquidity. Finally, in columns 4-5 we split the sample by bank ownership. As the Ugandan
banking system is dominated by foreign-owned banks that are locally funded, we find that the
results are driven by their lending behavior as opposed to that of domestic banks.

6.2

Intensive margin: Alternative identification strategy

We also test for the bank lending channel using an alternative identification strategy proposed
by Khwaja and Mian (2008). This approach is common in studies of the transmission of financial sector shocks to the supply of bank credit. De Haas and Van Horen (2013); Kapan and
Minoiu (2013); Cetorelli and Goldberg (2011) focus on shocks in bank funding markets during
the 2008-2009 global financial crisis, Farooq and Zaheer (2015) look at a run by depositors on
banks in Pakistan, Ivashina and Scharfstein (2010) examine a run by corporations on banks in
the US, and Schnabl (2012) assesses the international transmission of a sovereign default.
In this approach, for each borrower, we compare the change in bank credit before and after
a liquidity shock for banks with differential exposure to the shock. This allows us to determine
whether banks that were ex-ante more vulnerable to the shock reduced the supply of loans to
15

the same borrower more than other banks. Our liquidity shock is the significant monetary
tightening that occurred starting in July 2011 with the first hike in the policy rate. The preand post-shock periods are six quarters centered on July 2011 (namely, 2010:Q1-2011:Q2 and
2011:Q3-2012:Q4, as shown in Figure 4). Working with six-quarter windows helps us preserve
sample size as the identification strategy requires limiting the sample to the borrowers that
obtain loans from at least two different banks before and after the shock. We estimate the
following specification at the (bankdistrict-specific industry) pair level:
Dln( LOAN AMOUNTjb ) = a1 I NTERBANKb + d1 LIQU IDITYb + d2 CAPITALb +
4

+ bi BANK CHARACTERISTICSib +
i =1

(4)

+ a2 I NTERBANKb LIQU IDITYb +


+ a3 I NTERBANKb CAPITALb + fj + eibt
where Dln( LOAN AMOUNTjb ) represents the log-difference in total bank credit from bank b
to firms in the district-industry j between the pre- and post-shock periods. I NTERBANKb is a
bank-specific variable that captures banks exposure to the monetary policy shock. Our proxy
for banks exposure to the shock is their reliance on interbank funding measured by the ratio of
interbank liabilities to total deposits. To control for pre-shock balance sheet characteristics that
may influence a banks ability to sustain lending in face of an adverse shock, we add additional
controls (BANK CHARACTERISTICSb ) as follows: (i) an indicator for foreign-owned banks,
(ii) log(total assets) as a measure of bank size, (iii) the ratio of risk-weighted assets to total
assets as an indicator of the banks risk profile, and (iv) the ratio of non performing loans to
gross loans as a measure of asset quality. All variables are measured as of 2011:Q2 (that is,
before the shock).
In this setting, identification hinges on two assumptions: the first is that the shock is unanticipated, and hence banks do not adjust their balance sheets in expectation of the shock. Our
monetary policy shock is clearly not exogenous, but we believe its magnitude to be partly
unanticipated (especially for the second, 700 bps hike of the policy rate between September
and November 2011), for reasons discussed in Section 2.1. The second assumption is that all
borrowers in each district-industry pair receive a common demand shock and hence reduce
credit demand proportionately vis-a-vis banks. Under this assumption, including industrydistrict fixed effects (fj ) in Equation 4 helps isolate credit supply effects from simultaneous
demand shifts. All regressions based on on Equation 4 are estimated using OLS with standard
errors clustered at the district-industry level.
This alternative approach allows us to ask the question: for firms from the same district-

16

industry, did banks with higher exposure to the monetary policy shock reduce the supply of
credit more? The results, shown in Table 9, suggest the answer is yes. In columns 1-4 we see
that the coefficient on I NTERBANKb , which captures the extent to which banks were exposed
to rising interest rates in the interbank market starting in July 2011, is negatively associated
with the difference in loan volumes before and after July 2011. The coefficient estimates suggest
that a 1 percentage point increase in reliance on interbank funding (as a share of total deposits)
reduces the supply of bank loans by 0.3-0.5 percent (columns 1 and 3).
All specifications include bank capital and liquidity and their interactions with the measure
of exposure to the monetary policy shock, but we do not include capital and liquidity at the
same time. This is because they are highly correlated (the correlation coefficient is 0.62) and the
sample is small. The estimates columns 3-4 indicate that banks with weaker balance sheets cut
lending more than other banks during during the six quarters starting July 2011, hence were
more effective in transmitting the shock. The estimates in columns 4 suggest that an increase
in reliance on interbank funding by one percentage point at the mean of capital (25.32 percent)
is associated with a supply of loans lower by 0.08 percent. The semi-elasticity becomes -0.3 at
levels of capital lower than the mean by half a standard deviation, and is zero at capital levels
higher than the mean by a quarter of a standard deviation.
Overall, the results suggest that our baseline message holds up to this alternative empirical
approach. In columns 5-8 we re-estimate the specifications in columns 1-4 using a weighting
scheme. Recall that our unit of observation are (bank-district specific industry) pairs, which
means that banks that are more active lenders show up more frequently in the dataset, so
their balance sheet characteristics are over-represented in a simple regression. To address
the concern that our results may be driven by the behavior of a few banks, we weigh the
observations by the inverse of the frequency with which each bank appears in the sample.
The results suggest that this is not a severe problem, as coefficient magnitudes are close to the
unweighed ones (columns 5-8).

Conclusions

The question of how monetary policy influences credit aggregates is a central concern for policy makers, especially in countries where the transmission of monetary policy can be impaired
by weaknesses in the contracting environment, underdeveloped financial markets, and a lack
of competition in the banking sector. In this paper we examined the bank lending channel
during a unique period in which the Ugandan economy experienced very large interest rate
swings, in both directions, over a relatively short period of time. We took advantage of a
17

unique supervisory dataset on individual loan applications and loans granted to a large sample of non-financial firms that we merged with bank balance sheet and macroeconomic information. The richness of our data allows us to control for changes in the demand for loans and
to look at the extensive and intensive margins of loan supply adjustment.
We find evidence for loan supply adjustment on both the extensive and intensive margins. Coefficient magnitudes indicate weaker monetary policy transmission than in advanced
economies. Furthermore, we find evidence of a strong bank capital channel, as better capitalized banks transmit monetary policy changes less than other banks. Finally, there is interesting
heterogeneity in loan supply responses to interest rate changes for domestic vs. foreign currency loans, with the latter adjusting on the extensive margin to a greater extent than local
currency loans. Our findings are robust to a battery of robustness tests.
We see these results as a first step toward better understanding the transmission of policy rate changes to credit aggregates and real economic growth in frontier and developing
economies. Possible extensions include exploiting heterogeneity in borrower characteristics
(e.g,. risk profile) and bank-borrower characteristics (e.g., duration of the banking relationship) to gauge variations in the strength of the bank lending channel. It is also worth analyzing
the effects on firm employment and investment of these sharp changes in the monetary policy
stance during our period of analysis.

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20

Figures and tables

Figure 1: Macroeconomic developments in Uganda, 2009-2014


30

25

20

15

10

0
2009q1

2010q1

2011q1

GDP growth (y-o-y)

2012q1

2013q1

Core inflation (y-o-y)

2014q1

7-day interbank rate

Notes: All data are quarterly. Real GDP growth and core inflation are calculated on a year-on-year basis. Sources: Authors
calculations using data from the Bank of Uganda and Uganda Bureau of Statistics.

Figure 2: Monetary conditions and credit growth: 2010-2014

20

20

10
10

Interest rates

Credit growth rate (in percent, y-on-y)

30
30

Credit growth rate

Policy rate

Source: Monthly data. Bank of Uganda and International Financial Statistics (IFS).

21

2014:4

2014:1

2013:7

2013:10

2013:4

2013:1

2012:7

2012:10

2012:4

2012:1

2011:10

2011:7

2011:4

2011:1

2010:7

2010:10

2010:4

0
2010:1

-10

7-day interbank rate

80

(a) Bank capital

2013:Q4

2014:Q1

2013:Q2

2013:Q3

2013:Q1

2012:Q4

2012:Q2

2012:Q3

2011:Q4

2012:Q1

2011:Q3

2011:Q1

2011:Q2

2010:Q3

2010:Q4

2010:Q1

2010:Q2

20
2013:Q4

2014:Q1

2013:Q2

2013:Q3

2013:Q1

2012:Q4

2012:Q2

2012:Q3

2011:Q4

2012:Q1

2011:Q3

2011:Q1

2011:Q2

2010:Q3

2010:Q4

2010:Q1

2010:Q2

10

20

40

30

60

40

50

Figure 3: Bank capital and liquidity: 2010-2014

(b) Bank liquidity

Notes: Bank capital is the ratio of total regulatory capital (Tier 1 + Tier 2) to total risk-weighted assets. Bank liquidity is the ratio
of liquid assets to total deposits. The data refer to the sample of 15 banks. Source: Bank of Uganda and authors calculations.

Figure 4: Sample periods for alternative identification strategy

20

10
10

Interest rates

20

Credit growth rate

2014:4

2014:1

2013:10

2013:7

2013:4

2013:1

0
2012:10

2012:7

2012:4

2012:1

2011:10

IT-lite period
2011:7

2011:4

2011:1

2010:10

2010:1

2010:7

pre IT-lite period

-10

2010:4

Credit growth rate (in percent, y-on-y)

30
30

7-day interbank rate

Notes: This chart shows the split of our sample period around the introduction of the IT-lite monetary policy framework in Jul
2011, which we use for the Khwaja and Mian (2008) identification strategy (Table 9)). Each period runs for six quarters around the
introduction of the new framework. The pre-IT-lite period runs from 2010:Q1 to 2011:Q2 and the IT-lite period runs from 2011:Q3
to 2012:Q4. Source: Bank of Uganda and International Financial Statistics (IFS).

22

Table 1: Industry composition of loan applications and granted loans


Panel A: Distribution of loans by industry
Loan applications

Granted loans

Industry

Agriculture
Mining and Quarrying
Manufacturing
Trade
Transport and Communication
Electricity and Water
Building, Construction and Real Estate
Community, Social and Other Services
Central and Local Government
Other

3,023
538
1,903
5,637
3,962
99
3,228
4,032
1,106
7,650

9.7
1.7
6.1
18.1
12.7
0.3
10.4
12.9
3.5
24.5

5,473
1,464
6,545
6,925
3,009
173
4,588
2,236
331
8,683

13.9
3.7
16.6
17.6
7.6
0.4
11.6
5.7
0.8
22.0

Total

31,178

100.0

39,427

100.0

Local currency (UGX)


Foreign currency (USD)

27,122
4,056

87.0
13.0

26,800
12,627

68.0
32.0

Panel B: Distribution of firms by industry


Applicant firms

Borrowing firms

Industry

Agriculture
Mining and Quarrying
Manufacturing
Trade
Transport and Communication
Electricity and Water
Building, Construction and Real Estate
Community, Social and Other Services
Central and Local Government
Other

735
116
400
1,393
1,239
35
843
1,079
395
2,939

8.0
1.3
4.4
15.2
13.5
0.4
9.2
11.8
4.3
32.0

992
64
526
1,284
655
46
704
650
139
4,331

10.6
0.7
5.6
13.7
7.0
0.5
7.5
6.9
1.5
46.1

Total

9,174

100.0

9,391

100.0

Source: Authors calculations using data from Compuscan, Uganda.

23

Table 2: Variables: definition and sources


Variable

Description

Source

Interest rate on interbank market with a maturity of 7


days.
Interest rate on government securities with a maturity of
91 days.

Bank of Uganda

Macroeconomic data
7-day interbank rate
91-day T-Bill rate
Discount rate

DGDPt

Rate at which banks can borrow from the Bank of


Uganda against eligible collateral.
Rate at which banks borrow and lend in the overnight
interbank market in Uganda.
Bank of Uganda policy rate (central bank rate or CBR)
introduced in July 2011 together with an inflation targeting lite framework.
Real GDP growth (q-o-q)

DCPIt

CPI growth (q-o-q)

BANK BRANCHES

Number of bank branches in district

Overnight interbank rate


Policy rate

Bank of Uganda &


International Finance
Statistics (IFS)
International Finance
Statistics (IFS)
International Finance
Statistics (IFS)
Bank of Uganda
International Finance
Statistics (IFS)
International Finance
Statistics (IFS)
Authors calculations
from Bank of Uganda
data

Bank balance sheet data


LIQU IDITY
CAPITAL
I NTERBANK
SIZE
ROA
NPL
RISK PROFILE
FOREIGN BANK

Liquid assets to total deposits


Total regulatory capital (Tier1+Tier2) divided by risk
weighted assets
Interbank borrowing divided by total deposits
Log(total assets)
Return on assets, computed as net income divided by
total assets
Non performing loans divided by gross loans
Risk weighted assets divided by total assets
Dummy variable for banks with majority foreign ownership

Bank of Uganda
Bank of Uganda
Bank of Uganda
Bank of Uganda
Bank of Uganda
Bank of Uganda
Bank of Uganda
Bank of Uganda

Credit register data


LOAN GRANTED

LOAN AMOUNT
LOAN TYPE

DISTRICT
I NDUSTRY

Dummy variable that takes value 1 for loan applications that are accepted. Loan application status can be:
accepted, rejected, pending, and cancelled by the borrower.
Total loan amount (in UGX or USD) for granted loans, in
logarithms.
Credit lines are loans classified as bonds, financial guarantees, overdraft, and revolving credit. Outright loans
are hire purchases, leasing, letters of credit, mortages,
and secured and unsecured loans.
Borrower district. There are 67 districts.
Borrower industry of activity. There are 9 industries:
Agriculture, Mining and Quarrying, Manufacturing,
Trade, Transport & communication, Electricity and Water, Building, Construction and Real Estate, Community,
Social, and Other Services; and Institutional Sector.

24

Compuscan, Uganda

Compuscan, Uganda
Compuscan, Uganda

Compuscan, Uganda
Compuscan, Uganda

Table 3: Descriptive statistics


Variable

Obs.

Mean

S.D.

Min

p25

p50

p75

Max

18
18
18
12
18
18
18
11
17
18
75

12.53
10.30
16.52
14.85
0.41
0.19
0.27
-0.27
5.03%
2.27%
36.71

6.82
4.45
5.99
4.37
3.44
2.28
3.50
3.07
1.78%
2.93%
61.05

3.07
4.14
8.23
11.33
-4.31
-4.12
-6.71
-4.50
1.16%
-1.07%
1.00

9.95
8.87
13.42
11.58
-1.06
-1.38
-2.20
-1.33
4.06%
0.33%
2.00

11.41
9.39
15.58
12.25
-0.16
0.06
-0.17
-0.33
4.91%
1.84%
5.00

16.81
13.38
19.00
18.83
0.75
1.50
0.76
0.00
6.03%
3.00%
13.00

26.23
19.49
28.00
22.00
8.13
5.09
8.14
7.67
8.05%
10.91%
153.00

757
757
757
757
757
757
757
855

41.99
24.91
5.64
19.37
2.94
3.90
61.30
80.00%

26.62
11.32
11.90
1.21
3.69
4.47
12.74
-

0.00
11.26
0.00
16.08
-40.81
0.00
10.08
0.00

28.74
17.06
0.00
18.62
2.12
1.02
52.48
-

40.36
22.07
1.24
19.39
3.44
2.77
62.34
-

56.99
28.64
5.06
20.28
4.68
5.03
70.27
-

130.46
78.89
104.79
21.98
12.69
40.32
99.97
1.00

20,186
31,178
31,178
18,352
10,399
7,953
11,090
8,476
2,614

84.66%
13.01%
48.81%
0.24
0.30
0.15
1.16
0.73
2.54

0.96
1.01
0.88
39.36
25.73
66.52

0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00

0.01
0.02
0.00
0.03
0.03
0.01

0.03
0.06
0.01
0.07
0.07
0.06

0.14
0.20
0.06
0.20
0.21
0.20

1.00
1.00
1.00
29.89
21.01
29.89
2693
2309
2693

Macroeconomic data
7-day interbank rate
91 day T-bill rate
Discount rate
Policy rate
D 7-day interbank rate
D 91 day T-bill rate
D Discount rate
D Policy rate
DGDP
DCPI
BANK BRANCHES
Bank balance sheet data
LIQU IDITY
CAPITAL
I NTERBANK
SIZE
ROA
NPL
RISK PROFILE
FOREIGN BANK
Credit register data
LOAN GRANTED
Application for USD loan
Application for credit line
LOAN AMOUNT (all loans, UGX bn)
LOAN AMOUNT (disbursed, UGX bn)
LOAN AMOUNT (credit lines, UGX bn)
LOAN AMOUNT (all loans, USD mn)
LOAN AMOUNT (disbursed, USD mn)
LOAN AMOUNT (credit lines, USD mn)

Notes: The period of analysis is 2010:Q12014:Q2. Macroeconomic and bank balance sheet data are measured on a quarterly basis.
Granted loans amounts (LOAN AMOUNT) are expressed in real terms using the Uganda CPI (January 2010=100). UGX stands
for Ugandan Shilling.

25

Table 4: Extensive margin of credit supply and monetary conditions Baseline


Dep. Var.: LOAN GRANTEDijt

(1)

(2)

(3)

(4)

(5)

DIRt

-0.0086***
(0.001)

-0.0057***
(0.001)
0.7363***
(0.186)
-0.0068***
(0.001)

-0.0041***
(0.001)
0.6161***
(0.185)
-0.0050***
(0.001)
0.0032***
(0.001)
0.0060***
(0.002)

-0.0134*
(0.007)
4.3886***
(0.780)
-0.0233***
(0.005)
0.0025**
(0.001)
0.0088***
(0.002)
-0.0002**
(0.000)
0.0009***
(0.000)
0.0125
(0.012)
-0.2131***
(0.024)
0.0004***
(0.000)
0.0000
(0.000)

0.0029***
(0.001)
0.0068***
(0.001)
-0.0002**
(0.000)
0.0009***
(0.000)
0.0086
(0.013)
-0.1730***
(0.022)
0.0004***
(0.000)
-0.0001
(0.000)

20,118
0.488
Yes
Yes
No

20,118
0.493
Yes
Yes
No

20,118
0.497
Yes
Yes
No

20,118
0.499
Yes
Yes
Yes

DGDPt
DCPIt
LIQU IDITYb,t
CAPITALb,t

DIRt LIQU IDITYb,t


DIRt CAPITALb,t

DGDPt LIQU IDITYb,t


DGDPt CAPITALb,t

DCPIt LIQU IDITYb,t


DCPIt CAPITALb,t
Observations
R2
Firm FE
Bank FE
Quarter FE

20,118
0.486
Yes
Yes
No

Notes: The table reports regression results of a linear probability model in which the dependent variable is an indicator for
successful loan applications by firm i to bank b at time t. Standard errors, clustered at the district level, are reported in parentheses.
* significant at 10%; ** significant at 5%; *** significant at 1%.

26

Table 5: Extensive margin of credit supply and monetary conditions By loan currency
Dep. Var.: LOAN GRANTEDijt

(1)

(2)

(3)

UGX
DIRt
DGDPt
DCPIt
LIQU IDITYb,t
CAPITALb,t

DIRt LIQU IDITYb,t


DIRt CAPITALb,t

DGDPt LIQU IDITYb,t


DGDPt CAPITALb,t

Observations
R2
Firm FE
Bank FE
Quarter FE

0.0027*
(0.001)
0.0078***
(0.002)
-0.0003*
(0.000)
0.0007***
(0.000)
0.0169
(0.020)
-0.1786***
(0.032)
0.0006***
(0.000)
-0.0000
(0.000)

17,485
0.513
Yes
Yes
No

17,485
0.517
Yes
Yes
No

17,485
0.519
Yes
Yes
Yes

DCPIt LIQU IDITYb,t


DCPIt CAPITALb,t

-0.0048
(0.008)
4.1019***
(1.325)
-0.0267***
(0.007)
0.0023
(0.001)
0.0098***
(0.002)
-0.0003**
(0.000)
0.0006**
(0.000)
0.0230
(0.021)
-0.2134***
(0.034)
0.0006***
(0.000)
0.0001
(0.000)

(5)

(6)

-0.0105**
(0.005)
0.5573***
(0.189)
-0.0111***
(0.004)
0.0063***
(0.001)
-0.0012
(0.004)

-0.0481***
(0.014)
3.6421***
(0.834)
-0.0325***
(0.009)
0.0020
(0.002)
0.0050
(0.005)
-0.0004
(0.000)
0.0029***
(0.001)
0.0344
(0.033)
-0.2252***
(0.034)
0.0005***
(0.000)
-0.0000
(0.001)

0.0020
(0.002)
0.0040
(0.005)
-0.0004
(0.000)
0.0028**
(0.001)
0.0347
(0.028)
-0.1559***
(0.049)
0.0005*
(0.000)
-0.0003
(0.001)

2,633
0.517
Yes
Yes
No

2,633
0.535
Yes
Yes
No

2,633
0.546
Yes
Yes
Yes

USD

-0.0035***
(0.001)
0.6618***
(0.210)
-0.0037**
(0.002)
0.0030**
(0.001)
0.0070***
(0.002)
1

(4)

Notes: The table reports regression results of a linear probability model in which the dependent variable is an indicator for
successful loan applications by firm i to bank b at time (quarter) t. Standard errors, clustered at the district level, are reported in
parentheses. * significant at 10%; ** significant at 5%; *** significant at 1%.

27

28

DIRt,t

DIRt,t

3,624
0.424
Yes
Yes
No
No

11.7735***
(1.886)
-0.0030
(0.013)

-0.0178
(0.011)

(2)

3,624
0.430
Yes
Yes
No
No

10.7979***
(1.736)
0.0068
(0.013)
0.0147***
(0.004)
0.0401***
(0.013)

-0.0082
(0.009)

(3)

3,624
0.432
Yes
Yes
No
No

32.8899***
(7.899)
-0.0021
(0.043)
0.0230***
(0.005)
0.0379**
(0.018)
-0.3833*
(0.203)
-0.3509
(0.281)
-0.0002
(0.001)
0.0006
(0.002)

-0.1234**
(0.047)
0.0015
(0.001)
0.0030*
(0.002)

(4)

3,624
0.438
Yes
Yes
Yes
No

0.0251***
(0.006)
0.0314
(0.021)
-0.3914*
(0.198)
-0.3122
(0.283)
-0.0011
(0.001)
0.0009
(0.002)

0.0012
(0.001)
0.0034
(0.002)

(5)

3,624
0.641
Yes
Yes
Yes
Yes

0.0259***
(0.009)
0.0148
(0.024)
-0.5088
(0.308)
0.0465
(0.277)
-0.0017
(0.001)
0.0006
(0.002)

0.0007
(0.002)
0.0055**
(0.002)

(6)

3,624
0.420
Yes
Yes
No
No

-0.0149***
(0.005)

(7)

3,624
0.424
Yes
Yes
No
No

10.5212***
(2.299)
-0.0028
(0.012)

-0.0115*
(0.006)

(8)

3,624
0.430
Yes
Yes
No
No

10.1999***
(1.942)
0.0070
(0.012)
0.0145***
(0.004)
0.0399***
(0.012)

-0.0056
(0.005)

(9)

3,624
0.432
Yes
Yes
No
No

-0.0694**
(0.027)
0.0003
(0.001)
0.0027***
(0.001)
25.0984***
(8.904)
-0.0141
(0.040)
0.0235***
(0.005)
0.0280
(0.020)
-0.3778*
(0.203)
-0.0152
(0.327)
0.0003
(0.001)
0.0003
(0.002)

(10)

3,624
0.438
Yes
Yes
Yes
No

0.0264***
(0.006)
0.0198
(0.023)
-0.4240**
(0.204)
0.0747
(0.353)
-0.0005
(0.001)
0.0005
(0.002)

-0.0001
(0.001)
0.0031***
(0.001)

(11)

3,624
0.642
Yes
Yes
Yes
Yes

0.0280***
(0.008)
0.0008
(0.026)
-0.5735**
(0.246)
0.5380*
(0.275)
-0.0010
(0.001)
0.0005
(0.002)

-0.0004
(0.001)
0.0041***
(0.001)

(12)

Notes: The table reports regression results of a linear model in which the dependent variable is the loan amount granted to borrowers in district-specific industry j by bank b at time (quarter) t. Standard
errors, clustered at the district level, are reported in parentheses. * significant at 10%; ** significant at 5%; *** significant at 1%.

Observations
R2
Bank FE
Industry-district FE
Quarter FE
Industry-district Quarter FE

DCPIt CAPITALb,t

DCPIt LIQU IDITYb,t

DGDPt CAPITALb,t

DGDPt LIQU IDITYb,t

CAPITALb,t

LIQU IDITYb,t

DCPIt

CAPITALb,t

LIQU IDITYb,t

3,624
0.419
Yes
Yes
No
No

DIRt,t

CAPITALb,t

DIRt,t

DGDPt

DIRt,t

-0.0085
(0.009)

DIRt,t

LIQU IDITYb,t

(1)

Dep. Var.: LOAN AMOUNTjbt

Table 6: Intensive margin of credit supply and monetary conditions Baseline, UGX loans

29

DIRt,t

DIRt,t

1,032
0.240
Yes
Yes
No
No

12.6881**
(4.759)
-0.0141
(0.012)

-0.0100
(0.009)

(2)

1,032
0.243
Yes
Yes
No
No

11.8449**
(4.888)
-0.0080
(0.015)
0.0130***
(0.004)
-0.0368***
(0.011)

-0.0162*
(0.009)

(3)

1,032
0.246
Yes
Yes
No
No

13.4455
(10.053)
0.1071
(0.084)
0.0055
(0.003)
-0.0129
(0.014)
0.1532
(0.104)
-0.3980**
(0.184)
0.0027***
(0.001)
-0.0109**
(0.004)

-0.1141***
(0.034)
0.0003
(0.001)
0.0044**
(0.002)

(4)

1,032
0.267
Yes
Yes
Yes
No

-0.0002
(0.006)
-0.0319**
(0.013)
0.0860
(0.096)
-0.2444*
(0.133)
0.0056***
(0.001)
-0.0143***
(0.004)

-0.0013
(0.001)
0.0062***
(0.002)

(5)

1,032
0.427
Yes
Yes
Yes
Yes

-0.0010
(0.012)
-0.0275
(0.019)
0.1448
(0.230)
-0.5251***
(0.143)
0.0059***
(0.001)
-0.0141***
(0.004)

-0.0018**
(0.001)
0.0068***
(0.002)

(6)

1,032
0.235
Yes
Yes
No
No

-0.0102
(0.006)

(7)

1,032
0.240
Yes
Yes
No
No

12.0867**
(4.392)
-0.0150
(0.015)

-0.0052
(0.004)

(8)

1,032
0.243
Yes
Yes
No
No

10.9195**
(4.551)
-0.0099
(0.017)
0.0129***
(0.004)
-0.0362***
(0.010)

-0.0078**
(0.003)

(9)

1,032
0.246
Yes
Yes
No
No

-0.0590**
(0.024)
0.0008**
(0.000)
0.0010
(0.001)
7.4681
(8.556)
0.0933
(0.080)
0.0048*
(0.002)
-0.0149
(0.013)
0.2269*
(0.116)
-0.2801*
(0.159)
0.0023***
(0.001)
-0.0096**
(0.004)

(10)

1,032
0.266
Yes
Yes
Yes
No

0.0016
(0.004)
-0.0376***
(0.013)
0.0472
(0.082)
0.0197
(0.100)
0.0052***
(0.001)
-0.0130***
(0.004)

-0.0003
(0.000)
0.0022**
(0.001)

(11)

1,032
0.426
Yes
Yes
Yes
Yes

0.0010
(0.012)
-0.0343*
(0.019)
0.0580
(0.224)
-0.2418*
(0.122)
0.0057***
(0.001)
-0.0121***
(0.003)

-0.0009***
(0.000)
0.0019*
(0.001)

(12)

Notes: The table reports regression results of a linear model in which the dependent variable is the loan amount granted to borrowers in district-specific industry j by bank b at time (quarter) t. Standard
errors, clustered at the district level, are reported in parentheses. * significant at 10%; ** significant at 5%; *** significant at 1%.

Observations
R2
Bank FE
Industry-district FE
Quarter FE
Industry-district Quarter FE

DCPIt CAPITALb,t

DCPIt LIQU IDITYb,t

DGDPt CAPITALb,t

DGDPt LIQU IDITYb,t

CAPITALb,t

LIQU IDITYb,t

DCPIt

CAPITALb,t

LIQU IDITYb,t

1,032
0.234
Yes
Yes
No
No

DIRt,t

CAPITALb,t

DIRt,t

DGDPt

DIRt,t

-0.0045
(0.010)

DIRt,t

LIQU IDITYb,t

(1)

Dep. Var.: LOAN AMOUNTjbt

Table 7: Intensive margin of credit supply and monetary conditions Baseline, USD loans

Table 8: Extensive margin of credit supply and monetary conditions Additional tests
Dep. Var.: LOAN GRANTEDijt

DIRt
DGDPt
DCPIt
LIQU IDITYb,t
CAPITALb,t

DIRt LIQU IDITYb,t


DIRt CAPITALb,t

DGDPt LIQU IDITYb,t


DGDPt CAPITALb,t

DCPIt LIQU IDITYb,t


DCPIt CAPITALb,t
SIZE
ROA
NPL
BANK BRANCHES

Observations
R2
Firm FE
Bank FE
Quarter FE

(1)
Bank vars

(2)
(3)
By loan type:

(4)
(5)
By ownership:

Credit lines

Outright loans

Foreign

Domestic

-0.0126*
(0.007)
4.0973***
(0.731)
-0.0235***
(0.005)
0.0018**
(0.001)
0.0092***
(0.002)
-0.0002**
(0.000)
0.0010***
(0.000)
0.0192
(0.014)
-0.2163***
(0.023)
0.0005***
(0.000)
-0.0000
(0.000)
-0.0215
(0.016)
0.0046*
(0.003)
0.0136***
(0.003)
0.0001
(0.000)

-0.0023
(0.006)
4.9694***
(0.918)
-0.0278***
(0.008)
0.0011
(0.001)
0.0078***
(0.002)
-0.0002*
(0.000)
0.0005**
(0.000)
-0.0056
(0.020)
-0.2083***
(0.025)
0.0007***
(0.000)
-0.0002
(0.000)

-0.0297**
(0.014)
4.1408***
(1.109)
-0.0307***
(0.010)
0.0028**
(0.001)
0.0080***
(0.002)
-0.0005**
(0.000)
0.0021***
(0.001)
0.0467*
(0.026)
-0.2479***
(0.047)
0.0001
(0.000)
0.0008*
(0.000)

-0.0089
(0.008)
4.8050***
(0.956)
-0.0257***
(0.006)
0.0023**
(0.001)
0.0117***
(0.002)
-0.0002*
(0.000)
0.0006*
(0.000)
0.0095
(0.015)
-0.2345***
(0.029)
0.0006***
(0.000)
-0.0002
(0.000)

0.0020
(0.008)
-0.1220
(2.016)
0.0037
(0.013)
-0.0003
(0.000)
0.0010
(0.002)
0.0000
(0.000)
-0.0001
(0.000)
0.0235
(0.028)
-0.0304
(0.119)
0.0001
(0.000)
-0.0004
(0.001)

20,118
0.499
Yes
Yes
No

10,333
0.474
Yes
Yes
No

9,785
0.652
Yes
Yes
No

14,859
0.477
Yes
Yes
No

5,259
0.717
Yes
Yes
No

Notes: The table reports regression results of a linear probability model in which the dependent variable is an indicator for
successful loan applications by firm i to bank b at time (quarter) t. Standard errors, clustered at the district level, are reported in
parentheses. * significant at 10%; ** significant at 5%; *** significant at 1%.

30

31
246
0.406
Yes

246
0.395
Yes

0.022
(0.015)

246
0.408
Yes

0.008**
(0.003)

246
0.407
Yes

0.023***
(0.007)

0.025**
(0.009)

-0.677***
(0.136)
2.607***
(0.360)
1.243***
(0.236)
0.079***
(0.019)
0.226***
(0.053)

246
0.441
Yes

246
0.414
Yes

0.017
(0.018)

-0.256***
(0.066)
2.409***
(0.535)
0.830**
(0.355)
0.046
(0.027)
0.183***
(0.044)

(6)

246
0.446
Yes

0.008**
(0.003)

-0.488***
(0.089)
3.197***
(0.340)
1.067***
(0.204)
0.119***
(0.021)
0.155**
(0.067)
0.051***
(0.014)

(7)

246
0.436
Yes

0.029***
(0.009)

0.021*
(0.010)

-0.759***
(0.162)
2.672***
(0.296)
1.198***
(0.231)
0.076***
(0.020)
0.227***
(0.064)

(8)

Notes: The table reports regression results of a linear model in which the dependent variable is the log difference of total loan volumes granted to district-specific industry j by bank b between the
(2010:m1-2011:m6) period and the (2011:m7-2012:m12) period. The periods are separated by the introduction of the IT-lite monetary policy framework (2011:m7). All bank-level variables are measured
as of 2011:Q2 (pre-IT lite). In columns 5-8 the observations are weighted by the inverse of the number of times each bank appears in the dataset (in a pair with a borrowing industry). The weighting
scheme controls for the fact that the balance sheets of very active banks (that lend to many industries) appear in the dataset more frequently than those of less active banks. Robust standard errors that
are clustered at the district-specific industry level are reported in parentheses. * significant at 10%; ** significant at 5%; *** significant at 1%.

Observations
R2
Industry-district FE

CAPITAL I NTERBANK

LIQU IDITY I NTERBANK

CAPITAL

LIQU IDITY

NPL

RISK PROFILE

SIZE

FOREIGN BANK

-0.494***
(0.104)
3.064***
(0.480)
1.034***
(0.227)
0.115***
(0.028)
0.138
(0.083)
0.052***
(0.015)

-0.276***
(0.042)
3.203***
(0.382)
1.055***
(0.202)
0.109***
(0.022)
0.143*
(0.074)
0.062***
(0.017)

-0.286***
(0.074)
2.271***
(0.517)
0.911**
(0.330)
0.046*
(0.022)
0.163**
(0.058)

-0.287***
(0.049)
2.958***
(0.529)
0.995***
(0.226)
0.098***
(0.030)
0.124
(0.087)
0.056**
(0.020)

I NTERBANK

(5)
Weighted

(4)

Unweighted

(3)

DLOAN AMOUNT

(2)

(1)

Dep. Var.:

Table 9: Intensive margin of credit supply and monetary conditions Alternative identification strategy