Effect of financial development on domestic private investment in Uganda: evidence from time series approach

Abstract

The role of financial development in fostering the growth of domestic private investment has received enormous attention in the economics literature. In Uganda, there is scanty evidence on the effect of financial development on domestic private investment yet financial development has proved to have significant effect on employment creation and economic growth and subsequently on domestic private investment. This study examines the effect of financial development on domestic private investment in Uganda using time series data obtained from World Development Indicators over a period between 1983 and 2020. The Autoregressive Distributed Lag (ARDL) approach was applied to examine the short run and long run effects of financial development on domestic private investment in Uganda. The study found financial development with a strong and a significant effect on domestic private investment both in the short run and the long run. The study recommends policies that are geared towards promoting financial development through increased provision of enabling environment to financial sector operations so that credit given to private sector increases which in the end contributes to increase in economic activities and thus a substantial increase in the growth of domestic private investment. Furthermore, the government is encouraged to continue pursuing expansionary monetary measures such as offering a relatively low interest rate by the central bank in order for commercial banks to be in position to provide loans at an affordable interest rate as well as providing sufficient interest rates on deposits, and support the growth of domestic private investment. Also, the government should allocate more funds to productive investment projects so that firms find it simpler to get access to these funds which subsequently creates avenues for employment creation and poverty reduction, hence a push to domestic private investment.