Relationship Between Interest Rates and the Level of Investment in Uganda Assignment

Relationship Between Interest Rates and the Level of Investment in Uganda Assignment Words: 7599

CHAPTER ONE 1. 0Introduction This study is about the relationship between interest rates and the level of investment in Uganda. This chapter presents the background to the study, the statement of the problem, purpose of the study, objectives of the study, research questions, and scope of the study, significance of the study, the conceptual model and the organizational setup of the study. 1. 1Background to the study Interest rates are likely to experience an up ward pressure as the central bank steps up efforts to curb inflationary pressures from increased government spending.

However, the increase in interest on short term instruments such as treasury bills will be controlled by issues on long term bonds whatever the case. Commercial banks are not likely to significantly alter their plans to lend to the private sector beyond the existing strategies such that interest rates will remain higher many agents can afford (kakongoro, 2003). Literature on economic growth and development; Few economic ideas are as intuitive as the notion that increasing investment is a good way to raise output and income.

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The recent empirical research also supports this view the rate of investment is robustly and positively correlated with the rate of economic growth in cross country, long run growth regressions. Growth was constrained by lack of investment that in turn was constrained by lack of finance. Consequently, if financing was made available, it was argued, physical capital investment and ultimately, growth would follow (Reinikka, 2001). The rate of investment will be slower. This is so because the higher the rate of investment the higher the cost and lower is the rate of return.

Consequently, the rate of return becomes equal to the rate of interest much quicker putting an end to further investment during a given period of time. The net investment will take place at the rate of return equal to the market rate of interest (Vaish, 2000). 1. 2Key information and background of Uganda clays limited Uganda Clays Limited was incorporated as a private limited liability company on 10 July, 1950 in Kampala, Uganda. On 4 March 1999, UCL was converted into a public limited liability company under section 33 of the companies Act.

Uganda Clays limited is an important supplier of building clay products in the housing and construction industry. Its main business is the production and sale of roofing tiles, walling materials such as burnt clay bricks, interlocking and corner blocks, partition blocks, ventilators, suspended floor units, floor tiles, pipes, other building materials and decorative clay products such as grilles, flower pots, vases and other pottery. In the financial year ended 31 December, 1998, the company’s turn over was UShs 2. billion and the profit after taxation was UShs 98. 6 million. For the six months ended 30 June, 1999, the accounts of the company showed a turn over of UShs 1. 6 billion and profit after tax of UShs 133. 9 million. Uganda clays Shortlisted on Uganda Securities Exchange in 2000, as a way of raising the share capital. 1. 3Statement of the problem Borrowing costs continue to raise concern as interest rates show no signal of coming down. Bank of Uganda, in a pre-emptive move to limit inflationary pressures is gradually increasing the bank rate (Mutebile, 2003).

However, Ugandans are still faced with numerous bank charges that affect customers ability to invest or take up the new products commercial and financial institutions offer them (Mutebile, 2006). It is against the above knowledge gap that the researcher sought to examine the relationship between interest rates and the level of investment. 1. 4 Purpose of the Study The study sought to establish the relationship between interest rates and the level of investment in Uganda. 1. 5Research Objectives i. To identify the various types of investment i. To analyze the relationship between interest rates and the level of investment in Uganda. iii. To assess the causes of interest rate changes in the financial institutions. 1. 6 Scope of the study Subject scope; The study focused on the relationship between interest rates as an independent variable and the level of investment as the dependent variable. Time Scope: information obtained related to the period 1998 to date. 1. 7The significance of the study The study will be useful to the following parties. i.

To the student: the study was presented as research completed for the award of a Diploma in Accountancy of Namasuba College of Commerce. ii. To the academic world: other scholars will be able to use this research as reading material to understand better the effect of interest rates on investment. iii. To the business world: this study will help business institutions especially banking institutions and beginner firms on how to guard against the effects of interest rates on investment. Donor communities and the World Bank may use the study to increase on financial resources in order to raise investment levels. v. To the government: the study would help government institutions such as the central bank in designing macro economic policies that will protect the integrity of investments financially and enable a favorable investment atmosphere. 1. 8The conceptual framework The conceptual frame work is a development of an extensive review on existing literature. The model explains the relationship between the variables under study. It describes interest rates (independent variable) and the level of investment (dependent variable. ) Fig. 1 Conceptual Model . 9Limitations of the study ???The resources were not enough. The researcher never had enough money to cover all the budgeted expenditures. ???The weather at some time disturbed the researcher ???The researcher got caught on the time. ???At some point it was had for the researcher to access some information from the libraries. CHAPTER TWO LITERATURE REVIEW 2. 0 Introduction This chapter discusses the literature both theoretical and empirical on the effect of interest rates on investments and the relationship that exists between the two variables.

The chapter is organized under the following subheadings; definition of key terms and types of investment, analysis of the relationship between interest rates and the level of investment and assessing the causes of interest rates changes in financial institutions. 2. 1 Definition of key terms Interest rate A rate which is charged or paid for the use of money. An interest rate is often expressed as an annual percentage of the principal. It is calculated by dividing the amount of interest by the amount of principal.

Interest rates often change as a result of inflation and Federal Reserve policies. For example, if a lender (such as a bank) charges a customer $90 in a year on a loan of $1000, then the interest rate would be 90/1000 *100% = 9%. (InvestorWords. com) Interest rate is charged when the money is being borrowed, and paid when it is being loaned. Interest is paid by a bank when money is deposited because the bank uses that money to make loans. The bank then charges the borrower a little more for that same money so it can make a profit for its service.

When interest rates are high, fewer people and businesses can afford to borrow, so this usually slows the economy down. However, more people will save (if they can) because they receive more on their savings rate. When the central banks set interest rates, such as the U. S. Fed Funds rate, it is the amount they charge other banks to borrow money. This is a critical interest rate, in that it affects the entire supply of money, and hence the health of the economy. (Kimberly Amadeo). Investment Investment can be defined as Money committed or property acquired for future income.

It can also be broadly referred to as the trade off between risk and reward while aiming for incremental gain and preservation of the invested amount (principal). In contrast, speculation aims at ‘high gain or heavy loss,’ and gambling at ‘out of proportion gain or total loss. In economics, investment means creation of capital or goods capable of producing other goods or services. Expenditure on education and health is recognized as an investment in human capital, and research and development in intellectual capital.

Return on investment (ROI) is a key measure of a firm’s performance. Types of Investment Two main classes of investment are (1) Fixed income investment such as bonds, fixed deposits, preference shares, and (2) Variable income investment such as business ownership (equities), property ownership. There are many different types of investment. Broadly speaking, they fit into four asset classes: ???Short term deposits ???Bonds ???Property ???Shares Within each asset class there are investments to suit different kinds of risk, duration, returns and liquidity.

There are also different ways of investing. You can take the ‘DIY’ route and invest directly in one or more of the asset classes. Or, you can invest in a managed fund where fund managers make a wide range of investment decisions for you. Below is a brief description of each type of investment. (1) Short term deposits Bank savings accounts The simplest kind of short term (or cash) investment is a savings account. Returns are low compared to other investments, but returns are guaranteed by the bank – so your investment won’t drop in value in the short term like others might.

You can withdraw part or all of your money whenever you want (total liquidity). This makes them ideal for short term savings goals or as a place to keep your emergency fund – They’re not a good investment option for medium or long term goals. Bank fixed term investments You give the bank a lump sum for a set period (a fixed term) usually three, six or 12 months. Your money is locked away for the fixed term. In return, you get a higher interest rate than you could get in a straight savings account. You may be able to withdraw your money, but you will get a lower rate.

These can be a good short or medium term investment, depending on interest rates. Interest rates are always changing – sometimes they go through a ‘high phase’ – this is usually a good time to have money on fixed term deposit. (2) Bonds A bond is like an IOU issued by a government or a company. You give them money for a certain period, and they promise to pay a certain interest rate and re-pay you on maturity. Bonds lock your money away for a set period of time, but they can sometimes be traded. Generally, they aren’t a good short term investment.

Small investors don’t usually invest directly in bonds, it’s more usual to go through a managed fund. Finance company debentures are a kind of bond. These are not usually able to be traded. Finance companies come in many shapes and sizes, and the risk of their investments varies as well. (3) Property Property is a popular investment asset but it is important to realize that if you invest directly in property you are holding an asset which is harder to dispose of than some other assets. Your own property may of course be your biggest asset, but you cannot benefit from its value if you also need somewhere to live.

You could invest in other properties, such as buy to let, but it may be better to consider investing in property via investment funds. Not only do these offer you the option to cash in your investment on a daily basis, but they also offer you the benefits of exposure to commercial property investment. Rental property Owning property rented to individuals or businesses can be a safe and profitable investment. Returns from property investment come from rental income, after deducting expenses, and from the increase in the value of property over time.

People debate whether property is a better investment than shares. What’s important to remember is that they’re different forms of investment. If well managed both can provide good long-term results. If not, and without the right knowledge and attention, investment in shares and property can result in significant losses. It’s easy to see losses on the share market because the prices are available almost daily. Losses on property investment are generally not published, so don’t believe anyone who suggests “you can’t go wrong with property investment”. That’s not to say ou can’t benefit from property as an investment. There are several different ways in investing in property – directly or indirectly. If you’re interested in direct property investment, you can manage the day-to-day administration of your rental property yourself, or use a property management company to do it for you. A property management company takes on the tasks of finding tenants, collecting the rent and bond monies, and attending to maintenance issues etc on your behalf. The fees charged for these services are usually a percentage of the rental income.

For an indirect property investment, you can invest in a Kiwi Saver scheme, private superannuation scheme or managed investment fund that invests some of your money in property. This could be by way of ownership of rented buildings or by way of an investment in shares of public companies, which specialize in property ownership. This is another option that gives you the many advantages of property ownership without having to find the property and do the hands on management yourself. This type of indirect property investment also makes it easier for the average investor to get the benefits of diversification. 4) Shares By investing in shares in a public company listed on a stock exchange you get the right to share in the future income and value of that company. Your return can come in two ways: ???Dividends paid out of the profits made by the company. ???Capital gains made because you’re able at some time to sell your shares for more than you paid. Gains may reflect the fact that the company has grown or improved its performance or that the investment community sees that it has improved future prospects.

Any loss or gain in value is said to be ‘realized’ if you sell the shares right there and then. If you hold onto them the loss or gain is ‘unrealized’. The price of shares in any individual public listed company can vary from day to day. On any day some shares may go up in value and some down, depending on how investors view the prospects of each company. And all of the listed company shares in a particular country or industry may increase or decrease in price because of rises and falls in economic confidence or changes in the particular industry.

There are ranges of complex factors which influence share prices on a daily basis and no one can accurately predict what price listed shares will be in the future. We know from past experience that some companies will fail and some will flourish. Overall the long-term trend is for the value of listed companies to increase at a rate higher than inflation. Therefore by investing in a wide range of companies operating in a range of industries and countries, an investor has a good chance of making long-term gains.

Remember that in assessing the return from shares you need to take into account dividends received as well as capital gains. You should also expect that the dividends from the shares that you own will increase over time. Because of the volatility of share prices (i. e. the fact that in the short term they may go up or down) it’s not wise to invest funds which you need in the short term, in shares. When you need your money you’ll generally be able to sell your shares, but the price at the time may be below your purchase price. Shares should be used as a long-term investment.

Direct investment You can invest directly in term deposits, bonds, shares and property or you can place your time specialists look after the investment decisions for you. For some people making their own investment decisions and taking a more hands on approach gives them personal satisfaction and saves them paying management fees. If you’re interested in direct investment talk to an accountant or adviser. Direct investment in shares in specific companies or selected rental properties should only be undertaken if you have detailed knowledge or are prepared to pay for specialist advice.

Particularly in the case of property investment, you need to be willing to either spend the necessary time on administration and management, or to pay a property management company to do this for you. People who want to acquire their own property investment generally have to rely more on their own knowledge and judgment. It’s therefore important to read publications and attend property investment seminars before making any decisions. Issues you need to consider include the location and type of property (e. g. ity or rural, residential, retail, warehouse, manufacturing, office or special purpose property such as motels or car parking buildings etc), financing and taxation arrangements, price, condition of property and maintenance requirements, lease terms, selection of sound tenants, record keeping etc. Owning a property is like operating a small business. Know the business, put time into the detail and you’ve a good chance of doing well. Rushing in without doing your homework can lead to disaster or at least a risk that you’ll lose some of your capital.

If you want to invest directly in shares or property remember the importance of duration, risk, diversification, returns and liquidity. Managed funds In a managed fund your money is pooled with other investors, and a professional fund manager invests it in a variety of investments. Managed funds come in many forms – different funds invest in different types of assets for different objectives. Some funds target all-out growth and invest more in high risk shares than others – they could rise dramatically or just as easily drop dramatically.

These are funds for money that isn’t absolutely vital to your future plans. Other funds look for solid long term growth from a range of deposits, bonds, and shares – a better place for a lump sum intended for your retirement. Financial advisers, banks and insurance companies can all advise you on managed funds that match your investment needs. Note there used to be a tax disadvantage in investing in managed funds. However this is no longer the case with managed funds that are PIEs (Portfolio Investment Entities).

Managed funds allow investors access to markets which would otherwise be difficult to invest in. For example, managed funds let you invest overseas or in commercial property. Managed funds usually involve paying management and administration fees. These can vary a lot, so check to see what you’d have to pay. Use our product comparison checklist to compare several funds. 2. 2Analysis of the relationship between interest rates and the level of investment The effect of interest rates on investment in an environment where firms make irreversible investment and learn overtime.

Changes in the interest rate affect both the cost of capital and cost of delaying investment. At low rates, increasing the interest rate stimulates investment by raising the cost of delay. Existing evidence support the hypothesis that firms change the time at which they invest in response to changes in interest rates (Chetty, 2004). In line with the above argument, Bhasicaran (2003) and Alm (2003) highlight that high rates do not only deter business from borrowing money but they also slow down expansion.

Sharing the same view as the above, Kihangire (1995) emphasizes that changes in interest rates should have an effect on the level of planned investment under taken by private sector businesses in the economy. Kihangire (1995 also stresses that a fall in interest rates should decrease cost of investment relative to the potential yield and as a result plan capital investment project on the margin may become worthwhile . a firm will only invest if the discounted yield exceeds the cost of the project.

According to Bibangamba (1998) financial managers normally look at interest rates, inflation, and exchanged rates before undertaking serious investments decision. Basically, these are all prices that one has to pay attention to in one way or another, since they influence the potential outcome of the investment. In agreement Mugisha (1995) also emphasizes that a variable surcharge may be applied over and above the official bank rate to discourage frequent heavy borrowing. All borrowings from Bank of Uganda will be netted out from a commercial bank’s overall liquidity position to derive an “adjusted” liquidity position.

In line with the above view, growth was constrained by lack of investment that, in turn, was constrained by lack of finance. Consequently, if financing was made available, it was argued, physical capital investments and ultimately growth would follow (Remikka and Jakob, 2001) Mutebile (2003), stresses that borrowing costs continue to raise continue to raise concern as interest rates show no signal of coming down, Bank of Uganda (BOU), in pre-emptive over to limit inflationary pressures is gradually increasing the bank rate.

However, this upward move in bank rate signals a gradual crowding out of private sector as borrowing from financial institutions becomes expensive. Similar studies by Maxwell (1989) shows that Interest rate changes affect the value of an interest earning as rates fall the value increases and as rates rise the value falls. This risk is very apparent in the bond market as Pindy (1988) agrees to the fact that, the impact of interest rates on your personal extends well beyond your debts. Interest rates on your personal finances extend well your debts.

Interest rates affect your equity portfolio too. There is plenty of evidence. Indeed, in history to prove that interest rates can have a profound impact on the stock market. As a result, the stock market watches the bond market like a hawk. There are basically six ways in which changes in interest rates affect the stock market investors. Changes in interest rates directly affect corporate profits. Companies need to borrow funds to finance expansion programmes, meet working capital requirements, purchase equipment and maintain inventory of raw materials and finished goods.

Low interest rates lowers the cost of money and increase the profits margins of companies since share prices are directly linked to corporate profits, the lowering of interest rates always has a bluish effect on the stock market ( Kasekende and Egol , 1998). In agreement, Ssewanyana (2006) argues that changes in interest rates affect the general demand for goods and services in the economy. When interest rates are lowered, people tend to spend more and save less.

When interest rates are raised the reverse happens, increased consumer spending as a consequence of lower interest rates leads to an expansion in the demand for the goods and services provided by corporate sectors. Inline with the same studies Allum (2006) states that lower interest rates also reduce the cost of borrowing money for the purchase of shares. This is another way in which the lowering of interest rates has a bullish effect on stock markets. Similar studies by Mukwanason, 1997 (indicate that changes in interest rates affect the way companies finance their operations.

During a high interest rates regime, companies prefer to raise funds through issue of equity shares rather than through bonds and high cost bank loans. When interest rates fall, bank loans becomes a cheaper source of finance than equity, companies prefer to borrow money from banks and raise their debt equity relative attractiveness of competing financial assets like shares, bonds and other fixed interest investments. Low interest rates generally tend to cause a shift of investible funds from bonds, banks and company deposits to equity shares and vice versa.

In view of the above, Muhumuza (2006) notes that lowering of interest rates generally lifts the stock market. Conversely, stock market tends to slip as interest rates rise. This is not to say that this happens in perfect coordination. It takes time for changes in interest rates to work their way through the markets in the manner described above. For an alert investor, though changes in interest rates offer pointer to switch from debt investment to the equity market when interest rates falls and vice versa.

The results of empirical finding of the impact of interest rate and supply of credit from the banking system on investment using the switching investment function (Mthuli, 1998); also the interest rates effect rates effect on investment is to reduce investment by ? E92 million for every one percentage point rise in the real interest rates. Also Seck and Nill (1993) describe that there appears to be a positive relation between the stock of financial assets held in the financial system, banking sector credit to the private sector and the level of investment.

In view of the above Oshikoya (2000) indicates that particular attraction of stock market also relate to their potential to motivate external financial inflows. Further, while higher bank base financial savings are often crowded out of productive investments through the over bearing influence of the public sector, equity flow through the stock markets is directly tied to the real investments. Similar studies by Flannery (2003) highlight the relationship between interest rates sensitivity of common stock returns and the maturity composition of the firm’s normal contracts.

Using a sample of activity traded commercial banks and stock savings and loan association, common stock returns are found to be correlated with interest rates changes. The co-movement of stock returns and interest rates changes is positively related to the size of the maturity difference between the firm’s normal assets and liabilities. According to Hallwood and Donald (1989), the relationship between interest rates and investment, since the relationship can apply to another types of investment.

Considering the purchase of housing as an example, most people borrow money, called “mortgage”, to buy the houses they want. As they borrow, they have to repay the sum borrowed and the interest on it. The way to repay is normally to remit monthly mortgage payments to the lender. Thus ,even if the same amount of money is borrowed , the monthly mortgage payment would be high (low ), if the interest rate is high ( low). as a result, more people would like to borrow money to buy houses at he time of low interest rates, because such low interest rates actually mean lower monthly mortgage payments.

This explains why more people wish to buy houses or “investment” decreases when the interest rate is high. In line with above, Kakongoro (2006) replicates that the increase in interest or short term instruments such as treasury bills will be controlled by issues on long-term bonds. Whatever the case, commercial banks are not likely to significantly alter their plans to lend to the private sector beyond the existing strategies such that interest rates will remain higher than many agents can afford. Contrasting studies by

Moore, Maccini and Schaller (2004), that economic theory predicts a negative relationship between inventories and the real interest rate, but previous empirical studies (mostly based on the older stock adjustment model) have found little evidence of such a relationship. Moore et al derive a parametric test for the role of the interest rate in specifications based on the firm’s optimization problems. These Euler equation and decision rule tests mirror earlier evidence, finding like role for the interest rate.

Contrasting view by Musinguzi (1994) shows that high interest rates have helped to propel the economic growth. Countries have received international credit for maintain high growth rate over the past few years. I addition, foreign investors with cash deposits in interest bearing account have also been keen on taking advantage of the high rates which guarantee a good return on their investments. Same report emphasizes that commercial banks are also expecting the high interest rates to encourage ore and more people to save in an attempt to receive good interests on their incomes (Alam, 2003). . 3Assess causes of interest rates changes in financial institutions An interest rate is the price a borrower pays for the use of money he doesn’t own, and the return a lender receives for deferring his consumption, by lending to the borrower (Chetty, 2004). This is further enhanced by Vaish (200), who describes interest rates as a payment made by a borrower to the lender of funds. Interest rates are normally expressed as a percentage over the period of one year. The process of change in how economies and financial markets interact also complicates task of the central bank.

Our understanding of the how these are, first the behavior of forward interest rates in financial markets and second the pattern of external imbalances (Geithner, 2006). Geithner (2006) also agrees to the fact that the demographic shifts under way in the major economics seemed to have contributed to an increase in demand for longer maturity bonds, but the effect of these changes seemed likely to be small in comparison to the changes in the behavior orf forward interest rates.

The fact that official purchases of financial are driven by different factors than those driving private investors suggest that we would probably see some what different combination of capital flows. , exchange rates and interest rates in the absence of official intervention. This makes the task of assessing the probable trajectory of growth and inflation more complicated, though studies by the Federal Reserve and outside suggest that the scale of foreign official accumulation has put downward pressure on interest rates with estimates of the effect ranging from small to quite significant.

Similarly studies conducted by McIntosh, Janvry and Sadoulet (2005) observe that the rising competition among finance institutions does not lead to an increase in client drop out rate, but induces a decline in repayment performance and savings deposited with the incumbent , suggesting rising multiple loan taking by clients. This joint effect on drop out and repayment is consistent with some negative e information about clients and is being shared across lenders. However, they observed decline in repayment rates in a context of raising multiple loan taking shows that information sharing about clients is far from complete.

CHAPTER THREE METHODOLOGY 3. 0 Introduction This chapter presents the methodology that was used to collect the data in the study. It explains the research design which the researcher used to collect the data, data type, data sources, data collection methods, data processing and analysis as well as presentation of the findings. 3. 1 Research design A cross section study was used. It was a combination of exploratory and descriptive methods. This approach was suitable in describing the effect of interest rates on investment. 3. 2Data type The nature of data that was collected for purposes of this study was secondary data. . 3Data sources Secondary data was obtained from journals, textbooks, presentations, research reports, periodicals and the internet. 3. 4Data collection Methods The researcher reviewed existing literature on the variables under study. The researcher was using a questionnaire guide to collect data on the objectives. Thus, documentary methods of data collection were used in the study. The researcher visited a number of libraries including British council library, Uganda institute of Banker’s resource center, Makerere University library and Makerere University Business School library, Nakawa

College of Business Library, Credit reference Bureau Brochures besides surfing the internet for journal articles. 3. 5Data Processing and Analysis After collecting data from the different secondary sources, the data was processed by editing. Editing was done to improve on the accuracy of the data and relevance with a view to match the data according to themes. The researcher compared and contrasted the views of different scholars in line with the literature reviewed and objectives of the study. Emerging issues were discussed for purposes of drawing conclusions. Descriptive analysis was used since only qualitative data was used. . 6Presentation of findings The researcher compared and contrasted the views of different scholars in line with the literature reviewed and objectives of the study. Emerging issues were discussed for purpose of drawing conclusions. CHAPTER FOUR PRESENTATION AND DISCUSSION OF FINDINGS 4. 0Introduction This chapter presents a comprehensive analysis of the different views from different authors in respect of the major objectives of the study. 4. 1 Findings on the types of investment Four asset classes of investment were indentified: ???Short term deposits ???Bonds ???Property ???Shares

Within each asset class there are investments to suit different kinds of risk, duration, returns and liquidity. There are also different ways of investing. You can take the ‘DIY’ route and invest directly in one or more of the asset classes. Or, you can invest in a managed fund where fund managers make a wide range of investment decisions for you. (1) Short term deposits Bank savings accounts The simplest kind of short term (or cash) investment is a savings account. Returns are low compared to other investments, but returns are guaranteed by the bank – so your investment won’t drop in value in the short term like others might.

You can withdraw part or all of your money whenever you want (total liquidity). This makes them ideal for short term savings goals or as a place to keep your emergency fund – They’re not a good investment option for medium or long term goals. Bank fixed term investments You give the bank a lump sum for a set period (a fixed term) usually three, six or 12 months. Your money is locked away for the fixed term. In return, you get a higher interest rate than you could get in a straight savings account. You may be able to withdraw your money, but you will get a lower rate.

These can be a good short or medium term investment, depending on interest rates. Interest rates are always changing – sometimes they go through a ‘high phase’ – this is usually a good time to have money on fixed term deposit. (2) Bonds A bond is like an IOU issued by a government or a company. You give them money for a certain period, and they promise to pay a certain interest rate and re-pay you on maturity. Bonds lock your money away for a set period of time, but they can sometimes be traded. Generally, they aren’t a good short term investment.

Small investors don’t usually invest directly in bonds, it’s more usual to go through a managed fund. Finance company debentures are a kind of bond. (3) Property Property is a popular investment asset but it is important to realize that if you invest directly in property you are holding an asset which is harder to dispose of than some other assets. Your own property may of course be your biggest asset, but you cannot benefit from its value if you also need somewhere to live. You could invest in other properties, such as buy to let, but it may be better to consider investing in property via investment funds.

Not only do these offer you the option to cash in your investment on a daily basis, but they also offer you the benefits of exposure to commercial property investment. Rental property Owning property rented to individuals or businesses can be a safe and profitable investment. Returns from property investment come from rental income, after deducting expenses, and from the increase in the value of property over time. (4) Shares By investing in shares in a public company listed on a stock exchange you get the right to share in the future income and value of that company.

Your return can come in two ways: ???Dividends paid out of the profits made by the company. ???Capital gains made because you’re able at some time to sell your shares for more than you paid. Gains may reflect the fact that the company has grown or improved its performance or that the investment community sees that it has improved future prospects. Direct investment You can invest directly in term deposits, bonds, shares and property or you can place your time specialists look after the investment decisions for you.

Direct investment in shares in specific companies or selected rental properties should only be undertaken if you have detailed knowledge or are prepared to pay for specialist advice. Particularly in the case of property investment, you need to be willing to either spend the necessary time on administration and management, or to pay a property management company to do this for you. Managed funds In a managed fund, your money is pooled with other investors, and a professional fund manager invests it in a variety of investments.

Managed funds come in many forms – different funds invest in different types of assets for different objectives. Some funds target all-out growth and invest more in high risk shares than others – they could rise dramatically or just as easily drop dramatically. These are funds for money that isn’t absolutely vital to your future plans. Other funds look for solid long term growth from a range of deposits, bonds, and shares – a better place for a lump sum intended for your retirement. Financial advisers, banks and insurance companies can all advise you on managed funds that match your investment needs. . 2Findings on the relationship between interest rates and the levels of Investment in Uganda. Several authors including Bhaskaran (2003), Alam (2003), Chetty (2004), Report (2005), Reimikka and Job (2001), Mutebile (2003), Flannery (2003), Kakongoro (2006), observe that high interest rates act as an impediment to the would be investors and also it reduces the returns on investments in terms of profitability since a lot of the investment returns would be consumed by the price for debt which is the interest rates on such debts.

In the same breath, high costs of borrowing also slow down expansion of businesses. High cost of capital hinder the growth in investment, hence it is away of financial institution trying to crowd out the private sector borrowing on which the economic growth depends. In contrast to the views of the above authors, Moore (2004), Alan (2003), Maccini (2004) and Schaller (2004) argue that interest for maintaining high growth rate over the last few years perhaps because of the above phenomena.

Also high interest rates act as an inducement (incentives) to foreign investors since they can reap huge returns on their investment. However, in the same reflection commercial banks also expect the high interest rates to encourage more and more people to save in an attempt to receive goods interests on their incomes. 4. Findings on the causes of interest rates changes in financial Institutions According to Vaish (2000), Geithner (2006), Greenspan (2006), Sadoulet, McIntosh and Janvry (2005) the change in interest rates is influenced by several factors such as; Expected increase in inflation since this eats up the value of bank borrowing rendering a falling the value of such loan borrowing , the real purchase power of these monies falls so to guard against this economic behavior in terms of inflation increases banks have to charge a high interest rate depending on their economic predictions.

In agreement, cowdell (1994) states that the high risks attached to some borrowers for example long term borrowers also introduce in an element of risk which banks can only be secured by charging such investors high rates to enable them effect the repayment of such bank debts in time or even before time with fear that it might accumulate beyond what the borrower can afford to pay. In relation to the above study, Demers (1999) also indicates tat the degree of competition among the increasing or lowering the interest rates.

Increased competition introduces fear of loosing out crowd of clients to new competitors who might sought to offer lower rates as a bait of capturing a big base of clientele. Finally studies by Cukierman (stresses that the government or central bank can impact on the change in interest rates by increasing the borrowing requirements by the in financial institutions such as banks, hence the commercial banks pass this to the clients which could be the investor in terms of increased price on borrowing. CHAPTER FIVE CONCLUSIONS AND RECOMMENDATIONS 5. 1 Introduction

This chapter presents conclusions and recommendations in relation to the study objectives and research questions as discussed in the previous chapter. 5. 2 Conclusions Two main classes of investment are (1) Fixed income investment such as bonds, fixed deposits, preference shares, and (2) Variable income investment such as business ownership (equities), property ownership. Many of the scholars present rates as being one of the major determinants of investment in any given economy. If not taken into account may act as a great impediment to the growth in investment levels.

Interest rates changes in the financial institutions is caused by factors that introduces uncertainty to these credit systems or banking hence factors like high inflation rates , risks or failure to pay in time , degree of competition among others in these banks, hence leading to either high or low rates of interests on borrowing. Growth in investment current is significantly being affected by the increase frequency of load shading impacting negatively on the manufacturing sector which generate export products that is one of the eminent earner of foreign currency hence giving a boost to the G.

D. P. 5. 3 Recommendations There is need for massive sensitization of the population about the various investment types and their benefits in order to break the savings investment gap that exists in the country. The central and commercial bank should regulate inflation levels which impacts or causes high rates of interest. In a bid to increase investment the government should give low interest grants or loans the private investors. Electricity crisis should be curbed through building new electricity dams on Karuma falls and Nyagak River to increase power generated.

In order to promote growth in investment levels the government should reduce the bureaucracy that is involved with getting the licenses and perhaps support the exporters by funding their activities. Investors should evaluate the effect of loans or debt funding before going for them otherwise their efforts/ investments can end up getting frustrated. Financial institutions can promote investments by reducing rates offered to the big borrowers and perhaps monitoring the activities of these interests on savings so as to promote investments. Low interest loans should be given to group of investors to enhance increased level of investments.

The levels in investments can be increased through reducing high taxes, interest rates in order to attract Foreign Director Investors. 5. 4 Areas for further studies In view of the study, I recommend that other researchers focus on:- (i)Interest rates on firm’s profitability (ii)Effect of taxes on growth in investments. Appendix 1 Guide Questionnaire for Collection of Secondary Data 1. What is interest rate? 2. What is investment? 3. What are the causes of interest rate changes in financial institutions? 4. What are the classes of investment? 5. What are the ways in which interest rates affect the stock market investors? . What are the types of investment? 7. What is the relationship between interest rates and the level of investment? 8. What is the background of interest rates and the level of investment? 9. What are the significance of interest rates and the level of investment? Appendix 2 BUDGET FOR THE RESEARCH ACTIVITYCOST PER ITEMTOTAL (Ushs) Transport costs50,000 Calling costs360 per unit x 50 units18,000 Stationary for writing Papers 3,300 Pens @500 x3 1,500 Pencils @100 200 Staples and pins 1,000 Files @ 1000 x 2 2,0008000

Internet surfing costs50 per minute10,000 Typing and printing costs500 per page40,000 Purchase of relevant literature150,000150,000 Lunch & refreshments40,00040,000 Miscellaneous expenses75,00075,000 GRAND TOTAL350,800 REFERENCES Abid, A. Bhascaran, M. R. (2003). High Interest Rates Hurting Businesses The New Vision, March. 13th, Vol 3. No. 74. Chetty, R. (2004). Interest Rates and Backward-Bending Investment. NBER Working Paper No. 10354. National Bureau of Economic Research. Demers, Michael. (1991). Investment under Uncertainty, Irreversibility and the Arrival of information over time.

Review of Economic Studies, Blackwell Publishing, and Vol. 58 (2). Page 333-50. David, K. (1995). An Overview of formal Lending Interest Rates on The common Stock Returns of Financial Institutions Flannery, M. James, C. M (2000). American Finance Association, Vol. 39, No. 4. Hen,j. , Brinkman and Carl,G. (1998) Fourth year of positive Growth in Africa. Hollywood and Donald (1989) the theory of Financial and Monetary depth . Wiley Publishers, New York. Jossy, B. (1998). Financial Sector reform and Economic development Journal of Banking. Vol. 3 No. 2 Kampala Kakongoro, M looking forward on Uganda’s Economy.

Uganda in the Vision Magazines. (2006). Musoke, W. (1999). Inflation, Interest and Exchange Rates and Investments. The Industrial Finance, Vol. 5, No. 1. Mugisa, E. (1995). The Banking Environment in Uganda in the 1990’s Journal of Banking. Vol. 3. No. 1. Mukwanason, H. Interest Rate Policy and the saving ???Investment process in Uganda. Journal of Banking, Vol. 2001. (1997) Musinguzi, F. (1994). Financial Markets in Uganda and Interest Rates policy. Kampala. Maxwell, F. (1987), Saving, Investments, Growth and the cost of financial regression. World Development. Vol. 8. No. 2. McIntosh, C. , Allain, Jarvey, and Sadonlet, E. 2005). How rising competition among Microfinance Institutions affects Incumbent Lenders. The Economic Journal, Vol. 115. Issue 506. Ncube, M. (1998). Financial Markets and Monetary Policy in Africa. Pindyck, Roberts. (1998). Irreversible Investment, Capacity Choice, and the valve of the firm. American Economic association, Vol. 78 (5) page 969-85. Reinikka, R, Collier, P. )2001) Constraints to Investment . Uganda’s Recovery Foundation Publishers. Suruma,. (2006) Growth as power crisis takes centre stage. The daily Monitor, Vol. 15, No. 129. Tumusime, M. (2006). Charge Realistic rates. The daily Monitor, April. th Vol. 97. Vaish, MC. (2000). Monetary theory . 15TH ED. Vikas Publishing Housing PVT LTD. Wall Street Words: An A to Z Guide to Investment Terms for Today’s Investor by David L. Scott. Copyright ?? 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. Interest Rate Determination in Developing Countries: A Conceptual Framework, Sebastian Edwards Mohsin S. Khan http://www. businessdictionary. com/definition/investment. html Investment Management Association. IMA. com How Do Interest Rates Affect Investments? By Mika Hamilton Investment, by Valentino Piana (2001) Uganda Clays Limited, Prospectus

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