Mechanism of Contagion Credit Risk in Ugandan Banking Sector

摘要

Credit contagion is tendency of a credit crisis in one financial institutions spreading to another and through the whole financial system. It stems from the fact that credit problems in one bank could easily affect the next bank or financial institution like a virus. However much as credit contagion may be deadly, it's not always true that credit problems in one institution will easily spread to the next institution. Financial institutions make money through advancing credit against assets. However the behaviors of these assets that are attached to the credit advance are the main course of contagion effect Once there are two or more banks whose assets portfolio is the same and the assets behave in a similar manner to the economic currents, then a credit problem with one financial institution will easily extend like a virus to the next setting off a contagion credit effect in the financial system. This paper is dedicated to finding out the extent to which different banks within the financial system are exposed to contagion risk as a result of an initial credit problem within a single bank. Evidently there has been a boom in the credit market in Uganda, with such a boom in the market, credit advancement conditions tend to be relaxed in a way to make more clients access credit. However current global events in the sub prime mortgage crisis in the United States exposes several Ugandan institutions indirectly to the spread of this effect within the Ugandan financial system. Currently there seems to be a slow down in the credit market. Therefore empirical findings indicate that there is contagion risk is banking and that an initial failure could generate further failure within the financial system if there is no intervention. Therefore the vulnerability of the banking system in Uganda is very high and measures have to e devised to reduce this risk of vulnerability.