Ugandan businesses cut borrowing as credit costs and economic pressures bite

KAMPALA, October 7, 2026 — Borrowing by Ugandan businesses has fallen sharply, with new Bank of Uganda [BoU] data showing a steep decline in loan applications amid concerns over lending costs and rising operating expenses.

The Bank of Uganda’s Credit Demand Survey shows that only 8.8 percent of surveyed businesses applied for a loan in the three months to September 2026, down from 17.6 percent in the previous quarter. The central bank expects the proportion seeking loans to fall further to 4.4 percent in the three months to December.

The decline points to weakening borrowing appetite among businesses at a time when firms are facing higher costs and tighter financial conditions.

The survey, which covered businesses in and around the Kampala metropolitan area, received responses from 91 of the 104 entities targeted. The central bank said the decline in credit demand was probably linked to rising lending rates.

“Rising lending rates” were cited as a likely factor behind the decline in credit demand, according to the central bank.

Commercial banks in the country remained the dominant source of business financing, accounting for 91.7 percent of loan applications during the quarter.

On the other hand, grants and equity financing accounted for the remaining 8.3 percent, while no borrowing was reported from Savings and Credit Cooperative Organisations [SACCOs], microfinance institutions, money lenders, credit institutions or microfinance deposit-taking institutions.

However, the Bank of Uganda’s separate Bank Lending Survey presents a contrasting outlook from the supply side of the credit market.

Local banks expect overall demand for business credit to increase sharply in the three months to December, with a net increase of 72.2 percent. Demand is expected to rise across both small and medium-sized enterprises and large businesses, as well as for short- and long-term loans.

The central bank attributed the anticipated increase to heightened end-of-year trading activity, as businesses stock up ahead of the festive season, rising prices that are increasing working-capital requirements and the start of activities under the new financial year, including borrowing linked to government contracts.

Agricultural financing is also expected to increase ahead of peak sales periods.

The conflicting signals suggest a widening gap between what banks expect businesses to need and what firms are currently prepared to borrow.

The Credit Demand Survey found that businesses that did not borrow cited having sufficient capital as the leading reason, at 33.9 percent. Low business activity accounted for 19.5 percent, while unfavourable interest rates and servicing an existing loan accounted for 18.6 percent.

The Bank Lending Survey also points to mounting risks for borrowers. Banks recorded a net increase of 26.4 percent in expected loan defaults by enterprises, although this was lower than the 48.7 percent recorded in the previous survey.

The central bank said “escalating input costs, particularly fuel and essential commodities”, were squeezing business profitability and increasing the risk of repayment difficulties.

Credit conditions have also tightened across several productive sectors. Banks reported net tightening in building, mortgage, construction and real estate at 20.3 percent, transport and communication at 19.7 percent, mining and quarrying at 13.9 percent, electricity and water at 7.4 percent, and agriculture at 5.8 percent.

Agricultural borrowers are facing additional uncertainty from unpredictable weather, including drought and flood risks, as well as rising production and input costs, the survey found.

Despite these pressures, most banks expect their lending rates to remain unchanged through December. The survey found that 86.2 percent of banks expect lending rates to remain unchanged, while 10.4 percent anticipate an increase and only 3.4 percent expect rates to decline.

The central bank said banks expecting higher rates cited “rising funding costs, liquidity pressures, the scarcity of US dollar funding and the high cost of mobilising local-currency deposits”.

For households, the picture is different. Banks expect to ease credit standards to households, while 83.6 percent of respondents anticipate an increase in household credit demand in the three months to December.

But household borrowers are also considered increasingly vulnerable. Banks recorded a 51.8 percent net increase in household loan defaults in the quarter to September, compared with the 37.8 percent increase anticipated in the previous survey.

The rise was linked to higher living costs, fuel and transport prices, school fees and other end-of-year financial obligations.

The Bank of Uganda said most banks expect the monetary policy stance to remain unchanged in the quarter to December, citing “stable macroeconomic conditions and controlled inflation”.

The two surveys therefore paint a mixed picture of Uganda’s credit market: businesses are currently borrowing less, while banks expect demand to rebound sharply towards the end of the year.

At the same time, higher costs and growing default risks could constrain the ability of businesses and households to take on and service new debt.

https://thecooperator.news/bou-warns-excess-govt-borrowing-could-crowd-out-private-sector/

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