The banking sector is walking a tightrope. On one side lies the ambition to lend and grow in a recovering economy; on the other, an unsettling mix of political uncertainty, shrinking donor support, and the explosive rise of digital loans that has left the financial system exposed to new risks.
A Bank of Uganda (BoU) report paints a sobering picture of what lies ahead.
The Bank Lending Survey Report for quarter one of the 2025/26 financial year (July-September) suggests that the credit market could face a spike in loan defaults in the months leading up to December, as borrowers, both corporate and individual, struggle to meet repayment obligations amid tighter liquidity and heightened uncertainty.
Uptick in bad loans
Although most banks told the central bank they expect loan performance to remain largely stable, the data reveals a different story.
Beneath the surface, many are bracing for an uptick in bad loans, with the report showing that 61.6 percent of banks expect defaults on enterprise loans to remain steady, but a net increase of 10.1 percent is anticipated, which is a reversal from the 11.8 percent decline in just one quarter earlier.
The central bank attributes this shift primarily to the country’s political calendar, with the country inching closer to the 2026 general elections.
Banks, the report notes, are increasingly wary of potential disruptions in government spending, delays in project payments, and the economic anxiety that often grips markets during election cycles.
‘The uncertainty surrounding the political climate has increased the perceived risk of business disruptions,’ the BoU report notes.
According to the report, 63 percent of banks believe the current political environment is the single largest factor behind the expected rise in loan defaults.
Businesses dependent on government contracts or state spending are likely to feel the pinch first.
Adding to the problem is a steep decline in donor funding, particularly following the restructuring of Usaid support and reduced NGO inflows.
Nearly a quarter of banks, 22 percent, told the central bank that this reduction has already constrained liquidity in the market, making it harder for them to extend loans.
‘The tightening of liquidity due to reduced donor inflows is limiting financing for both banks and clients. This, combined with political uncertainty, has heightened the overall risk of loan non-performance,’ the report notes.
Another emerging concern is the rise of digital and mobile lending, where loans are approved within minutes, often with minimal verification.
At least 13 percent of banks cited the limited credit history of mobile borrowers as a growing source of default risk.
While such platforms have expanded access to credit, especially for small traders and individuals previously excluded from formal banking, they have also opened a Pandora’s box of repayment challenges.
Pressure on household loans
During the quarter ending September 2025, the default rate on household loans rose by 4.2 percent, continuing an upward trend even though it remained below the 20 percent spike anticipated earlier in the year.
Banks link the rise to multiple pressures, such as the rising cost of borrowing, the festive season, which is traditionally a time of heavy spending, and the boom in digital lending, which has blurred the line between convenience and caution.
‘Digital credit has boosted financial inclusion but created exposure to repayment risk,’ the report observes, calling on banks to tighten credit screening and monitoring in sectors that are politically and economically sensitive.
A sector on edge
In its report, BoU warns that the coming months could ‘test the resilience’ of the financial system as election-related tensions and liquidity constraints converge.
‘The default rate on loans is projected to increase for both enterprises and households during the quarter to December 2025,’ the report notes.
Thus, as the country enters a politically charged period, the central bank urges lenders to tread carefully by balancing lending growth with prudence.