Global rating agency Standard and Poor’s (S and P) has cautioned that while Uganda’s banking sector remains well-capitalised, its growing exposure to government securities continues to limit lending to the private sector.
In its latest assessment, S and P said commercial banks’ exposure to government debt had risen to 31 percent of total system assets by June 2025, reflecting banks’ preference for high-yielding government paper.
‘This has crowded out private-sector lending and slowed capital market development, resulting in a slowdown in credit extension to 8.2 percent in June 2025,’ the agency said.
However, it noted that banks remain well-capitalised, with a combined core capital ratio of 25.8 percent, well above the 10 percent statutory minimum.
S and P also noted that banks are maintaining low levels of nonperforming loans, at 3.7 percent of total loans by June 2025.
Bank of Uganda’s September State of the Economy report shows that yields on government securities continued to rise, mainly due to higher government borrowing toward the end of the 2024/25 financial year and frontloaded issuances in the early 2025/26 financial year.
In the three months to August 2025, yields on Treasury bills rose to 11.5 percent (91-day), 13.2 percent (182-day), and 15.4 percent (364-day).
For Treasury bonds, yields on the two-year, 15-year, and 20-year maturities rose slightly, while those on the three-year, five-year, and 10-year dropped modestly.
Interbank rates declined in the three months to August 2025 as liquidity improved, supported by Bank of Uganda’s foreign currency purchases and increased government spending.
Overnight rate dropped to an average of 9.5 percent from 10.5 percent, while the seven-day rate fell to 10.3 percent from 11.2 percent.
The use of the standing lending facility fell sharply to Shs2.5 trillion from Shs9.4 trillion, indicating that banks relied less on central bank funding.
Despite improved liquidity, private-sector credit growth remained modest. In the three months to July 2025, annualised private sector credit growth rose slightly to 9.7 percent from 9 percent in April. Shilling-denominated loans grew 11.2 percent, while foreign currency loans increased 5.5 percent, up from 3.6 percent.
Credit demand rose to Shs8.0 trillion in July 2025, while net credit supply climbed to Shs5.6 trillion, reflecting reduced risk aversion as non-performing loans declined. The rate of credit approval improved to 70.1 percent from 59.2 percent.
However, overall net credit extensions fell to Shs1.1 trillion from Shs1.4 trillion, mainly due to a sharp drop in foreign currency loan disbursements, which recorded net recoveries of Shs261b.