Businesses and households are borrowing more as improving loan quality and easing lending conditions encourage banks to open their credit taps.
Bank of Uganda’s August Monetary Policy Report shows private-sector credit growth reached 16.1 percent in June, while total net credit extensions doubled to Shs2.89 trillion in the three months to June from Shs1.44 trillion in the preceding three months.
Credit demand rose to Shs10.47 trillion from Shs8.47 trillion, while supply rose to Shs6.42 trillion from Shs4.92 trillion. The value-based approval rate improved to 61.3 percent from 58 percent.
The expansion continued into July, with the Ministry of Finance’s August Performance of the Economy Report showing outstanding private-sector credit reaching Shs28.09 trillion, from Shs27.75 trillion in June, representing annual growth of 18.1 percent.
However, Bank of Uganda Governor Michael Atingi-Ego has warned that excessive government borrowing from the domestic market could push up interest rates and crowd out private borrowers.
Appearing before Parliament’s Committee on Budget, Atingi-Ego said the market could absorb government’s planned Shs12.7 trillion domestic borrowing, but cautioned against exceeding that level.
The warning comes as government’s debt-servicing bill rises sharply.
Bank of Uganda’s August report, drawing on Ministry of Finance data, shows interest payments increased by 31.5 percent to Shs11.04 trillion in 2025/26 financial year from Shs8.39 trillion a year earlier.
Domestic interest payments accounted for most of the increase, jumping by 37.9 percent to Shs9.74 trillion from Shs7.06 trillion. External interest payments, including commitment fees, declined slightly to Shs1.3 trillion from Shs1.33 trillion.
Government revenue, including grants, meanwhile reached Shs37.09 trillion, Shs2.70 trillion below the programmed Shs39.79 trillion.
The combination of revenue underperformance and higher recurrent spending produced a Shs12.42 trillion fiscal deficit, with domestic sources accounting for 87.9 percent of deficit financing.
That creates a potential contest for money between government and private borrowers.
When government demand for domestic financing rises, it can put upward pressure on interest rates and encourage banks and institutional investors to allocate more funds to government securities, potentially making credit more expensive or less accessible to businesses. However, for now, lending conditions have improved.
The weighted average shilling lending rate declined to 17.73 percent in the three months to June from 18.65 percent in the three months to March. In June alone, it fell to 16.9 percent, its lowest level since April 2025.
Bank of Uganda partly attributes the improvement to better asset quality. Non-performing loans declined to 2.67 percent in June from 3 percent in March, their lowest level since December 2011. Borrowing costs, however, remain high across several sectors.
Agriculture borrowers faced an average shilling lending rate of 19.6 percent in the three months to June, compared with 18.8 percent for housing, 18.4 percent for personal loans, 17 percent for trade and 17.4 percent for manufacturing.
This is important for companies seeking working capital and investment financing. An expanding loan book does not automatically mean affordable credit, especially when borrowing rates remain in double digits.
Any upward pressure on yields could therefore slow investment even while headline private-sector credit figures continue showing strong growth.
Government also faces substantial refinancing requirements. The Ministry of Finance report shows government raised Shs2.63 trillion through Treasury bills and bonds during the month, of which Shs2.03 trillion, or about 77 percent, refinanced maturing securities. Only Shs600.41b financed other budget requirements.
Still, there is no immediate indication that government is struggling to raise money. Treasury bill bids in August averaged 2.42 times the amount offered, while Bank of Uganda says government securities auctions in the three months to July were oversubscribed, and yields generally declined.
The concern, therefore, is what happens if government borrowing moves beyond planned levels just as businesses and households are demanding more credit.
Bank of Uganda expects private-sector credit growth to remain strong, supported by improving economic activity, easier lending conditions and investment, including oil-related activity.
But Atingi-Ego’s warning highlights the balancing act, in which banks are lending more, loan demand is rising, and bad loans are falling, while government is simultaneously relying heavily on the same domestic financial market.
Preserving that private-sector credit recovery will increasingly depend on keeping government borrowing within plan while improving revenue collection and containing debt-servicing costs.