The Bank of Uganda Lending Survey for the first quarter of the 2026/27 financial year, released on October 5, showed businesses preparing to borrow more to stock up for the festive season, finance working capital, execute projects and expand operations.
But nine days later, on October 14, the central bank raised its benchmark interest rate from 9.75 percent to 12 percent. The increase, within days, introduced new dynamics to plans, some of which could have already gone into budgets for the last quarter of 2026.
The two developments have put businesses at a crossroads. While banks expected demand for credit to rise towards the end of the year, tighter monetary policy raises questions about whether businesses can afford the loans they had planned to take.
This forces them to weigh expansion ambitions against the need to protect cash flow and remain operational.
Projected rise in credit demand
The lending survey found that 77.4 percent of commercial banks expected demand for enterprise credit to increase in the quarter ending December 2026, up from 37 percent that reported increased demand in the quarter ended September.
Demand was expected to rise across businesses of different sizes. Some 78.6 percent of banks anticipated increased demand from small and medium-sized enterprises, compared with 31.1 percent in the September quarter.
Short-term credit was expected to record the strongest increase, with 81.1 percent of banks anticipating higher demand, compared with 40.9 percent in the previous quarter. For long-term loans, the proportion expecting increased demand rose from 14.9 percent to 65 percent.
Banks attributed the anticipated increase to festive-season trading, early stock purchases to avoid supply disruptions, working-capital needs, project execution and financing for government contracts and agricultural activity ahead of peak sales periods.
However, a separate Bank of Uganda Credit Demand Survey, released on October 5, offered a more cautious picture from borrowers.
Only 8.8 percent of surveyed businesses applied for loans in the three months to September, down from 17.6 percent in the preceding quarter.
The proportion planning to apply in the following three months – October to December – was expected to fall to 4.4 percent. That survey covered businesses in and around Kampala.
Banks anticipated greater demand based on seasonal and business financing needs, while fewer businesses reported actually approaching lenders.
Where the money is going
The value of existing lending offers another indication of how credit is moving through the economy. The Ministry of Finance’s August 2026 Performance of the Economy report put outstanding private-sector credit at Shs28.09 trillion in July.
This comprised Shs19.28 trillion in shilling-denominated credit and the equivalent of Shs8.81 trillion in foreign-currency loans.
New credit approvals offer a different measure. In July, lending institutions approved Shs5.16 trillion for disbursement, compared with applications valued at Shs3.65 trillion.
The approval rate stood at 141.5 percent, the highest since the start of 2026, partly because some banks carried forward approvals from the previous quarter.
Transport and communication received the largest share of approved credit in July, accounting for 24.8 percent, or Shs1.28 trillion.
Building, mortgage, construction and real estate followed with 24 percent, or Shs1.24 trillion. Together, the two sectors accounted for nearly half of approved credit.
Business, community, social and other services received 18.9 percent of approvals, while personal and household borrowing accounted for 14.1 percent.
Trade represented 9.3 percent and manufacturing 4.9 percent.
Construction and real estate firms often need substantial financing for projects that take time to generate returns.
Transport businesses need funds for vehicles, equipment, fuel and maintenance, while manufacturers require working capital to purchase inputs and sustain production.
For such businesses, borrowing decisions increasingly depend on whether expected revenue can cover loan repayments alongside operating expenses.
Tighter money changes the math
On October 14, Bank of Uganda raised the Central Bank Rate by 225 basis points to 12 percent.
It also increased the Cash Reserve Ratio from 11 percent to 13.5 percent, effective September 24, requiring commercial banks to hold a larger share of eligible deposits as reserves.
Headline inflation rose to 4.6 percent in September, from 4.1 percent in August, while core inflation increased to 3.7 percent from 3.5 percent.
For businesses, higher fuel prices, freight charges, insurance costs and imported input prices are already pressuring operating budgets.
Higher borrowing costs would compound those pressures, particularly for firms that depend on bank credit to finance routine operations.
Banks consider funding costs, borrower risk, loan duration, and collateral when setting lending rates. Tighter liquidity and rising funding costs can make financing less affordable or encourage lenders to be more selective.
Banks reported net tightening of 20.3 percent for building, mortgage, construction and real estate; 19.7 percent for transport and communication; and 13.9 percent for mining and quarrying. Agriculture was at 5.8 percent and manufacturing at 3.6 percent.
By contrast, lending standards eased for trade, with a net measure of 16.3 percent, and for personal and household loans, at 8.8 percent.
Banks expected a slight net tightening of enterprise credit standards in the December quarter.
This could make borrowing more challenging for businesses whose projects depend on long-term financing or whose financial position does not meet lenders’ requirements.
Expansion or survival?
Businesses must now decide which investments remain viable under tighter conditions. The risk is particularly acute for SMEs, which often have fewer financing alternatives and less capacity to absorb unexpected expenses.
Banks’ expectations of default rates on enterprise loans registered a net increase of 26.4 percent, although this was lower than the 48.7 percent recorded in the previous survey.
Bank of Uganda also lowered its economic growth forecast for the 2026/27 financial year to between 6 percent and 6.5 percent, from an earlier range of 7 percent to 7.5 percent. Slower growth could make businesses more cautious about investments that depend on sustained demand.
A tight liquidity environment requires businesses to evaluate whether the investment for which the money is being borrowed will generate enough cash to repay the loan while covering rising operating costs.
For some firms, borrowing may remain essential to secure contracts, maintain production or take advantage of seasonal demand.
Others may choose to defer expansion, reduce stock purchases or rely more heavily on internally generated funds until the cost and availability of credit become clearer.