Ugandan businesses are fighting for survival in an economy where banks increasingly prefer lending to the government instead of funding the private sector. Across the country, SMEs are struggling to access affordable credit, manufacturers are postponing expansion plans, and startups with growth potential are being locked out of financing altogether, not because money is unavailable, but because the government is absorbing a growing share of it.
In what economists describe as a classic “crowding-out effect,” commercial banks are pouring billions into Treasury Bills and government bonds that offer high, predictable, and virtually risk-free returns. Meanwhile, businesses are left battling some of the highest lending rates in the region.
The result is a dangerous imbalance: while the state continues borrowing aggressively to finance its budget needs, the very businesses expected to create jobs, industrialise the economy, and drive Uganda toward middle-income status are being squeezed out of the financial system.
According to a 2026 International Monetary Fund (IMF) report, government securities accounted for 30.4% of total banking sector assets in Uganda by March 2025.
“As of March 2025, government securities represented 30.4 percent of total banking-sector assets in Uganda. Among a few mid-tier banks, sovereign holdings reach 50–60 percent of their total assets. Consequently, Uganda ranked 4th among all Sub-Saharan African countries in terms of bank exposure to government debt” (International Monetary Fund, 2026).
The report further revealed that some mid-sized banks had invested as much as 50–60% of their assets in government debt, making Uganda one of the most sovereign-debt-exposed banking systems in Sub-Saharan Africa.
In practical terms, nearly one-third of the money inside Ugandan banks is being lent to the government rather than businesses.
The reason is simple: government borrowing has become too attractive for banks to ignore.
Treasury Bills and government bonds currently offer returns ranging between 15.3% and 17.7%, according to the Ministry of Finance’s 2025 economic reports. These investments come with almost zero default risk, minimal administrative costs, and guaranteed repayment backed by the state.
By comparison, lending to SMEs or manufacturers is far more complicated. Banks must assess creditworthiness, monitor repayments, handle collateral disputes, and absorb the risk of defaults, all within a business environment where commercial litigation can take years.
Faced with these realities, many financial institutions naturally choose the easier and safer option: financing government debt.
This preference is now directly affecting private sector growth.
Data from the Ministry of Finance shows that while Uganda’s total stock of private sector credit reached Shs25.3 trillion by December 2025, local currency lending had almost completely stagnated.
“Stagnant Shilling Lending: While the total stock of outstanding Private Sector Credit (PSC) reached Shs 25.3 trillion by December 2025, local Shilling-denominated loans remained completely flat, edging from Shs 17.706 trillion down to Shs 17.705 trillion” (Ministry of Finance, Planning and Economic Development, 2026).
At the same time, government borrowing continued accelerating. In August 2025 alone, Uganda raised Shs1.13 trillion through domestic debt auctions.
The imbalance is becoming increasingly visible in borrowing costs. Commercial lending rates remained between 18% and 19.65% during 2025, levels that many businesses simply cannot sustain profitably.
A 2025 study by economists A. Kasule and P. Ojangole, published in the Journal of Economics and Behavioral Studies, confirmed a direct negative relationship between domestic government borrowing and private sector credit growth in Uganda.
“The study confirmed a statistically significant, negative relationship between domestic debt expansion and private sector credit growth in both the short run and the long run” (Kasule & Ojangole, 2025).
The researchers noted that banks naturally favour government lending because sovereign debt is protected from the structural weaknesses that make private lending difficult, including poor collateral enforcement, limited financial transparency among SMEs, and slow commercial court systems.
The African Development Bank (AfDB), in its 2025 Uganda Country Focus Report, warned that Uganda’s low tax-to-GDP ratio of just 12.7% is forcing the government to rely heavily on domestic borrowing to finance spending gaps.
“Uganda faces an intense development financing gap because its domestic tax revenue mobilization remains low (tax-to-GDP ratio sits at just 12.7%). Because the state struggles to raise money via taxes, it aggressively drafts the domestic capital market to cover the deficit” (African Development Bank, 2025).
This constant demand for local financing is steadily absorbing liquidity that could otherwise support productive sectors of the economy.
For businesses, the consequences are severe.
SMEs, which account for the majority of employment in Uganda, face rising financing costs and shrinking access to capital. Manufacturers struggle to expand production. Young entrepreneurs with innovative ideas fail to secure startup funding. Farmers and agro-processors remain trapped in low-productivity cycles because long-term affordable financing is scarce.
The broader economy also suffers. When banks prioritise government securities over productive investment, industrial growth slows, export competitiveness weakens, and job creation declines. Instead of capital flowing into factories, technology, agriculture, and logistics, it circulates back into financing recurrent government expenditure and debt servicing.
This is why economists increasingly argue that Uganda’s Treasury Bill dependence is no longer just a banking issue, it is becoming a national development challenge.
The long-term solution will require structural reforms. Government must gradually reduce its dependence on domestic borrowing, strengthen tax collection efficiency, and create fiscal discipline that lowers pressure on local debt markets.
At the same time, Uganda’s financial system must become more supportive of productive enterprise. Faster commercial dispute resolution, stronger credit reference systems, improved collateral management, and targeted SME risk-sharing mechanisms could help make private sector lending more attractive to banks.
Until that happens, Uganda’s businesses will continue competing with their own government for access to money, and in that competition, the state currently holds the advantage.
