Interest rates remain a major obstacle for Uganda’s Small and Medium Enterprises (SMEs), which are vital to the country’s economy.
These businesses contribute over 70% of employment and nearly a quarter of the GDP. However, the rising cost of borrowing has made it increasingly difficult for SMEs to access affordable credit, hindering their ability to operate efficiently and grow sustainably.
While the Bank of Uganda maintains tight monetary policies to manage inflation and stabilize the shilling, these same measures are making it difficult for SMEs to access affordable credit, which is critical for their survival and expansion.
Across the country, SMEs are finding it increasingly difficult to secure loans at terms they can manage. Commercial lending rates have risen significantly, now ranging between 18% and 24% annually.
or small businesses that operate on narrow margins and unpredictable cash flows, these rates make formal credit facilities almost inaccessible.
Business owners often calculate the interest costs, required collateral, and strict repayment schedules, only to walk away from banks altogether.
Instead of borrowing to grow, they turn to informal lenders, SACCOs, village savings groups, or personal networks sources of financing that may offer flexibility but lack the capacity to fund large-scale operations or expansion.
This tightening of credit has had a direct impact on growth. A 2024 study by the Uganda Investment Authority revealed that more than 60% of registered SMEs had postponed investment or expansion plans due to difficulties accessing affordable financing.
The most affected were businesses seeking working capital loans especially in key sectors like agro-processing, retail, construction, and light manufacturing.
These sectors often require short-term injections of capital to fulfill orders, purchase raw materials, or upgrade equipment.
Without loans, many businesses are unable to meet increasing customer demand or modernize their operations to remain competitive.
SMEs are key drivers of employment, especially for youth and women. When businesses hold back on expansion, the ripple effect is fewer job openings and less income circulating within communities.
The analytics show a decline in SME-driven job creation, largely attributed to the increasing cost of doing business particularly the cost of financing.
At the same time, without access to credit, many SMEs are unable to invest in innovation, digital tools, or new products.
This locks them into low-capital operations with little chance to grow or compete in larger markets, eventually leading to fatigue and, in some cases, business closure.
To cope with the harsh credit environment, some SMEs are turning to digital financial services. Mobile lending platforms, digital wallets, and fintech-based credit providers have become popular alternatives.
These platforms offer relatively easier access to credit, though usually in small amounts and at shorter repayment periods.
Others are forming cooperatives to pool resources, access group loans, or bargain for better terms with microfinance institutions.
While these efforts provide short-term relief, they often fall short of meeting long-term financing needs such as asset acquisition, facility upgrades, or regional expansion.
Economists and private sector analysts agree that solving this credit bottleneck will require more than just waiting for market interest rates to fall.
There is a clear need for targeted government interventions. Credit guarantee schemes backed by the state could help reduce the risks that commercial banks face when lending to SMEs.
Interest rate subsidies for businesses operating in high-impact sectors, such as manufacturing, agriculture, tourism, and digital services could also ease the financial burden.
Simplifying credit assessment processes to look beyond traditional collateral and include factors like transaction history, tax compliance, and digital sales data could also widen access.
Furthermore, regulatory support for credit scoring innovations could make formal lending more inclusive and responsive to SME realities.
The Bank of Uganda, in its Financial Stability Report released earlier this year, emphasized the importance of financial inclusion and development of non-bank financial institutions to meet the financing gap.
Currently, only about 15% of SMEs in Uganda have access to formal credit an indication of the scale of the challenge and the opportunity for policy-driven solutions.
High interest rates are not just a fiscal issue they are a barrier limiting the ambitions of thousands of Ugandan entrepreneurs. These rates are putting brakes on business expansion, job creation, and technological advancement.
If left unaddressed, this could undermine Uganda’s broader economic goals, including its Vision 2040 strategy and ambitions for inclusive growth.
Access to affordable financing for SMEs must be prioritized, not just in policy documents, but through real, actionable reforms that ease credit conditions and build a more resilient and dynamic business ecosystem.