Banks in Uganda opt for government securities, sidelining private sector lending

Commercial banks in Uganda are increasingly turning to government securities—treasury bills and bonds—as their preferred investment vehicle, signaling a retreat from private sector lending in favor of safer, low-risk returns.

According to the latest Debt Statistical Bulletin and Public Debt Portfolio Analysis from the Ministry of Finance, commercial banks now hold the largest share of government securities at 29.3 percent, valued at Shs15.5 trillion. This marks a continued trend over the past five years, where financial institutions have scaled back on credit to businesses and individuals, citing high default risks.

The report shows that pension and provident funds follow with a 25.1 percent stake (Shs13.3 trillion), while the Bank of Uganda now holds 17.9 percent (Shs9.5 trillion)—a significant rise attributed to Shs7.7 trillion disbursed under the 2024/25 budget.

Other notable holders include other financial institutions (9.6 percent), offshore investors (5.9 percent), and retail investors (5 percent). Insurance companies remain at the bottom of the list, with a modest 1.7 percent stake in government securities.

The central bank continues to offer a range of interest rates on government instruments: 10 to 14 percent on short-term treasury bills, and 15 to 17.5 percent on long-term bonds. Notably, while the issuance of treasury bills dropped by 51 percent to Shs1.4 trillion, bond issuance more than tripled—rising by 236 percent to Shs10.6 trillion.

Analysts point to this shift as a double-edged sword. While it helps banks manage risk and secure stable returns—as noted by Dfcu Bank CEO Charles Mudiwa during the bank’s 2024 financial results presentation—it also means fewer resources are flowing into the private sector, where lending is considered riskier but critical for driving growth and job creation.

Secretary to the Treasury Ramathan Ggoobi has said government is increasingly borrowing domestically to avoid expensive external loans, particularly with shrinking access to non-concessional financing. This shift, however, is raising concerns over crowding out private sector borrowers.

The trend underscores the delicate balance between fiscal needs, financial sector stability, and the role of credit in economic development. As government securities remain attractive, questions grow over whether the private sector will continue to face credit constraints.