Business, household loan defaults climb as cost pressures bite

Uganda’s commercial banks are reporting a sharp rise in loan defaults by both businesses and households, underscoring growing financial strain as high operating costs, delayed salaries and rising living expenses erode borrowers’ ability to keep up with repayments.

The latest Bank of Uganda (BoU) Bank Lending Survey shows that lenders recorded a net 48 percent increase in defaults on business loans during the quarter ended June 2026, while defaults on household loans rose by a net 37.8 percent.

The findings suggest that despite resilient economic activity, many borrowers are struggling to service debt amid persistent cost pressures.

The central bank attributed the deterioration in business loan performance largely to rising fuel prices and the increasing cost of essential commodities, which have squeezed company profit margins and weakened cash flows.

“Overall, the majority of banks expect the default rate on loans to enterprises to broadly remain unchanged. However, banks registered a high net increase of 48.0 percent in the default rate expectation,” the report states.

Although slightly lower than the 54.9 percent net increase recorded in the previous survey, the latest figures indicate that repayment challenges remain widespread across the corporate sector.

Small businesses hardest hit

Small and medium-sized enterprises (SMEs) experienced the sharpest deterioration.

The survey shows that the net balance of banks reporting rising defaults among SME borrowers climbed to 56.5 percent, up from 46.3 percent in the previous quarter.

The figures reflect mounting pressure on smaller businesses, many of which operate with limited cash reserves and have been hit by higher fuel, transport, electricity and rental costs.

Large companies also experienced increased repayment difficulties.

Defaults among large enterprises rose sharply, with the net balance increasing to 36.2 percent from 18.4 percent in the previous quarter, suggesting that financial stress is spreading beyond small businesses to larger corporate borrowers.

BoU said geopolitical tensions in the Middle East have increased global energy prices and freight costs while adding pressure on exchange rates, making imported inputs more expensive and increasing the financial burden on businesses.

The report also links rising credit risk to disruptions caused by the enforcement of urban trade regulations, which displaced businesses in Kampala and other towns, reducing productivity and affecting incomes.

Long-term loans under pressure

Banks reported growing repayment difficulties for both working capital and investment loans.

Defaults on long-term business loans rose sharply during the quarter, reflecting increasing strain among companies servicing debt for property, machinery, factories and other capital investments.

The central bank said prolonged increases in operating costs and slower-than-expected returns on investment are making it harder for businesses to honour long-term repayment obligations.

Households also struggling

The survey found that household loan performance deteriorated more sharply than banks had anticipated.

Commercial banks recorded a net 37.8 percent increase in household defaults, significantly higher than the 26.2 percent increase they had projected in the previous quarter.

BoU attributed the increase to higher prices for food, fuel and other essentials, which have reduced disposable incomes and left many families with less money to repay salary loans, mortgages and personal credit.

Delayed salary payments, unemployment and job losses also contributed to the worsening repayment performance.

The deterioration comes despite banks expanding access to household credit.

During the quarter, lenders eased lending standards for retail customers as competition intensified for salary-backed borrowers, who are generally considered lower-risk because repayments are deducted directly from payroll.

However, the survey suggests that even salaried borrowers are becoming increasingly vulnerable as rising living costs outpace income growth and salary disruptions become more common.

The findings point to a growing challenge for Uganda’s banking sector, with lenders seeking to expand credit while managing rising default risks across both businesses and households.