Banks face cash squeeze as BoU raises Reserve Requirement

KAMPALA. Commercial banks have two days to lock up more of their customers’ deposits after the Bank of Uganda raised the Cash Reserve Requirement (CRR) to 13.5 per cent, tightening liquidity in the financial system as the shilling comes under pressure.

The new requirement, up from 11 per cent, means banks must now keep Shs13.50 out of every Shs100 in eligible deposits as reserves with the central bank, leaving up to 86.5 per cent available for lending and other investments.

The change takes effect after the current reserve maintenance cycle, with the central bank giving financial institutions no transitional period to comply.

Mr David Kalyango, the Executive Director for Supervision and Regulation at Bank of Uganda, said chief executive officers of commercial banks must take all necessary measures to meet the new requirement by the specified cycle date.

The increase is the latest in a series of measures by the central bank to absorb excess liquidity and address emerging inflation and foreign exchange pressures.

The shilling has weakened in recent months, with the currency trading around Shs3,925 to Shs3,935 against the dollar, compared with about Shs3,650 and Shs3,740 before the escalation of the Middle East conflict.

At the same time, annual headline inflation rose to 4.1 per cent in August, up from four per cent in July and the highest level since August 2025.

The Uganda Bureau of Statistics has attributed the increase largely to higher prices of fuel, electricity, water, housing, gas and other fuels, as well as some food items.

Banks face liquidity squeeze

The higher CRR will immediately reduce the amount of deposits that banks can deploy in loans, Treasury securities and other income-generating assets.

Analysts estimate that about Shs1 trillion could be locked up in the financial system as a result of the increase.

Unlike funds deployed in loans or government securities, mandatory reserves do not generate comparable interest income for banks, potentially putting pressure on their earnings and liquidity positions.

The impact could be more pronounced among smaller banks, which generally have less balance-sheet capacity to absorb a sudden reduction in lendable funds.

Banks could respond by becoming more selective when extending credit or raising lending rates to protect their margins.

Commercial bank lending rates currently range between 17 per cent and 19 per cent, according to Bank of Uganda, compared with an average of about 14.5 per cent across 14 African countries.

Tighter liquidity could therefore make borrowing more expensive for businesses and households, while some small and medium enterprises and higher-risk borrowers could face stricter lending conditions.

However, the measure is intended to address broader financial and macroeconomic pressures rather than restrict credit permanently.

Mr Benoni Okwenje, the General Manager for Financial Markets Operations at Centenary Bank, said reducing excess liquidity could help ease speculative activity in the foreign exchange market.

“Cutting liquidity in the banking industry will help bring down risks of speculation and volatility in the foreign currency market,” he said.

Defending the shilling

The CRR increase comes as pressure on the shilling has intensified amid higher global energy prices and uncertainty arising from the Middle East conflict.

Dr Adam Mugume, Bank of Uganda’s Executive Director for Research and Policy, said uncertainty over the duration of the conflict had prompted commercial banks to buy and hold larger volumes of dollars, adding pressure to the local currency.

Governor Michael Atingi-Ego has maintained that the central bank has sufficient foreign reserves and monetary tools to respond if movements in the exchange rate become disorderly.

“Bank of Uganda has what it takes to stabilise this exchange rate, so be still, all will be fine,” he said at the Annual Bankers’ Conference 2026.

He attributed the shilling’s movement largely to global oil prices and Uganda’s market-determined exchange rate regime.

Five CRR changes since 2022

The latest increase is the fifth upward revision of the CRR since 2022 as Bank of Uganda has adjusted liquidity conditions in response to changing economic pressures.

The requirement was raised from eight per cent to 10 per cent in 2022 as the central bank tightened monetary conditions to contain inflation linked partly to the Russia-Ukraine conflict.

It was later eased to 9.5 per cent as inflation moderated before being raised to 11 per cent in May to absorb structural liquidity in the market.

The latest increase to 13.5 per cent is intended to further tighten liquidity amid inflation and foreign exchange pressures.

Bank of Uganda said it will continue monitoring market conditions after the implementation deadline and may issue further guidance or intervene depending on how liquidity in the financial system responds.