Overview:
According to the Performance of the Economy Report for February 2026 released by the Ministry of Finance, the average weighted lending rate for Shilling-denominated loans rose to 18.33 percent in January, up from 18.00 percent recorded in December 2025.
KAMPALA — Commercial lending rates for Shilling-denominated credit edged upwards in January 2026, reflecting increased caution among banks, even as monetary authorities moved to tighten liquidity and stabilise inflation.
According to the Performance of the Economy Report for February 2026 released by the Ministry of Finance, the average weighted lending rate for Shilling-denominated loans rose to 18.33 percent in January, up from 18.00 percent recorded in December 2025.
The increase, the report notes, was largely driven by heightened risk perceptions among lenders, particularly for new borrowers in the agriculture sector. Banks responded by pricing loans higher to cushion themselves against potential defaults.
“The rise in the lending rate for Shilling-denominated credit was partly on account of the higher risk associated with new borrowers, particularly in the agriculture sector, which prompted commercial banks to charge slightly higher interest rates,” the report states.
In contrast, borrowing in foreign currency became marginally cheaper over the same period. The weighted average lending rate on foreign currency-denominated credit declined slightly to 7.21 percent in January 2026 from 7.32 percent in December 2025.
Analysts say the divergence reflects both global financial conditions and domestic risk dynamics, with foreign currency loans benefiting from relatively stable external rates, while local currency borrowing remains exposed to domestic sector risks.
Meanwhile, yields on government securities declined in February, pointing to improved investor confidence in the economy. Interest rates on Treasury bills and bonds eased during the month, driven by strong demand for government paper.
The Ministry of Finance attributes this to reduced political risk following the recent elections, as well as sustained participation by offshore investors in Uganda’s domestic debt market.
At the same time, the Bank of Uganda maintained the Central Bank Rate (CBR) at 9.75 percent in February, signalling a cautious but supportive monetary policy stance.
The Monetary Policy Committee assessed that the current rate remains appropriate to stimulate economic activity while keeping inflation within the medium-term target of five percent.
However, in a move aimed at tightening liquidity conditions, the central bank raised the Cash Reserve Requirement (CRR) for commercial banks from 9.5 percent to 11.0 percent. This requires banks to hold a larger portion of their deposits as reserves, effectively reducing the amount available for lending.
Economists say the combination of a steady policy rate and tighter reserve requirements reflects a balancing act by policymakers.
“The central bank is trying to support growth while at the same time preventing excess liquidity from fuelling inflation or exchange rate volatility,” a financial analyst said.
The developments suggest that while Uganda’s financial sector remains stable, credit conditions could remain relatively tight in the short term, particularly for high-risk sectors such as agriculture.
As banks reassess risk and policymakers fine-tune monetary tools, borrowers may continue to face elevated lending rates in Shilling terms, even as broader macroeconomic conditions show signs of stabilising.