Commercial banks in Uganda are increasingly shifting their investment strategies toward government securities, opting for treasury bills and bonds over traditional private sector lending.
This trend is sparking concern among economists and business owners about the long-term implications for economic growth and credit access.
According to the Ministry of Finance’s latest Debt Statistical Bulletin, commercial banks now hold the largest share of government securities—29.3 percent, totaling Shs15.5 trillion.
Over the past five years, banks have steadily pulled away from business lending, citing high default risks and preferring the low-risk, stable returns offered by government paper.
Pension and provident funds come next, holding 25.1 percent (Shs13.3 trillion), while the Bank of Uganda has increased its stake to 17.9 percent (Shs9.5 trillion), boosted by Shs7.7 trillion injected into the economy under the 2024/25 national budget.
Other investors in government debt include financial institutions (9.6 percent), offshore players (5.9 percent), and retail investors (5 percent). Insurance companies remain the smallest stakeholders, holding just 1.7 percent.
Safe Bets Over Bold Moves
Uganda’s central bank currently offers attractive yields—ranging from 10 to 14 percent on treasury bills and 15 to 17.5 percent on long-term bonds.
This explains the increasing preference among banks to invest in government instruments, especially given their predictable returns in a volatile credit environment.
While treasury bill issuance declined by 51 percent to Shs1.4 trillion, long-term bond issuance has surged—rising 236 percent to Shs10.6 trillion.
“Government securities allow us to manage risk and still earn solid returns,” said Dfcu Bank CEO Charles Mudiwa during the bank’s 2024 financial results announcement.
Crowding Out the Private Sector?
This pivot to government lending, however, comes at a cost. Banks’ reduced appetite for private sector lending means less capital is flowing into businesses, particularly small and medium enterprises (SMEs), which are key drivers of job creation and GDP growth.
Secretary to the Treasury Ramathan Ggoobi acknowledges this shift, noting that the government is borrowing more domestically to reduce reliance on expensive external loans, especially with concessional financing options drying up.
Yet economists warn that this approach may backfire by crowding out the private sector.
“It’s a delicate balance,” says economist Michael Mugabi. “Government needs funds, but excessive domestic borrowing could choke private enterprise and stunt economic expansion.”
Looking Ahead
The reliance on government securities reflects deeper structural challenges within Uganda’s financial ecosystem.
It underscores the need for reforms that can de-risk private sector lending, improve credit infrastructure, and create incentives for banks to support entrepreneurship.
Until then, Uganda’s business community may continue to struggle with limited access to affordable credit—while banks play it safe on the sidelines.
