When Henry Musasizi, the finance minister, told Journalists on the sidelines of the Uganda Development Bank’s annual general meeting that he wants the bank’s lending rate to fall from 12% toward single digits, he seemed to describe a goal that sits awkwardly next to his own ministry’s borrowing habits.
Commercial banks charge businesses an average of 18.26% on shilling loans as of April 2026, according to the finance ministry’s own Performance of the Economy report, even though the central bank’s policy rate has sat at 9.75%. The gap between those two numbers is not really a mystery. It traces back to what government itself pays to borrow.
Uganda’s Treasury bonds have recently yielded between roughly 13% and 16%, and one-year Treasury bills have hovered near 14%, prices set at weekly and monthly auctions where commercial banks are the biggest buyers.
For any bank or businessperson choosing where to put its money, the arithmetic is not complicated. Lending to a small manufacturer or a hotel carries default risk, requires credit assessment staff, and ties up capital for years.
Buying a government bond is safe, liquid, and, at double digit yields, comparably rewarding. As one local investment newsletter put it, banks have little incentive to lend to “a struggling manufacturer, trader, school, or farmer when you can lend to government at lower risk, lower administrative cost, and often a very attractive return.”
The scale of the crowding is easy to miss because government has recently tried to shrink it. Domestic borrowing through bills and bonds was targeted at around sh9 trillion for the 2025/26 financial year, down from sh11.4 trillion the year before, a retreat the finance ministry says is partly meant to leave more room for private borrowers and to slow the rise in debt servicing costs.
Those costs are already substantial. Interest payments are projected to reach 4.7% of GDP this financial year, up from 3.7%, and debt servicing now consumes 35.7% of tax revenue, up from 23% just two years earlier.
Total public debt reached sh126.16 trillion by December 2025, above 50% of GDP and past the East African Community’s own convergence ceiling. When yields briefly fell to around 13 to 14% in January 2026 after government had met most of its financing needs, commercial lending rates eased too, before ticking back up as a stronger dollar and uneasy offshore investors pushed bond yields back into the 15 to 16% range by mid year.
None of this means UDB’s plan for a single digit interest rate is pointless. A development bank funded largely through equity and concessional external loans, rather than domestic bond issuance, can genuinely lend below the market clearing rate, and its stated priority sectors (agriculture, manufacturing, tourism) are ones commercial banks have been quietly de-prioritising in favour of government paper.
But the deeper fix, the one that would lower borrowing costs for businesses that will never qualify for a UDB loan, sits with the Treasury’s own domestic financing calendar, not with a single state lender’s capital table.
Uganda has already shown, in the brief window of falling yields in early 2026, that when government borrows less, banks lend cheaper. The harder question is whether it can sustain that discipline once oil revenue and other financing pressures return.
