Uganda’s banking sector has entered 2026 on a stronger footing, with bad loans declining further, profitability improving and capital buffers remaining well above regulatory requirements, according to the Uganda Bankers Association (UBA).
The latest UBA industry analysis, based on Bank of Uganda data, shows that the sector’s non performing loan (NPL) ratio fell to 3.01 percent in March 2026, extending the recovery recorded in 2025 as banks improved loan quality and strengthened risk management.
The report says the decline in bad loans has been accompanied by stronger earnings across the industry, with return on equity rising to 20.71 percent by March 2026 while return on assets increased to 3.88 percent. Banks also became more efficient, with the industry’s cost to income ratio improving to 66.28 percent.
“The banking industry enters the second half of the decade with stronger capital, improved asset quality and higher profitability,” the report says.
The sector’s financial strength was also reflected in its capital position, with total qualifying capital to risk weighted assets standing at 25.7 percent in 2025, far above the regulatory minimum set by the Bank of Uganda.
Uganda’s banking industry continues to be dominated by a handful of large institutions. The five biggest banks accounted for about 55.5 percent of total industry assets, while the 10 largest controlled nearly 79.5 percent.
Despite their dominance, the UBA says the market is not considered highly concentrated because the Herfindahl Hirschman Index stood at about 890, below the internationally recognised threshold of 1,500 used to classify concentrated markets.
The report, however, highlights growing pressure on smaller financial institutions.
Tier 2 and Tier 3 institutions recorded a cost to income ratio of about 93.2 percent in 2025, compared to 66.9 percent for Tier 1 banks, indicating that smaller lenders continue to face higher operating costs.
Their combined assets nevertheless grew from Shs1.25 trillion in 2022 to Shs1.89 trillion in 2025.
The UBA also expressed concern over the funding model of smaller institutions, noting that their loan to deposit ratio has remained above 100 percent, meaning part of their lending is financed through borrowings and other non deposit funding sources rather than customer deposits.
Digital financial services continued to reshape the banking industry during the year, with shared agent banking recording one of the fastest growing segments.
Transaction values on the shared agent banking platform jumped by 76.1 percent from Shs16.7 trillion in 2024 to Shs29.4 trillion in 2025, while the number of registered agents increased from 15,288 to 22,793.
Mobile money based digital lending also expanded rapidly, with about Shs3.5 trillion disbursed through more than 150 million lending transactions in the year ending June 2025.
The association warned that the rapid growth of digital finance is exposing banks to new risks.
“Increased digitalisation is bringing new risks, particularly cybercrime and electronic fraud,” the report says, adding that banks are also facing growing competition from fintech companies and mobile network based lenders.
The outlook for lending has become more cautious despite the sector’s stronger financial position.
According to Bank of Uganda’s latest lending survey, banks expect to tighten credit standards for businesses while continuing to ease lending requirements for households.
The report says lenders are also anticipating higher default rates because of rising fuel and production costs, delayed salary payments, job losses and geopolitical uncertainty.
To sustain the sector’s recovery, the UBA has called for fiscal consolidation to reduce government reliance on domestic borrowing, arguing that this would allow banks to gradually redirect more lending towards the private sector.
The association also recommends reforms to credit guarantee schemes, improvements in loan loss provisioning rules, faster resolution of commercial disputes, stronger credit infrastructure and completion of Uganda’s long delayed national payments switch.
While the industry’s balance sheets have become stronger, the UBA says the bigger test will be ensuring that banks channel more credit into businesses, agriculture, and other productive sectors instead of increasingly financing government expenditure.
