Uganda is experiencing a lower uptake of loans in foreign currency in tandem with the ongoing fluctuation in exchange rates and increased funding costs faced by commercial banks.

Available official data shows that overall private sector credit grew 9.8 percent in the first quarter of 2023 compared to 10.2 percent last quarter of 2022. This is largely because of a decline in foreign currency lending – from 2.4 percent in the previous quarter to 0.1 percent in the first three months of 2023.

The weighted average lending rate, attached to foreign currency loans fell to 7.7 percent between January and March 2023 compared to a market average rate of 8-10 percent recorded in the past.

In contrast, Uganda shilling-denominated loans grew by 12.1 percent in the period compared to 13.5 percent in the final quarter of 2022, latest Bank of Uganda data shows.

Prime lending rates charged on the local shilling loans rose to 20.5 percent in the period.

Total loan extensions fell to Ush531.9 billion ($140 million) during the first quarter compared to Ush1 trillion ($236.7 million) recorded between October and December 2022.

Subsequent movements in benchmark interest rates applied to foreign currency loans have rendered these credit facilities much less affordable for local borrowers.

Real estate slump

In Uganda, clues on the reduced borrowing can be seen in sectors that have traditionally had a strong dollar demand.

“The real estate sector tends to mirror changes in local economic cycles. Faster economic growth implies more investment activity in the real estate sector and the reverse is true,” explained said Moses Lutalo, managing director of Broll Uganda Ltd.

"The cost of dollar loans has risen to about 11 percent per year – a rate deemed too high by many real estate developers," he explained.

“Funding costs attached to foreign currency loans have gone up and the persistent currency volatility risks have scared away interested borrowers. For example, a $2 million fixed deposit currently attracts an interest rate of eight percent per year,” observed Dr Fred Muhumuza, a director at Bank of Baroda Uganda.