The rapid growth of digital and mobile lending is transforming Uganda’s financial landscape.
It is expanding access to credit for millions who were previously excluded from the formal banking system.
But as financial inclusion deepens, a new challenge is emerging: a rise in loan defaults and growing concerns over the sustainability of unsecured digital credit.
A new Bank of Uganda Bank Lending Survey Report for the first quarter of the 2025/26 financial year indicates that commercial banks are warning that the very innovation meant to bridge access gaps is now creating new vulnerabilities in the credit market.
At least 13% of banks cited limited credit history among digital borrowers as a growing cause of default risk.
Many digital lenders, including banks, fintechs, and mobile network operators, are extending loans with minimal verification, relying largely on mobile transaction data and digital footprints instead of collateral or traditional credit checks.
While this has opened financial doors to small traders, informal workers, and youth entrepreneurs, it has also led to a surge in unsecured loans that are proving difficult to recover.
“Digital credit has boosted financial inclusion but created exposure to repayment risk,” Bank of Uganda observes in its report, calling on lenders to strengthen borrower assessment and monitoring.
Expanding access, rising exposure
Over the past five years, mobile lending platforms, many of them mobile money driven have become household names, offering convenience and speed, which has enabled borrowers to secure short-term loans in minutes, often with little paperwork.
However, the ease of access has also encouraged impulsive borrowing and loan stacking, where individuals take out multiple loans from different platforms to service existing debt.
The report warns that as digital credit grows, the share of non-performing loans in this category could increase, especially among households and small enterprises struggling with high borrowing costs and limited financial literacy.
During the quarter ending September 2025, the central bank noted a 4.2% rise in household loan defaults, partly attributed to the boom in mobile and digital lending.
Although the increase was smaller than the 20% spike previously projected, the upward trend has prompted renewed concern about credit discipline and repayment culture.
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Financial experts agree that digital credit is a double-edged sword, empowering the financially excluded but risky for lenders without proper safeguards.
Kenneth Mumba Kalifungwa, the Stanbic Bank chief executive, has previously said that, whereas digital innovation is reshaping credit access, it must be backed by stronger credit scoring systems and responsible lending practices.
“Technology has enabled us to reach customers we couldn’t serve before, but it also calls for discipline in how we lend. We must ensure that inclusion does not come at the cost of financial stability,” he said.
Similarly, Bank of Uganda’s survey, which was conducted among 22 banks and nine non-bank deposit-taking financial institutions, found that many banks are reviewing their digital lending models to include better risk profiling, repayment tracking, and partnerships with credit reference bureaus.
Political and economic headwinds
The report also notes that political uncertainty ahead of the 2026 elections, coupled with reduced donor funding, has tightened liquidity across the banking system.
As a result, some lenders are relying heavily on short-term, high-yield digital products to sustain profitability, a move that could heighten exposure to default risk.
With 22 percent of banks citing reduced NGO and USAID inflows as a key liquidity constraint, and 63 percent warning about political risks, the banking sector faces a delicate balancing act between expansion and prudence.
Thus, as a mitigation to the default risk, Bank of Uganda is urging lenders to adopt responsible digital credit practices, including borrower education, data-sharing frameworks, and regulatory compliance to prevent predatory lending.
“The default rate on loans is projected to increase for both enterprises and households during the quarter to December 2025,” the report cautions, urging vigilance among financial institutions.
Uganda’s credit market has become more digitized, but the challenge now is how lenders balance between extending credit and maintaining a stable credit market.
The mobile loan revolution has opened new doors for access, but unless lenders tighten their controls and borrowers build financial discipline, those doors could quickly morph into debt traps.
