There is nothing unusual about a bank buying Treasury bills. In fact, that is part of prudent banking. Government securities are safe, liquid, and predictable. But when too much bank money flows into Treasury bills and government bonds, the question stops being one of prudence and becomes one of priorities. That is the concern emerging from Uganda’s 2025 banking results.
At a time when businesses are crying out for affordable credit, several banks are still holding large volumes of government securities on their balance sheets. From the banks’ point of view, the logic is clear: why 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? But from the economy’s point of view, that choice can amount to crowding out the private sector.
This is the uncomfortable truth in Uganda’s financial system: the government may not be the only borrower in the market, but it is increasingly the borrower that banks seem to prefer. The crowding-out argument is straightforward. Banks have finite resources. Every shilling mobilized from depositors must be allocated somewhere. It can go into private sector loans, where risk is higher and monitoring is expensive, or into Treasury bills and bonds, where repayment is virtually assured. If government paper offers a strong return with minimal hassle, banks will naturally tilt in that direction. And when they do, private firms face tighter credit conditions.
Stanbic Bank Uganda, the country’s biggest bank, continues to maintain a large stock of investment securities alongside its loan book. To be clear, Stanbic remains a major lender to the private sector. But its 2025 results also underline how central government securities remain to earnings, liquidity management, and balance sheet strategy. When the largest bank in the market is comfortable holding substantial sovereign paper, the signal to the rest of the market could be powerful.
dfcu Bank’s 2025 results tell a similar story. The bank continued to report meaningful holdings of government securities at a time when loan growth remained measured and caution around credit quality persisted. Again, this makes sense from the bank’s perspective. Private lending in Uganda is not risk-free; bad loans can quickly erode profitability. Treasury instruments, by contrast, provide a safer home for funds. Yet every additional shift toward government paper means less appetite for riskier private borrowers — especially smaller businesses that do not have prime collateral or long credit histories.
Bank of Baroda Uganda also stands out as an example of conservative asset allocation. In its 2025 reporting cycle, government securities remained a prominent component of its earning assets. That may delight shareholders looking for stability, but it should concern anyone focused on economic transformation. Banks are supposed to do more than preserve capital. They are also supposed to intermediate savings into productive enterprises. When too much of that intermediate is redirected to financing the state, economic dynamism suffers.
Even banks with strong retail and SME identities are not immune to this pattern. In many cases, Treasury bills and bonds sit quietly under the line item of “investment securities,” making them seem technical and harmless. But the economic effect is significant. Those are funds that could otherwise support machinery purchases, stock financing, transport fleets, export working capital, or agro-processing expansion.
The people who feel this most are not large corporates. Big companies often still get credit because they have audited accounts, proven cash flows, and acceptable collateral. The real casualties are small and medium-sized enterprises. These businesses already face high borrowing costs, strict collateral demands, and short loan tenors. When banks can earn comfortably from Treasury bills, the incentive to stretch for SME lending weakens further. In effect, the small business owner is not just competing with other firms for credit; he is competing with the Ugandan government.
If banks prefer T-bills to business loans, then private investment slows. Factories delay expansion. Traders reduce inventory. Farmers postpone improvements. Start-ups remain undercapitalized. Job creation weakens. Productivity gains stall. The economy may still record growth, but it becomes a less entrepreneurial, less inclusive kind of growth — one driven more by state financing needs than by private sector ambition.
We cannot blame banks though. They are responding rationally to incentives. The deeper problem lies in the structure of domestic borrowing. When government borrows heavily from the local market and offers attractive yields, it effectively sets a floor under lending rates. Banks then price private loans at a premium above the sovereign benchmark. The result is predictable: credit becomes expensive, selective, and concentrated among the safest borrowers. This is why this issue is ultimately one of policy, not just bank behavior.
If Uganda wants a truly private-sector-led economy, one that will deliver the 10x ($500b) growth by 2040, then the financial system must reward lending to productive enterprises, not merely lending to the state. That means reducing excessive reliance on domestic bank financing of fiscal deficits, expanding credit guarantee schemes for SMEs, improving borrower information, collateral systems, and contract enforcement so that business lending becomes less risky.
The writer is a Senior Operations Officer at the World Bank Group based in South Africa.
The views expressed in this article are the author’s and do not necessarily reflect those of the World Bank Group.
