Why Ugandan Households Feel Interest Rate Shocks Strongly: Insights from IMF Data

The IMF study finds that monetary tightening in Uganda strongly raises household lending rates and reduces loan availability, with fixed-rate borrowers and low-income households hit hardest. Bank balance-sheet strength significantly shapes how sharply each institution transmits policy changes to borrowers.

Uganda’s monetary transmission dynamics come into sharp focus in this IMF working paper, produced by researchers at the International Monetary Fund, using administrative loan-level data from the Bank of Uganda and the country’s Credit Reference Bureaus. The study traces how movements in the Central Bank Rate filter through commercial banks and ultimately shape the pricing, maturity, and availability of loans taken by Ugandan households. Drawing on more than 630,000 loans originated between 2017 and 2023, it offers one of the most granular examinations of credit conditions in a low-income country, showing that even in a market with high risk and limited hedging tools, monetary policy finds a powerful, uneven path to households.

A Credit Market Unlike Those in Advanced Economies

The report begins by placing Uganda’s evolving credit landscape against a backdrop of fluctuating interest rates and growing household borrowing. Household credit has risen steadily, even as the central bank tightened policy during inflationary spells and pandemic disruptions. Yet a central empirical challenge arises: nearly all Ugandans borrow from only one bank, making classic identification methods impossible. The authors circumvent this by constructing “synthetic borrowers,” clustering individuals with similar income, employment status, gender, and district. These synthetic borrowers mimic multi-bank behavior and allow the researchers to isolate supply-side responses to monetary shocks.

What emerges from the data is a portrait of a credit market marked by high costs and short horizons. The average loan size is UGX 12.6 million, interest rates average a striking 31 percent, and maturities rarely exceed 29 months. Fixed-rate loans, unlike in rich countries, are smaller, shorter, and significantly more expensive than floating-rate loans, reflecting the high funding costs, greater credit risk, and the absence of hedging instruments in Uganda’s financial system.

A Banking Sector With Uneven Buffers

Uganda’s banking sector is concentrated, with just five banks holding nearly 90% of the total assets. Bank balance sheet data reveal wide variation in capitalization, liquidity, and government securities holdings, differences that become crucial channels through which monetary policy transmits. Banks maintain high liquidity ratios of around 30 percent and hold a substantial portion of assets, about 20 percent, in government securities, far above the norm in advanced economies. These characteristics shape the extent to which each bank tightens or sustains lending when the central bank raises rates.

Monetary Tightening Hits Fixed-Rate Loans Hardest

The core finding is clear: monetary tightening significantly affects household borrowing conditions. A 100-basis-point increase in the Central Bank Rate pushes lending rates up by roughly 55 basis points in the following quarter, while loan amounts contract. Although maturities do not immediately shrink, their medium-term path shows a firm tightening. Banks with stronger capital buffers and higher liquidity respond more aggressively: they raise loan rates more sharply and shorten maturities more decisively than weaker banks, demonstrating a pronounced balance-sheet channel in action.

The contrast between floating and fixed-rate loans is especially striking. Fixed-rate products, already riskier for lenders in Uganda’s volatile macroeconomic environment, react far more strongly to policy tightening. Without a derivatives market to hedge interest-rate risk, banks sharply reduce maturities and raise interest rates on fixed-rate loans, making this segment the most sensitive to policy shifts.

Winners, Losers, and a Consistent Policy Message

The distributional analysis reveals that gender-based differences in transmission are minimal, but income disparities matter. Low-income borrowers face notably sharper rate hikes at banks heavily invested in government securities, reflecting risk-averse balance-sheet strategies that amplify regressive outcomes during tightening cycles. These borrowers bear the highest increases in borrowing costs after policy shocks, even though they generally take smaller loans.

To confirm the robustness of these results, the study adds controls for changes in the cash reserve requirement, exchange rate movements, and banks’ expectations of future lending rates. It also re-estimates the model excluding Kampala, Uganda’s financial hub, and redefines borrower locations at the regional level. Across all tests, the main findings remain stable.

Ultimately, the paper shows that Uganda’s monetary policy transmits powerfully and unevenly through the household credit channel. For policymakers, the lesson is clear: the average pass-through tells only part of the story. Uganda’s financial architecture, shaped by bank balance sheets, product types, and income disparities, determines who feels monetary tightening most, and how deeply it affects household access to credit.