Commercial Banks in Uganda have two days left to meet the new minimum Cash Reserve Requirement (CRR) set by the central bank at 13.5 percent up from the previous 11 percent. CRR is a part of the total customer deposits that a bank should maintain or keep and not lend it out. Banks usually lend out money mainly from the money that customers deposit with them, and Bank of Uganda says only up to 86.5 percent of the amount may be lent out.
The central bank uses this approach to pull excess liquidity out of the banking sector, effectively making less available the money for lending out. This in turn should make the local currency scarcer and more expensive to the dollar, hence stabilizing the foreign exchange rate. With less money available for lending by the banks, it means credit to the private sector becomes limited, subsequently reducing or controlling the flow of money into circulation, leading to a controlled inflation rate.
Both inflation and the foreign exchange rate have been rising, with headline inflation for the first time hitting the 4.0% at the end of July 2026 before rising to 4.1 percent in August, since August 2025.
Uganda Bureau of Statistics largely attributes this to the increase in prices of fuel, electricity, water housing, gas and other fuels like charcoal, as well as some essential foodstuffs. On the other hand, the shilling has also been depreciating over the last six months, due to the high cost of imported fuel, a decline in tourism earnings and a-lower-than-expected growth in exports.
Consequently, the shilling has depreciated to 3,925 and 3,935 to a dollar, buying and selling, up from the 3,650 and 3,740 levels recorded before the Iran conflict. The sharp rise in the dollar has drawn reactions from the public calling for action by the bank of Uganda to tame the forex rates, but BoU says any action is aimed at “smoothing out” any volatility, but not to stop the dollar rate from rising.
Governor Michael Atingi-Ego says BAnk of Uganda retains more than enough foreign reserves and monetary tools to step in and stabilize the exchange rate if the depreciation turns disorderly. “Bank of Uganda has what it takes to stabilize this exchange rate so be still, all will be fine,” he told the Annual Banker’s Conference 2026, attributing the current situation mainly to the global oil prices, and a market-determined currency – the shilling.
The uncertainty over how long the Middle East conflict will take has seen commercial banks buy and stock dollars in large volumes, further exerting pressure on the shilling, according to Dr Adam Mugume, Central Bank’s Executive Director for Research and Policy.
The hike in the CRR should therefore directly strain the operational capacity and financial performance of Ugandan financial institutions, particularly commercial banks, with analyses estimating about 1 trillion shillings to be locked up in the financial institutions immediately.
Raising the CRR means banks immediately forfeiting a larger share of their customer deposit base and forfeiting it from liquidity available for lending. Because these mandatory reserves generate zero interest income, banks will bear losing bigger chunks of their active investable capital from which they would earn interest rates or even use to buy government treasury bills and bonds.
This is more likely to affect smaller banks than the bigger ones. Implementation of the move will likely lead to higher interest rates to borrowers as the banks seek to protect their profit margins from the lost investment capital.
Currently, interest rates by commercial banks range between 17 and 19%, which is among the highest rates in Africa where the average rate in 14.5%, according to the Bank of Uganda. Tighter liquidity conditions also lure banks into more selective, tightening loan conditions and turning away riskier retail borrowers and small-and-medium enterprises as they seek to conserve scarce capital.
While structurally and legally the banks are capable of executing this change, the banks will encounter different challenges especially depending on size. “Cutting liquidity in the banking industry will help bring down risks of speculation and volatility in the foreign currency market,” said Benoni Okwenje, General Manager, Financial Markets Operations at Centenary Bank.
Since 2022, BoU has revised upwards the CRR five times to achieve macroeconomic stability. In 2022, it was raised from 8% to 10 as BoU moved to aggressively tighten liquidity to fight the inflation spike caused by the Russia-Ukraine conflict.
Later, following a slight easing to 9.5 percent as inflation cooled off, it was again raised in May this year to 11.0 percent to “absorb structural market liquidity” to anchor inflation which was rising.
The latest revision to 13.5 is largely to defend a sliding shilling against global energy supply and price shocks, according to Bank of Uganda.
According to David Kalyango, the Executive Director of Supervision and Regulation, the directive gives financial institutions zero transitional delay. He says Chief Executive Officers of commercial banks must take all “necessary measures” immediately to meet the standard by the specified cycle date. The central bank added that it will continuously monitor market conditions following the deadline and may issue further guidance or intervention depending on how system liquidity responds-URN. Give us feedback on this story through our email: kamwokyatimes@gmail.com
