How Climate Change Is Putting Uganda’s Banking Sector at Risk

KAMPALA — The drought currently devastating Karamoja and straining food security across Uganda’s north is not just a humanitarian crisis. It is also a financial one — and most of Uganda’s banks don’t know it yet. The loans they’ve extended to farmers, agribusinesses, rural cooperatives, and small traders operating in climate-exposed areas may be performing on paper while the actual collateral behind them — land productivity, livestock, harvest income — is quietly deteriorating. When those loans eventually turn bad, the climate exposure will be blamed on the borrower. But the risk was always there. It simply wasn’t measured.

This is the central argument now being made in financial research across the continent, and it applies with particular force to Uganda’s banking sector, which remains heavily exposed to agriculture and climate-sensitive rural economies without meaningful tools to account for what that exposure actually costs.

Climate risk, as financial analysts define it, comes in two distinct forms. Physical risk is the direct impact of climate events — droughts destroying crops pledged as collateral, floods wiping out infrastructure built using borrowed money, extreme heat disrupting the supply chains that feed a borrower’s revenue. Both types can undermine banking stability through loan defaults, asset revaluation, operational disruptions, increased insurance costs, and liquidity shortages — effects that are consistently magnified in emerging markets like Uganda, where economies are highly exposed to climate-sensitive sectors like agriculture, and where financial systems lack the diversification, robust regulation, and adaptive capacity of more developed markets.

Transition risk is the second form — and it’s slower moving but potentially just as damaging. As global energy and commodity markets shift away from fossil fuels and carbon-intensive industries, banks that have extended credit to businesses dependent on those industries face the risk of those assets losing value before the loans are repaid. For Uganda, with its oil production ambitions through the Lake Albert fields and the EACOP pipeline, this transition risk is not hypothetical. It sits on the balance sheets of every bank that has lent into Uganda’s energy sector or to the businesses that service it.

The problem is that almost none of this risk is being measured or disclosed. Over 80% of African banks still fail to disclose portfolio emissions, according to WWF’s 2025 Sustainable Banking Assessment for Africa, which found that banks in South Africa and Kenya lead the region in climate risk integration and disclosure, while most of the continent remains far behind. For Uganda specifically, the Bank of Uganda has not yet issued binding climate risk guidance for commercial banks, leaving institutions to manage climate exposure on a voluntary basis — which in practice means most of them don’t manage it at all. Ghana’s central bank has moved ahead of the region, issuing a Climate-Related Financial Risk Directive that took effect for banks in January 2026, requiring institutions to integrate climate risk into their governance, credit assessment, and stress-testing processes. Uganda has no equivalent framework in place.

The consequences of this gap are already visible, even if they’re not being labelled correctly. When a bank in Jinja or Mbarara writes off an agricultural loan because a farmer experienced a failed harvest, the write-off goes into the books as credit risk. The climate dimension — that the rainfall failure was entirely predictable from seasonal forecasting data, that the soil degradation making the failure worse has been documented for years, that the borrower’s vulnerability was a function of where they farm rather than how — disappears from the analysis. The next loan to the next farmer in the same catchment gets approved on the same terms, and the cycle begins again.

Climate shocks place pressure on public finances as governments face higher spending and reduced revenues, which increases debt and sovereign risk and can spill over into domestic credit conditions — reducing banks’ ability to sustain lending precisely when the economy needs it most. The current Karamoja emergency, where the government is today seeking Cabinet approval for additional food procurement, is a direct fiscal cost that will be financed from somewhere. Every shilling spent on drought relief is a shilling not available for infrastructure, health, or education — a crowding-out effect that ultimately constrains the economic activity that backs the banking sector’s broader loan book.

The solution isn’t to stop lending to agriculture or rural Uganda. Agriculture accounts for roughly 24% of Uganda’s GDP and employs the majority of the population — a banking sector that withdraws from climate-exposed sectors doesn’t protect itself, it simply shrinks its own market while failing the economy it depends on. The solution is to price climate risk accurately, which means banks building the tools to assess which borrowers are in high-risk flood zones, which supply chains are drought-dependent, which collateral values are tied to rainfall patterns, and which business models assume a climate stability that no longer exists.

Research on Sub-Saharan African central banks finds that without action, the risks from climate change to financial stability outweigh the opportunities — and that preparedness is crucial if central banks and supervisors are to shift that balance. For Bank of Uganda, the question of whether to issue climate risk guidance for commercial banks is moving from a question of aspiration to one of institutional responsibility. The banks that begin measuring this risk now — building climate scenario analysis into credit assessments, stress-testing portfolios against drought and flood scenarios, requiring climate disclosure from large corporate borrowers — will be better positioned when regulators eventually mandate it and better insulated when the next climate shock arrives. Given what is happening in Karamoja right now, that shock is not a future hypothetical. It is already here.