Digital fiscal transfers shape credit risk in Uganda’s microfinance banks, study finds

A new study of Uganda’s microfinance deposit-taking institutions reports that digital fiscal transfers, together with strong institutional liquidity buffers, appear to reduce credit risk in the short run, while economic expansions carry a hidden cost: rising exposure to loan defaults. The research, published as an open-access article in Humanities and Social Sciences Communications, examines how macro-financial dynamics and digital government payments jointly influence credit risk in one of East Africa’s frontier financial systems.

The analysis draws on monthly data spanning September 2022 to July 2025, a period covering the post-pandemic expansion of digital fiscal transfers across developing economies. The author, Lorna Katusiime, applies an Autoregressive Distributed Lag model, a statistical framework designed to separate short-run dynamics from long-run equilibrium relationships between variables.

In the short run, the results point to a stabilizing role for institutional balance sheets. Higher capital held by the microfinance institutions, larger customer deposit bases, and growing inflows of E-money are each associated with reduced credit risk. According to the study, these findings highlight the importance of liquidity buffers and digital fiscal inflows in cushioning loan portfolios. By contrast, increased loan loss provisions signal heightened portfolio vulnerability, marking a warning indicator of deteriorating asset quality.

Inflation plays a nuanced role in the model. The study finds that inflation temporarily eases credit risk by lowering real debt burdens, effectively making outstanding loans cheaper for borrowers to service in real terms. The author describes this effect as temporary, distinguishing it from the longer-run relationships the model estimates.

Over the long run, the system exhibits cointegration, meaning the variables move together toward a shared equilibrium rather than drifting apart permanently. Yet only one long-run driver proves statistically significant: economic activity. Stronger economic activity is associated with higher credit risk, a pattern the study interprets as procyclical risk behavior. Rather than lending more cautiously during booms, the institutions appear to take on greater risk as the economy expands.

The model also quantifies the speed of adjustment. An estimated 14.7 percent of any disequilibrium from the long-run relationship is corrected each month, indicating a moderately fast return to equilibrium after shocks disturb the system.

The expansion of digital fiscal transfers since the COVID-19 pandemic has transformed access to finance for marginalized communities, the study notes, yet the macro-financial implications of these transfers for institutional risk had remained underexplored. By linking E-money inflows directly to credit risk outcomes in regulated microfinance deposit-taking institutions, the research offers empirical evidence from a frontier market where such channels are increasingly central to financial inclusion.

The author concludes that Uganda’s microfinance deposit-taking institutions benefit from strong institutional liquidity, digital fiscal inflows, and moderate inflation as short-term stabilizers, but remain vulnerable to procyclical risk taking during periods of economic expansion. This vulnerability, the study argues, underscores the need for prudential regulation that is digitally sound, forward-looking, countercyclical, and risk-sensitive.

Beyond regulation, the findings point to the importance of coordinated oversight among fiscal, monetary, and digital finance authorities. The study suggests that ensuring digital innovation supports inclusive and resilient financial systems in the post-pandemic era requires these authorities to work together rather than in separate silos.

The evidence, the author writes, shows that fiscal digitalization can enhance financial stability and foster inclusive, sustainable credit growth in frontier markets. The published version is an early-release copy of accepted, peer-reviewed research, citable with a permanent DOI and subject to further edits before the final version of record replaces it.

Subject of Research: Credit risk dynamics and digital fiscal transfers in Uganda's microfinance deposit-taking institutions

Article Title: Digital fiscal transfers, macroeconomic stability, and credit risk in frontier financial systems: evidence from Uganda’s microfinance deposit-taking institutions

Article References: Katusiime, L. (2026). Digital fiscal transfers, macroeconomic stability, and credit risk in frontier financial systems: evidence from Uganda’s microfinance deposit-taking institutions. Humanities and Social Sciences Communications. https://doi.org/10.1057/s41599-026-09427-7

Image Credits: AI Generated

DOI: 10.1057/s41599-026-09427-7

Keywords: Uganda, microfinance deposit-taking institutions, digital fiscal transfers, credit risk, E-money, ARDL model, cointegration, procyclical risk, financial stability, prudential regulation, frontier markets, inflation