The objective of this study was to assess the economic implications of shrub encroachment on pastoral rangeland productivity in Mbarara district, in south western Uganda. Sixty pastoral households were surveyed, thirty of which were grazing on cleared farms (with less than 25% of grazing covered by bush) and thirty were grazing on bushy farms (with more than 75% of grazing land covered by bush). The study was a survey and did not involve rigorous experimental work. Results indicated that cleared farms had higher herbage dry matter yield ranging from 1 850 kg ha−1 to 2 230 kg ha−1, compared to a range of 622 kg ha−1 to 1 190 kg ha−1 on bushy farms. Heifers on cleared farms reached puberty earlier and calved relatively earlier (12-30 months) as opposed to 24-36 months on bushy farms. The mean calving rate on cleared farms was higher (33.6%) than 22.6% on bushy farms. Mean milk yield on cleared farms was 3.8 L cow−1 d−1 compared to 2.4 L cow−1 d−1 on bushy farms. Results of body condition score indicated that cattle on cleared range had a higher mean score of 5.8 compared to 4.2 on bushy farms. Mean annual gross income was US$49.393 per cow per annum on cleared farms compared to US$23.351 on bushy farms. Financial efficiency measured by TR/TVC ratio was 1.2 on cleared farms compared to 1.1 on bushy farms. From the findings of the study, it was concluded that shrub encroachment led to reduced herbage DM yield and low levels of crude protein of the pasture, while clearing more than doubled herbage DM production. As a result, animal productivity in terms of milk yield, body condition and reproductive performance were also reduced. Cleared farms were more profitable than bushy ones in terms of gross margins due to higher animal performance and hence higher incomes. The financial efficiency of cleared farms was low due to high costs of shrub control. Shrub encroachment is a serious problem facing pastoral production in Mbarara district and requires adequate attention.