Stability in Lending, Competitive Deposit Market, and a Narrowing Spread Signal Sector Efficiency

In June 2025, Tanzania’s banking sector exhibited notable stability and competitiveness. The overall lending rate held steady at 15.23%, slightly up from May, while short-term lending rates eased from 15.96% to 15.69%, reflecting increased liquidity and competition. Deposit rates rose across the board, with the negotiated deposit rate jumping from 10.64% to 11.21%, driven by end-of-year liquidity needs. Importantly, the short-term interest rate spread narrowed to 5.90%, down from 6.49% in June 2024, indicating improved efficiency and a more competitive banking environment benefiting both borrowers and depositors.

1. Lending Interest Rates

Lending interest rates represent the cost of borrowing from commercial banks and are influenced by factors such as the Bank of Tanzania’s (BoT) monetary policy, liquidity conditions, credit risk, and competition in the banking sector. In June 2025, lending rates remained broadly stable, with minor fluctuations reflecting market dynamics.

Key Lending Rates

The following table summarizes the lending rates for May and June 2025, with changes noted:

• Overall Lending Rate:
  • Increased slightly from 15.18% in May 2025 to 15.23% in June 2025 (+0.05 percentage points).
  • This marginal increase suggests stable credit conditions, with banks maintaining relatively high rates to account for credit risk and operational costs. The stability aligns with the BoT’s monetary policy stance, likely aimed at controlling inflation while supporting economic growth.
  • Compared to June 2024 (15.30%), the June 2025 rate is slightly lower, indicating a modest easing in borrowing costs over the year, possibly due to improved liquidity or competitive pressures.
• Short-Term Lending Rate (loans up to 1 year):
  • Decreased from 15.96% in May 2025 to 15.69% in June 2025 (-0.27 percentage points).
  • The decline suggests increased competition among banks for short-term lending, possibly driven by higher liquidity in the banking system or demand for short-term credit from businesses managing working capital needs.
  • Compared to June 2024 (15.57%), the June 2025 rate is higher, reflecting a temporary tightening in short-term lending conditions earlier in 2025, possibly due to seasonal liquidity demands.
• Negotiated Lending Rate:
  • Decreased from 12.99% in May 2025 to 12.68% in June 2025 (-0.31 percentage points).
  • Negotiated rates are typically offered to prime customers (e.g., large corporations or low-risk borrowers with strong credit profiles). The decline indicates banks are offering better terms to attract or retain high-quality borrowers, possibly due to competitive pressures or improved borrower creditworthiness.
  • Compared to June 2024 (12.82%), the June 2025 rate is lower, suggesting a trend toward more favorable conditions for prime borrowers over the year.

Context and Insights:

• Stability in Lending Rates: The overall lending rate’s stability (15.23% in June 2025) reflects a balanced monetary policy environment, with the BoT likely maintaining the Central Bank Rate (CBR) at a level to ensure price stability while supporting credit growth. The high rates (relative to deposit rates) indicate that banks are cautious about credit risks, particularly for non-prime borrowers.
• Short-Term Lending Dynamics: The decrease in short-term lending rates may be linked to the robust interbank cash market (IBCM) activity, with a turnover of TZS 2,873.9 billion in June 2025 (as noted in the previous query). Higher liquidity in the IBCM, with a slight decline in interest rates (7.93%), likely eased funding costs for banks, enabling them to lower short-term lending rates.
• Negotiated Rates and Competition: The decline in negotiated lending rates suggests increased competition among banks to secure high-value clients. This could be driven by Tanzania’s growing private sector, particularly in sectors like agriculture, manufacturing, and mining, which require significant financing.
• Economic Implications: Stable but high lending rates (15.23% overall) may constrain borrowing for small and medium enterprises (SMEs), which are sensitive to borrowing costs. However, the lower negotiated rates benefit larger firms, potentially boosting investment in key sectors.

2. Deposit Interest Rates

Deposit interest rates reflect the returns banks offer to depositors for savings, time deposits, and other accounts. These rates are influenced by liquidity needs, competition for deposits, and the BoT’s monetary policy. In June 2025, deposit rates generally increased, driven by seasonal liquidity demands at the end of the financial year.

Key Deposit Rates

The following table summarizes the deposit rates for May and June 2025, with changes noted:

• Overall Time Deposit Rate:
  • Increased from 8.58% in May 2025 to 8.74% in June 2025 (+0.16 percentage points).
  • This rise reflects banks’ increased demand for funds, likely driven by end-of-financial-year obligations, such as loan disbursements or reserve requirements.
  • Compared to June 2024 (7.66%), the June 2025 rate is significantly higher, indicating a sustained increase in deposit rates over the year, possibly due to tighter liquidity conditions or higher competition for deposits.
• 12-Month Deposit Rate:
  • Increased slightly from 9.72% in May 2025 to 9.79% in June 2025 (+0.07 percentage points).
  • The modest increase suggests banks are offering slightly better returns to attract longer-term deposits, which provide more stable funding for lending activities.
  • Compared to June 2024 (9.09%), the June 2025 rate is higher, reflecting a trend toward higher returns for depositors, possibly to compete with alternative investment options like Treasury bonds (yields of 14.50%–14.80% in June 2025).
• Negotiated Deposit Rate:
  • Increased noticeably from 10.64% in May 2025 to 11.21% in June 2025 (+0.57 percentage points).
  • Negotiated rates are offered to large or institutional depositors (e.g., pension funds, corporations). The significant rise indicates banks’ willingness to pay a premium to secure large deposits, likely to meet liquidity needs or fund lending activities.
  • Compared to June 2024 (9.86%), the June 2025 rate is much higher, suggesting increased competition for high-value deposits over the year.
• Savings Deposit Rate:
  • Increased from 2.52% in May 2025 to 2.90% in June 2025 (+0.38 percentage points), recovering from a dip in May.
  • Compared to June 2024 (2.86%), the June 2025 rate is slightly higher, indicating a modest improvement in returns for retail depositors.
  • The low savings rate reflects the lower risk and liquidity of savings accounts compared to time deposits, but the increase suggests banks are incentivizing retail savings to bolster their deposit base.

Context and Insights:

• Seasonal Liquidity Needs: The rise in deposit rates, particularly the negotiated rate (+0.57%), is attributed to seasonal liquidity demands at the end of the financial year (June 2025). Businesses and individuals often settle obligations, increasing banks’ need for funds to meet withdrawal demands or loan disbursements.
• Competition for Deposits: The significant increase in negotiated deposit rates suggests banks are competing aggressively for large deposits from institutional clients, who have bargaining power to secure better terms. This could be driven by the high yields on Treasury bonds (14.50%–14.80%), which compete with bank deposits as investment options.
• Retail Depositor Trends: The recovery in savings deposit rates (from 2.52% to 2.90%) indicates banks are also targeting retail depositors to diversify their funding sources. However, the low savings rate compared to time deposits reflects the limited bargaining power of retail clients.
• Economic Implications: Rising deposit rates encourage savings, which can support bank lending capacity and economic growth. However, higher deposit rates increase banks’ funding costs, which could pressure profit margins unless offset by lending income or operational efficiencies.

3. Interest Rate Spread

The interest rate spread is the difference between lending and deposit rates, typically measured for short-term instruments to reflect banking efficiency and profitability. A narrower spread indicates improved financial intermediation and a more competitive banking environment.

• Short-Term Interest Rate Spread:
  • June 2024: 6.49%
  • May 2025: 6.24%
  • June 2025: 5.90%
  • The spread narrowed by 0.34 percentage points from May to June 2025 and by 0.59 percentage points from June 2024 to June 2025.

Context and Insights:

• Calculation: The short-term interest rate spread is derived from the short-term lending rate (15.69% in June 2025) and the 12-month deposit rate (9.79% in June 2025), as these are comparable tenors. The spread is calculated as:
  • 15.69% - 9.79% = 5.90%
• Narrowing Spread: The decline in the spread reflects:
  • Increased Competition: Banks are lowering short-term lending rates (15.69%) and raising deposit rates (9.79%) to attract customers, reducing their profit margins per transaction.
  • Improved Efficiency: A narrower spread suggests banks are improving financial intermediation, passing on liquidity benefits to borrowers and depositors.
  • Liquidity Conditions: The robust IBCM turnover (TZS 2,873.9 billion) and lower IBCM rate (7.93%) in June 2025 indicate ample liquidity, enabling banks to offer better terms to borrowers and depositors.
• Economic Implications: A narrower spread benefits borrowers by reducing borrowing costs and encourages lending, supporting economic activity. However, it may squeeze bank profitability, prompting banks to seek operational efficiencies or alternative revenue sources.

Summary Table

Key Insights and Broader Implications

1. Stable Lending Environment:
   • The overall lending rate’s stability (15.23% in June 2025) and slight year-on-year decline (from 15.30% in June 2024) suggest that credit risk perceptions have not worsened, despite high rates. This stability supports private sector borrowing, particularly for large firms benefiting from lower negotiated rates (12.68%).
   • The decrease in short-term lending rates (15.69%) reflects competitive pressures and ample liquidity, as evidenced by the IBCM’s high turnover and lower rates. These benefits businesses seeking working capital loans, supporting sectors like trade and agriculture.
2. Rising Deposit Rates:
   • The increase in deposit rates, particularly the negotiated rate (11.21%), reflects banks’ efforts to attract funds to meet liquidity needs at the financial year-end. This aligns with the absence of Treasury bill auctions in June 2025, which may have increased banks’ reliance on deposits for liquidity.
   • Higher deposit rates encourage savings, strengthening banks’ funding base. However, the low savings deposit rate (2.90%) indicates limited benefits for retail depositors, potentially constraining household savings growth.
3. Narrowing Interest Rate Spread:
   • The narrowing spread (5.90% in June 2025) is a positive signal for Tanzania’s banking sector, indicating improved efficiency and competition. This benefits borrowers through lower borrowing costs and depositors through higher returns, fostering financial inclusion and economic activity.
   • The spread’s decline from 6.49% in June 2024 suggests structural improvements in the banking sector, possibly driven by technological advancements, regulatory reforms, or increased market participation.
4. Monetary Policy Context:
   • The BoT’s monetary policy likely played a role in stabilizing lending rates and supporting liquidity, as seen in the IBCM’s performance. The CBR, while not specified, is likely set to balance inflation (targeted at 3%–5%) and growth (projected at 5.5%–6% for 2025).
   • The rise in deposit rates and narrowing spread suggest the BoT’s liquidity management tools (e.g., open market operations, reserve requirements) are effective in maintaining a stable financial environment.
5. Economic Implications:
   • The trends in lending and deposit rates support Tanzania’s economic growth by facilitating credit access and encouraging savings. However, high lending rates (15.23% overall) may limit SME borrowing, a critical driver of employment and growth.
   • The competitive banking environment, as evidenced by the narrowing spread, could attract more players to the financial sector, enhancing financial inclusion and supporting Tanzania’s Development Vision 2025 goals.