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.

Tanzania's monetary policy in the fourth quarter of 2024 demonstrated a strategic approach to sustaining economic growth while maintaining price stability. The Bank of Tanzania (BoT) maintained a stable policy stance, supporting key sectors like agriculture, manufacturing, and construction through robust private sector credit growth. Effective liquidity management and moderate adjustments in interest rates highlighted the central bank’s commitment to fostering macroeconomic stability and inclusive economic activity.

Central Bank Rate (CBR) and Policy Stance

• CBR: The Bank of Tanzania (BoT) maintained the Central Bank Rate at 6%, demonstrating a stable monetary policy stance.
• 7-day Interbank Cash Market (IBCM) Rate: This rate was expected to fluctuate within ±200 basis points (bps) of the CBR, indicating the BoT's tolerance for short-term liquidity variations while ensuring stability.

Liquidity Conditions and Interbank Markets

1. Bank Liquidity

• Liquidity was tight in October 2024 due to increased demand for cash for seasonal crop purchases, especially cashew nuts.
• The 7-day IBCM rate averaged 8.48%, slightly exceeding the BoT's policy corridor, but declined from 8.58% in September 2024.

2. Monetary Injections

• To manage liquidity, the BoT scaled up injections through reverse repurchase agreements (reverse repos):
  • October 2024: TZS 2,887.9 billion,
  • September 2024: TZS 2,160 billion.
    This significant increase in reverse repos reflects the BoT’s active role in maintaining liquidity.

Monetary Aggregates Growth

1. Extended Broad Money Supply (M3)

• Growth in M3 accelerated:
  • October 2024: 14.6%,
  • September 2024: 11.4%,
  • October 2023: 12.4%.
    This rise indicates expanding financial activity, supported by robust monetary policy transmission.

2. Private Sector Credit

• Credit growth to the private sector remained strong:
  • October 2024: 17%,
  • September 2024: 17.5%,
  • October 2023: 17.9%.
    While slightly lower, this consistent growth reflects ongoing support for economic sectors.

Sectoral Credit Distribution

1. Agriculture:
   • Recorded the highest growth in credit at 44.7%, reflecting strong support for rural and agricultural activities.
2. Manufacturing:
   • Credit growth reached 18.7%, aiding industrial expansion.
3. Building and Construction:
   • Growth at 18.6%, indicative of sustained infrastructure investment.
4. Personal Loans:
   • Comprising 38.2% of the total loan portfolio, largely benefiting SMEs.
5. Trade:
   • Represented 12.7% of the loan portfolio.
6. Agriculture (overall share):
   • Accounted for 12% of total loans, emphasizing its importance in Tanzania’s economy.

Interest Rate Developments

1. Overall Lending Rate:
   • Increased to 15.67% from 15.53%, signaling slight tightening.
2. Negotiated Lending Rate:
   • Remained stable at 12.93%, aiding business planning.
3. Overall Deposit Rate:
   • Increased to 8.25% from 8.20%, enhancing savings attractiveness.
4. Negotiated Deposit Rate:
   • Rose significantly to 10.27% from 9.12%, reflecting better returns for large depositors.

Key Observations

1. Price Stability:
   • Despite tighter liquidity in October, the monetary policy maintained overall price stability.
2. Support for Growth:
   • The growth in M3 and private sector credit illustrates that monetary policy supported economic activity effectively.
3. Balanced Approach:
   • The policy successfully managed liquidity and ensured sufficient credit flow, particularly to productive sectors like agriculture and manufacturing.
4. Macroeconomic Stability:
   • BoT’s monetary policy ensured stable inflation, sustainable economic growth, and reasonable interest rates.

This multi-dimensional approach highlights the effectiveness of Tanzania’s monetary policy in fostering both macroeconomic stability and sectoral growth.

Tanzania's monetary policy in the fourth quarter of 2024 with key insights about the country's economic environment and the effectiveness of its central bank actions.

1. Policy Stability and Support for Economic Growth

• The stable Central Bank Rate (CBR) at 6% indicates a commitment to fostering economic growth while maintaining inflation within a manageable range.
• Despite seasonal liquidity tightness, the monetary policy stance was accommodative, ensuring adequate support for economic sectors.

2. Effective Liquidity Management

• Tight liquidity in October was managed through increased monetary injections (reverse repos). This intervention highlights the Bank of Tanzania's flexibility in responding to short-term economic demands (e.g., seasonal crop purchases like cashew nuts).
• The slight decline in the 7-day interbank cash market (IBCM) rate signals gradual easing of liquidity pressures.

3. Strong Credit Growth

• Robust credit growth of 17% in the private sector reflects a healthy financial sector capable of supporting businesses and households.
• Sectors like agriculture (44.7%), manufacturing (18.7%), and construction (18.6%) benefited significantly, showcasing targeted resource allocation to productive and growth-enhancing areas.

4. Interest Rate Dynamics

• The rise in lending and deposit rates indicates moderate tightening of monetary conditions, potentially to control inflation or stabilize the currency. However, negotiated rates remain competitive, supporting business borrowing and savings.
• The increase in the negotiated deposit rate (10.27%) suggests banks are competing for large deposits, possibly due to higher demand for liquidity.

5. Expansion in Monetary Aggregates

• The strong growth in the money supply (M3) to 14.6% and private sector credit underscores:
  • Economic confidence, with businesses and individuals accessing financing for growth.
  • An effective monetary transmission mechanism, where policy changes successfully impact financial flows.

6. Focus on Key Sectors

• The priority for agriculture reflects Tanzania's reliance on this sector for economic stability and employment. The highest credit growth in agriculture indicates significant support for rural economies and food security.
• The dominance of personal loans (38.2%) highlights the importance of SMEs and individual businesses in Tanzania's economic framework.

7. Macroeconomic Balance

• The policy achieved a delicate balance between:
  • Inflation control (via tight liquidity management and slightly higher rates),
  • Credit expansion (to productive sectors),
  • Economic growth support (through liquidity injections and targeted sectoral credit).

Conclusion

Tanzania's monetary policy in Q4 2024 reveals a proactive central bank addressing both short-term challenges (like seasonal liquidity tightness) and long-term goals (sectoral growth, price stability, and financial inclusion). It highlights an economy growing steadily, with sound monetary management ensuring stability and opportunity for diverse sectors.

Global growth faces multiple risks, including geopolitical tensions, which may disrupt trade and raise energy prices beyond $84 per barrel in 2024. Trade fragmentation could slow expected trade growth to below 2.5%, while persistent inflation, projected at 3.5% in 2024, might force central banks to maintain high interest rates of around 4% through 2026, dampening investment. Additionally, 40% of EMDEs are at risk of debt distress, with tightening global financing further constraining growth. Climate-related disasters and slower growth in key economies, like China, also pose significant threats to recovery. Conversely, faster disinflation and stronger U.S. growth offer potential upside.

1. Geopolitical Tensions

• Geopolitical risks remain a significant factor that could destabilize global growth. Escalating tensions, especially in areas like the Middle East and Eastern Europe, could lead to increased volatility in commodity prices, particularly energy.
  • Disruptions in the supply of oil could push prices higher than the projected $84 per barrel in 2024, dampening global economic activity​.
  • Geopolitical conflicts can disrupt global trade networks and heighten uncertainty, which has already reached historically high levels in recent years due to trade restrictions and sanctions​.

2. Trade Fragmentation

• Trade fragmentation and rising protectionism continue to threaten global trade. Trade policy uncertainty in major economies has reached its highest level since 2000, partly due to elections and new trade measures aimed at restraining cross-border flows​.
  • Trade growth is expected to recover moderately to 2.5% in 2024, but further trade barriers could reduce this significantly​.
  • A breakdown in global supply chains, especially in critical sectors such as semiconductors and energy, could cause delays and price increases that slow down production and economic recovery.

3. Inflationary Pressures

• Persistent inflationary pressures, especially in core areas like services, pose a risk to growth, as central banks may need to maintain tight monetary policies for longer.
  • Global inflation is forecast at 3.5% in 2024, but if inflationary trends continue to be more stubborn than anticipated, central banks might delay easing interest rates​.
  • Higher-than-expected inflation could lead to continued high global interest rates (expected to remain around 4% through 2026, double the previous two decades' average), dampening investment and consumer spending​.

4. Higher-for-Longer Interest Rates

• The risk of higher-for-longer interest rates could further slow down global activity. Monetary policy rates in advanced economies, especially in the United States and Europe, are expected to stay elevated as long as inflationary pressures persist.
  • This is particularly problematic for emerging market and developing economies (EMDEs), as it increases borrowing costs and leads to capital outflows. EMDE borrowing costs remain high, with about 40% of EMDEs vulnerable to debt-related stress​.
  • If interest rates remain high, global growth could deviate downward by 0.3-0.5 percentage points over the next two years, and investments could suffer​.

5. Debt Vulnerability and Fiscal Stress

• Many countries, particularly low-income countries (LICs) and EMDEs, are facing elevated levels of debt distress. The report highlights that around 40% of EMDEs are at high risk of debt-related stress​.
  • As global financing conditions tighten, servicing this debt will become more difficult, constraining governments’ ability to invest in growth-stimulating projects.
  • Public investment could be significantly reduced as countries try to balance fiscal sustainability with their debt obligations​.

6. Climate-Related Natural Disasters

• Increasing frequency of climate-related natural disasters could severely impact growth, especially in vulnerable regions like Sub-Saharan Africa and small island developing states.
  • These disasters can disrupt agriculture, infrastructure, and production chains, leading to output losses and exacerbating food insecurity.
  • Food prices could spike if global agricultural supply chains are hit by extreme weather events, with potentially significant implications for inflation in vulnerable economies​.
  • The report emphasizes that climate-related risks can stall or even reverse the progress made in disinflation efforts​.

7. Slower Growth in Key Economies

• Weaker-than-anticipated growth in key economies, such as China, poses a significant downside risk to global growth.
  • China’s growth is expected to slow to 4.8% in 2024, and any deeper or more prolonged downturn in China’s property market or overall economy could negatively impact commodity-exporting countries that depend on Chinese demand​.
  • A more severe slowdown in advanced economies, such as the Eurozone (projected to grow at only 0.7% in 2024), could drag down global trade and investment​.

8. Upside Risk: Faster Disinflation and Stronger Growth in the U.S.

• On the upside, faster-than-expected disinflation could occur if global supply chains recover more quickly, or if there is more progress in technological adoption that improves productivity.
  • In such a scenario, central banks could ease monetary policy faster, leading to a stronger growth outlook, particularly in advanced economies​.
  • U.S. growth could outperform expectations if labor force participation continues to rise and investment in technology-driven sectors remains strong​.

Key Figures:

• Global inflation: Forecast at 3.5% in 2024, but inflation risks remain high due to ongoing supply chain disruptions and persistent service sector inflation​.
• Interest rates: Expected to average 4% through 2026, but could stay higher if inflation remains stubborn​.
• 40% of EMDEs are vulnerable to debt-related stress, which could slow down growth if financial conditions tighten​
• Trade growth: Projected at 2.5% in 2024, but fragmentation and geopolitical tensions could reduce this further​.

Summary of Risks to Global Growth:

• Geopolitical tensions and trade fragmentation are critical risks that could disrupt global supply chains and trade flows.
• Inflation remains a major concern, with the possibility of persistent inflation forcing central banks to maintain high interest rates, which could dampen investment and growth.
• Debt vulnerability in EMDEs and climate-related disasters pose significant challenges, while slower-than-expected growth in key economies like China could impact global demand for commodities.
• On the upside, faster disinflation and stronger growth in the U.S. could help mitigate some of the risks, improving the global growth outlook.

Source: Global Economic Prospects June 2024 report