Costly credit, fees spark fresh scrutiny as banks post strong quarter 1 profit

This represents a 10.12 percent increase, reflecting sustained earnings momentum across the industry.

The growth was largely driven by interest income, which rose to Sh1.88 trillion from Sh1.53 trillion, an increase of 22.88 percent.

Interest income is generated from lending to households, businesses and government securities. The increase points to continued expansion in interest-earning assets, particularly government instruments and corporate lending, even as private sector credit demand remains cautious due to high borrowing costs.

Non-interest income also rose to Sh690.95 billion from Sh638 billion, an 8.3 percent increase, supported by fees and commissions from banking services, including digital transactions, foreign exchange operations, card usage and account maintenance charges.

The steady rise in this segment reflects the sector’s growing reliance on transaction-based income, supported by increased uptake of mobile and digital banking platforms.

However, the strong financial performance comes amid persistent public concern over the cost of credit and banking services. Small and medium-sized enterprises (SMEs), in particular, continue to cite high lending rates as a major constraint to accessing finance, while retail customers have raised concerns about rising bank charges and fees.

Bank of Tanzania (BoT) data up to February 2026 shows the average lending rate remained broadly stable at 15.11 percent, compared with 15.1 percent in January, indicating limited movement in borrowing costs despite changing market conditions.

The gap between rising bank profits and customer concerns has renewed debate on pricing, competition and efficiency within the banking sector.

Renown economist, Prof Samwel Wangwe, said the trend reflects structural challenges in credit allocation and risk assessment within the financial system.

“High lending costs are largely a reflection of perceived risks in the market. When default risks are high, banks have no option but to price that risk into loans,” he said.

He added that greater expansion of private sector lending, rather than heavy reliance on government securities, would help improve access to credit and support broader economic growth.

Prof Wangwe also noted that strengthening risk management frameworks and improving borrower assessment could gradually reduce the cost of lending over time.

Banking analyst, Mr Kelvin Mkwawa, said market structure also plays a role in pricing dynamics, pointing to the dominance of a few large banks.

“A small number of leading banks control a significant share of deposits and profitability. This reduces competitive pressure that would otherwise help drive down costs,” he said.

He added that concentration of government banking business within a few institutions further reinforces their market position, limiting the ability of smaller banks to compete on pricing.

Mr Mkwawa said a more diversified distribution of public sector banking relationships could improve competition and give customers more affordable options.

An international business and microfinance expert at Mzumbe University, Dr Daudi Ndaki, said lending costs are influenced by several interconnected factors, including interbank market conditions, central bank policy and borrower behaviour.

“The cost structure begins at the interbank level. If the cost of funds is high, banks inevitably pass that on to borrowers,” he said.

He added that weak repayment discipline and high default rates increase risk premiums charged by banks, pushing up lending rates.

“Improving repayment culture is essential. When default risk declines, the cost of credit can also come down gradually,” he said.

Dr Ndaki further pointed to ongoing reforms aimed at strengthening credit information systems, including the development of centralised borrower databases linked to national identification systems.

He said such reforms would improve transparency in lending decisions by allowing banks to better assess borrower history and reduce uncertainty.

“A more integrated credit information system will help reduce information gaps between lenders and borrowers, improving efficiency in pricing,” he said.

Analysts say that while the banking sector remains profitable and stable, the key challenge remains ensuring that financial sector gains translate into more affordable and accessible credit, particularly for SMEs and households that drive day-to-day economic activity.

Dr Ndaki further pointed to ongoing reforms aimed at strengthening credit information systems, including the development of centralised borrower databases linked to national identification systems.

He said such reforms would improve transparency in lending decisions by allowing banks to better assess borrower history and reduce uncertainty.

“A more integrated credit information system will help reduce information gaps between lenders and borrowers, improving efficiency in pricing,” he said.

Analysts say that while the banking sector remains profitable and stable, the key challenge remains ensuring that financial sector gains translate into more affordable and accessible credit, particularly for SMEs and households that drive day-to-day economic activity.