How Tanzanians spend personal loans

The central bank says in its Financial Stability Report released last week that construction accounted for the largest share at 19.6 percent, followed closely by education (19.2 percent), medical expenses (14.7 percent) and car purchases (14.2 percent).

While these sectors reflect efforts by households to improve their quality of life, they also highlight a growing trend of borrowing for consumption and long-term welfare rather than short-term income generation.

Business and agriculture followed at 16.6 percent and 15.7 percent respectively, indicating that a notable number of borrowers also targeted productive sectors.

The report notes a steady increase in personal loans over the past six years, rising from 29.7 percent in 2019 to 36.7 percent of total loans issued by the banking sector last year. This surge is largely attributed to reduced interest rates, extended repayment periods and increased loan sizes.

“The improved business climate and economic growth further enhanced household income, prompting increased spending and investment,” reads part of the BoT report.

It adds that the Bank reduced the risk weight on personal loans by 50 percent, prompting banks to ease credit conditions significantly. That included lowering interest rates, increasing loan sizes and extending repayment terms—all of which stimulated a rise in loan applications.

Despite much of the borrowing being used for non-income-generating activities, financial analysts caution that a balance must be struck. They contend that while it is encouraging to see households improving their living standards, it is equally crucial that borrowing is increasingly aligned with income-generating purposes to ensure sustainable debt management.

On a positive note, the report indicates that household financial positions have improved, enabling more reliable loan repayments and contributing to a steady decline in non-performing loans (NPLs). Some households have also invested in businesses, agriculture and financial assets—enhancing cash flow and creditworthiness—sometimes even using acquired assets as collateral for future borrowing.

BoT maintains that banking institutions remain optimistic. With household defaults decreasing and economic activity rebounding, banks are expected to continue lending under favourable terms while intensifying loan recovery efforts to maintain credit quality.

Dr Lutengano Mwinuka of the University of Dodoma said borrowing for household purposes remains widespread in Tanzania as many citizens are still transitioning through early stages of economic growth.

“The use of borrowed loans for personal household purposes is common in our economy because many are still in the economic growth process,” he said, noting that the trend reflects the financial realities of most households. “People’s economic status is still growing in a trajectory form, so they mainly focus on household purposes. Later, they shift to investment and other development needs.”

While acknowledging that borrowing has enabled many Tanzanians to improve their living standards, Dr Mwinuka cautioned against excessive reliance on loans for non-income-generating purposes, particularly for salaried individuals.

“It is important to evaluate the need for a loan and its purpose, particularly because many depend on their salaries for repayment,” he noted and urged Tanzanians to focus on long-term investments.

“It is not a problem if the loans are being repaid. But people should aim to use borrowed funds for investments such as real estate, rather than focusing heavily on household consumption.”

Dr Tobias Swai of the University of Dar es Salaam said the growing use of personal loans to finance small businesses, housing and vehicle purchases highlights deeper structural weaknesses in Tanzania’s financial sector.

He added that the trend reflects a lack of specialised institutions—such as housing banks, leasing companies and SME-focused lenders—forcing individuals to rely on personal credit for productive investments.

“This heavy dependence on personal loans is a sign that the financial system is not adequately structured to meet sector-specific needs. It’s an unsustainable workaround that increases costs for borrowers and stifles innovation in lending.”

The result is a blurring of the line between consumption and productive lending, with negative implications for financial inclusion and economic growth, Dr Swai added.

Small businesses remain largely informal, lacking access to affordable, long-term capital, which hampers expansion and job creation. This situation also raises the cost of doing business and complicates tax compliance due to informal financing structures.

Trade credit remains significant at 12.5 percent, reinforcing Tanzania’s dependence on imported goods over domestic production. Without targeted credit policies and industrial support, Tanzania risks remaining a consumer economy, rather than achieving the structural transformation outlined in Vision 2050.

Although agriculture’s credit share has increased to 12.4 percent, much of it still flows through personal loans.

Dr Swai stressed the need for stronger sector-specific financial institutions—like the newly launched Cooperative Commercial Bank to realign the financial sector with national development priorities.

Independent economic analyst Oscar Mkude said many employees and businesspeople borrow money from banks using job contracts and salaries as collateral, noting that government officials are among the most frequent loan takers due to their financial stability and ability to repay.

He added that high demand for education financing drives many to seek personal loans, especially as student loan conditions become more restrictive.

“Many opt for bank loans to support education due to limited access to government loans.”

Mr Mkude also pointed out that Tanzania’s banking system lacks broad-based mortgage services common in Europe, where construction loans are more structured and carry less risk.

He emphasised that trust issues and false loan application data limit banks’ willingness to lend, especially in sectors like agriculture.