Dar es Salaam. When Lucy John (not her real name) urgently needed financial assistance, she turned to a microfinance institution (name withheld) for help.
The institution swiftly approved her request for Sh20 million, a relief she accepted without thoroughly reviewing the loan terms. The only detail she recalled was that the interest rate stood at 20 percent.
Three months later, she learnt the hard way what failing to read the fine print meant.
After delaying repayment for three months, Lucy deposited Sh15 million, only to be told she still owed Sh5 million in principal, Sh12 million in penalties and another Sh12 million in interest.
“I was shocked. Even though the interest was Sh4 million, I didn’t expect the penalties to be so high. I tried to negotiate with the loan officer to reduce them, since I planned to settle the debt in December, but she insisted on the same amount,” she said.
Her experience highlights a crucial lesson: borrowers must read and fully understand their loan agreements before signing.
Many Tanzanians find themselves trapped in costly contracts because they overlook key details such as interest rates, repayment schedules, and penalties.
The Bank of Tanzania (BoT) has repeatedly warned the public against borrowing from unlicensed microfinance institutions, citing exploitation through excessive interest rates, hidden charges, and punitive penalties.
Some lenders, BoT says, have charged borrowers up to 20 percent interest per month.
To protect consumers, BoT introduced the Guidelines on Fees and Charges for Microfinance Service Providers, 2024, which require licensed lenders to clearly display their rates, fees, and penalties in both Kiswahili and English.
They must also seek BoT’s approval before introducing or increasing charges. The guidelines prohibit operational fees such as administrative or inquiry costs to prevent unfair burdens on borrowers.
Non-compliant institutions risk penalties of up to Sh20 million and possible licence suspension or revocation. BoT has also urged borrowers to verify whether a lender is licensed, noting that operating a microfinance business without a licence is a criminal offence under the Microfinance Act, 2018.
BoT Governor Emmanuel Tutuba stressed the importance of understanding loan contracts before borrowing. “Borrowers must assess their financial capacity and ensure they can meet repayment obligations. A loan agreement is a legally binding document—ignorance of its terms is not a defence,” he said.
Tanzania Association of Microfinance Institutions (TAMFI) Executive Secretary, Winnie Terry, said members under the association’s umbrella are not allowed to charge more than 3.5 percent interest monthly.
“We only regulate institutions affiliated with us. Those operating outside remain unmonitored, which is why BoT required all microfinance providers to register,” she said, adding that penalties vary by institution, making it vital for borrowers to read every clause carefully.
Independent analyst Christopher Makombe said some microfinance institutions continue to impose illegal interest rates of up to 20 percent monthly—equivalent to an annual rate exceeding 790 percent—leaving borrowers trapped in debt.
“Such rates are exploitative,” he said. “They prevent households and small businesses from growing and destabilise families financially.”
Mr Makombe urged BoT and the Fair Competition Commission to strengthen oversight, enforce interest caps, and ensure transparency in loan contracts. He also called for stronger financial literacy efforts.
“Many borrowers sign contracts without understanding compound interest, penalties, or the impact of delayed payments,” he said. “Always read the fine print, ask questions, and ensure the loan matches your repayment capacity. What you don’t know can cost you your peace of mind, your business, and your future.”
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