Banking refers to the industry and practice of managing financial transactions, such as

deposits, loans, investments, and currency exchange. It encompasses a wide range of

financial services provided by institutions such as banks, credit unions, and online banking
platforms. In Tanzania banking industry have the history before and after independence, that
show us where the banking industry in Tanzania come from.

The following is the history of banking in Tanzania before independence.

During the colonial era in Tanzania, banking was mainly controlled by European colonial
powers. The history of banking in Tanzania during this period can be traced back to the late
19th and early 20th centuries when German East Africa that was under German colonial rule,
The Germans established banks to support their economic interests in the region.

One notable bank during this time was the Deutsch-Ostafrikanische Bank (German East
African Bank), founded in 1904, this was the first bank that established in Tanzania during
the Germans period. It served as a central bank and provided financial services to European
settlers, businesses, and the colonial administration.

At the end of World War I and the defeat of Germany, the British took control of Tanganyika
(mainland Tanzania) under a League of Nations mandate. During British colonial rule,
banking activities continued to be dominated by European banks, The National Bank of India
(NBI) was one of the prominent banks operating in Tanganyika during the British colonial
period. It provided banking services to both Europeans and Asians in the colony.

The following is the history of banking in Tanzania after independence.

At independence on December 9, 1961, the country had only eight banks and four non-
banking financial institutions. Financial institutions that were the commercial banks they all
of which were foreign owned these commercial banks included the Standard Bank of South
Africa, National and Grindlays Bank, Barclays Bank-DCO and Ottoman Bank. Others were
the Bank of India, Bank of Baroda, Commercial Bank of Africa, and the National Bank of
Pakistan. And the non-banking financial institutions included the Post Office Savings Bank,
Land Bank, Local Development Loan Fund and African Productivity Loan Fund.
In 1965 the government established the Tanzania Bank of Commerce (TBC).And on the
following year, in 1966 the government of Zanzibar also they established the People's Bank
of Zanzibar (PBZ) in 1966, according to historical accounts from the BoT. Soon after
independence, in 1962, the government established the Agriculture Credit Agency, to foster
loans to farmers and it was converted to National Development and Cooperative Bank in
1964.

During the Arusha Declaration in 1967, all private commercial banks were nationalized and
their assets and liabilities were merged to form one big commercial bank, namely the
National Bank of Commerce (NBC). This bank became wholly owned by the government. At
that time the government focused on establishing financial institutions to cater for various
needs in other sectors such as agriculture, industrialization and housing.

In 1970 the Tanzania Investment Bank (TIB) was established to provide development finance
to the country's productive sectors, especially large-scale industry. In 1972 Tanzania Rural
Development Bank (TRDB) was established to provide financing to the rural sector. The
bank was later restructured and changed its name to Cooperative and Rural Development
Bank (CRDB). In the same year, Tanzania Housing Bank (THB) was established to specialize
in the financing of rural and urban residential, office and commercial buildings.

During this period the only financial institutions that were not owned by the government were
the Tanzania Development Finance Limited (TDFL) and Diamond Jubilee Trust Fund.

Conclusively, Tanzania has experienced significant growth in its banking sector, with the
emergence of new banks, expansion of financial services, and increased access to banking for
the population. The banking sector now plays a vital role in supporting Tanzania’s economy
by providing credit, mobilizing savings, facilitating transactions, and promoting investment
and entrepreneurship.
2. Define Central Bank, which Institution in our country operate as Central Bank? and
explain different function of Central Bank.

Central bank; refers to the financial institution that is responsible for overseeing country’s
monetary policy also with maintaining financial stability in order to foster the country’s
economy. In the financial system a central bank is most powerful component because it deals
with country’s monetary system, In our country Tanzania, Bank Of Tanzania (BOT) operates
as a central bank of our nation, a central bank of Tanzania was established by the
Bank of Tanzania Act of 1965, and it becomes into operations on 14th June 1966.

The following are the different functions of central bank.

Monetary policy; Central banks have the authority to formulate and implement monetary
policy, This involves decisions about interest rates, money supply, and other measures aimed
at achieving specific economic goals, such as controlling inflation or stimulating economic
growth, example Bank Of Tanzania (BOT) In fulfilling this mandate, the Bank assesses
economic conditions and determines the policy rate required to achieve the inflation
objective, in consideration of the output growth. Consistently, the Bank deploys an
appropriate mix of monetary policy instruments to steer interbank cash market interest rates
along the Central Bank policy rate. The Bank uses the interbank market interest rate as the
operating target to achieve broader macro-economic objectives. In its day-to-day operations,
the Bank assesses the liquidity in the banking system and decides on the magnitude, type and
maturity of instruments to be deployed for liquidity management.

Issuance of currency; Central banks have the sole authority to issue currency in the country,
They are responsible for designing and distributing banknotes and coins, as well as
maintaining the integrity and security of the currency, let’s took example on central bank of
Tanzania have the sole right to issue banknotes and coins in and for Tanzania, which shall be
the only legal tender in Tanzania. The Bank is therefore responsible for designing and
procuring banknotes and coins to meet the currency needs. The unit of currency in Tanzania
is the Shilling, each of which is divided into one hundred cents.
Regulator and supervisor; central bank oversee and regulate commercial banks and other
financial institutions to ensure their stability and adherence to regulatory standards. This
includes setting capital requirements, conducting inspections, and providing guidance on risk
management practices, for example Bank of Tanzania (BOT), the Bank is mandated to
regulate and supervise all financial matters of Social Security Schemes operating in Tanzania.
The primary objectives of regulating and supervising banks and financial institutions are to
maintain the stability, safety and soundness of the financial system; and to reduce the risk of
loss to depositors.

Lender of last resort; Central banks serve as a lender of last resort, providing emergency
liquidity assistance to financial institutions facing solvency problems or liquidity shortages.
This function helps maintain stability in the financial system and prevent systemic crises, so
in other words we can say that if commercial banks fail to get loans of other lenders they can
go and borrow funds from central bank because it stand also as a lender of last resort.

Government’s bank; Central banks manage the government’s accounts, handle its
borrowing and lending activities, and facilitate transactions between the government and
other financial institutions, They also often act as a fiscal agent for the government in issuing
debt securities, for example Bank of Tanzania is a banker and fiscal agent to the Government
of the United Republic of Tanzania and to the Revolutionary Government of Zanzibar
(Governments). It is also a banker to public authorities and commercial banks. These
functions are as mandated by the Bank of Tanzania Act 2006.

Banker’s bank; commercial banks hold accounts with the central bank, much like
individuals and businesses hold accounts with commercial banks, when these commercial
banks hold accounts with central bank they can access the following services, reserve
requirements, settlement and clearing, lending and borrowing, regulatory oversight, so that
central bank serves as a cornerstone of the banking sector, providing essential services and
support to ensure the smooth functioning of the financial system.

In conclusion; the central bank acts as a central hub for the banking sector, providing
essential services and support to ensure the smooth functioning of the financial system as a
whole, also central banks play a critical role in maintaining financial stability, supporting
economic growth, and ensuring the smooth functioning of the financial system.
 3. Commercial Banks plays an important role in our economy, explain different
functions of Commercial Bank.
Commercial bank; refers to the financial institution that accepts deposits from the general
public and provides loans to individuals, governments and businesses. Examples of
commercial banks include CRDB bank, DCB bank, National Bank of Commerce (NBC),
NMB bank, Commercial banks they accept deposits and then pay interest on those deposits
also they offer loans and charge interest on those loans that they grant to individuals,
government and businesses, there are primary and secondary functions of commercial banks.

The following are the primary functions of commercial banks.

Acceptance of deposit; this is one of core functions of commercial banks, they accept
deposits from customers through various accounts including savings accounts, checking
accounts, and term deposits, acceptance of deposits is the one of core functions of
commercial banks because these deposits serve as a source of funding for the bank’s lending
activities, they use those deposits to grants loans which they will return with interest that used
to pay depositors and remaining to stay as a profit to commercial banks.

Provision of loans; another primary function of commercial banks is the provision of loans
to the individuals, businesses and government, commercial banks they offer various types of
loans, including mortgages, personal loans, business loans, and lines of credit, the lending
function of commercial banks plays a vital role in allocating capital, supporting economic
activities, and promoting growth and development in the economy.

The following are the secondary functions of commercial banks.

Advisory services; advisory function of commercial banks involves providing financial

advice and guidance to customers to help them make informed decisions about managing
their finances, investing, and planning for the future, the advisory function of commercial
banks aims to empower clients to make sound financial decisions, achieve their financial
objectives, and enhance their financial well-being through personalized advice and guidance.

Financial intermediation; Commercial banks act as intermediaries between surplus

spending units (SSU) and deficit spending units (DSU) by taking in deposits from surplus
spending units and lending them out to deficit spending units. This process helps channel
funds from those with surplus funds to those in need of funds, thereby promoting economic
growth and development, also help to connect them and reduce the mismatch problems
between surplus spending units and deficit spending units.
Agency function; also commercial banks have the function to act on behalf of their
customers in different scenarios, this function is known as agency function where commercial
banks acts as an agent of his customers, the commercial banks can perform agency function
in following matters including transfer of funds, collection and payments of various items,
trustee and executor services also with standing orders.

In conclusion; there are so many functions of commercial banks but those explained above
are the some of the functions of commercial banks, but commercial banks play a crucial role
in the economy by providing essential financial services, facilitating economic transactions,
and supporting economic growth and development.
 4. Explain financial system and its components.

Financial system; refers to the system which involves the network of financial institutions,
financial markets, financial instruments, and regulatory framework. That they facilitate the
transfer of funds between savers and borrowers, the allocation of capital, and the
management of financial assets and liabilities within an economy. Financial system it serves
as the backbone of the modern economy by providing the infrastructure and mechanisms for
efficient financial intermediation and resource allocation.

The following are the components of financial system.

Financial institutions.

These are entities that provide financial services, including banks, credit unions, insurance
companies, investment firms, pension funds, and other intermediaries that facilitate the flow
of funds between savers and borrowers. Example of financial institutions are Unit Trust of
Tanzania - Asset Management and Investment Services (UTT AMIS), PSSSF, NSSF, also
with commercial banks such as CRDB bank, DCB bank etc.

Financial markets.

These are platforms where individuals, businesses, and governments buy and sell financial
assets such as stocks, bonds, currencies, commodities, and derivatives. Examples include
stock exchanges, bond markets, foreign exchange markets, and commodities markets.
Examples of financial markets include Dar es salaam Stock Exchange (DSE), Johannesburg
Stock Exchange (JSE), London Stock Exchange (LSE), New York Stock Exchange (NYSE)
and others.

Financial instruments.

These are tradable assets that represent financial claims or ownership rights, such as stocks,
bonds, loans, mortgages, certificates of deposit, futures contracts, options, and other
securities. Also these are those assets that are being traded in the financial markets.

Financial services.

These include lending, depositing, insuranceand pensions. Financial services provide investor
s a way ofmanaging assets and offer protection against systematic risk alsoensure individual
have the appropriate amount of capital in themost efficient investments to promote growth. B
anks, Insurancecompanies, investment companies, investment service areconsidered as financ
ial service.

Regulatory frameworks.

This comprises laws, regulations, and supervisory agencies that govern the operations and
conduct of financial institutions and markets, promote financial stability, protect investors
and consumers, and maintain the integrity and efficiency of the financial system. These
regulatory bodies are there to mentain confidence and stabilityin the financial institutions and
the financial system generally, example of regulatory bodies in Tanzania includes Bank of
Tanzania (BOT), Social Security Regulatory Authority (SSRA), Tanzania Insurance
Regulatory Authority (TIRA).
REFERENCES

Purohit,A.(2013).Bank credit: Banking principles and practices.first edition,published by

black prints.

https://byjus.com/question-answer/answer-in-details-what-are-the-secondary-functions-of-
commercial-banks-or-subsidiary-functions/

Bank of Tanzania. (n.d.). Functions of the central bank. Retrieved April 08, 2024, from
https://www.bot.go.tz/functions-of-the-central-bank/