Tanzania’s Shadow Credit System: How Informal Lenders Fill the Banking Gap

Dar es Salaam. In the bustling streets of Dar es Salaam, amid the noise of traders and the rush of shoppers, a silent financial system has taken hold—one that operates outside the law yet thrives openly on every street corner.

A trend that has taken root far from the polished halls of Tanzania’s Central Bank or the neat ledgers of licensed financial institutions.

It is fast, ruthless, convenient, and increasingly indispensable for thousands of Tanzanians who can no longer access credit from formal banks. In recent years, informal lenders—commonly known as shylocks—have spread across Tanzania’s urban and rural landscapes, offering fast loans with little bureaucracy.

Interest rates in this unregulated market range from 20 percent per month to as high as 50 percent with some hitting 100 percent.

These figures dwarf the Central Bank of Tanzania’s (BoT) legal limits and expose borrowers to cycles of unmanageable debt.

A System Fueled by Desperation

For small business owners like food vendors, boda-boda drivers, and market traders, emergencies rarely wait for bank processes. Many have no collateral, no formal employment, and no bankable history.

With commercial lenders demanding documentation and guarantees they cannot provide, borrowers turn to the only option available: the informal lenders who offer money "now, even yesterday," as one trader puts it.

"It’s not that these guys hide," says Fred Sanga, a trader in Kariakoo.

"They are very clear about their terms from day one. They tell you what you qualify for, what you don’t, and how fast you must pay. Apart from the fact that they are outside the law, I don’t see why they should be considered a problem."

Mr Sanga insists that the real issue is the absence of a friendly credit environment for small businesses. "If banks were accessible, affordable, and responsive, these people wouldn’t exist," he says.

His view is echoed—almost unexpectedly—by economists.

Prof Abel Kinyondo, an economist and lecturer, says the shylock phenomenon is less a sign of criminality and more evidence of a financial system that has failed to serve the majority.

"Rather than calling it a danger, we should ask: why are they here in the first place?" he says. "If the formal system was adequate, affordable, and quick, people would run away from informal lenders. But banks are slow, risk-averse, and often inaccessible. These guys simply fill a gap."

Prof Kinyondo argues that lenders exist because the demand for emergency, flexible credit far outweighs what banks can offer.

"People want money now, not next week. No bank can do that. Informal lenders can," he says.

Even those who qualify for formal loans sometimes opt for informal borrowing because of its convenience—no paperwork, no collateral, no bureaucracy.

"They take trust as collateral. Sometimes just someone to reference you. That convenience is missing in the formal system," Prof Kinyondo adds.

Debt That Follows You Home

But convenience comes at a punishing price. Borrowers who default often lose household items, tools of trade, or even business stock.

Ms Amina Makanza, a food vendor in Buguruni, knows this reality too well. Desperate after her son fell ill, she borrowed Sh 500,000 and agreed to repay Sh 750,000 in 30 days. When she failed, the lender confiscated her cooking utensils and ingredients—leaving her not just indebted, but jobless.

Her story is one of thousands.

Tanzania’s laws require all lenders to be registered and licensed, with interest rates capped by the Bank of Tanzania (BoT). But enforcement remains another issue. Many shylocks operate openly, advertising loans on posters, WhatsApp groups, and even through employers.

Borrowers often fear retaliation, and some lenders allegedly enjoy informal protection from local authorities.

Prof Kinyondo is cautious with the word "danger," but agrees the system is harmful—especially when borrowers lack financial literacy.

"Yes, interest rates go to 50 percent or even 100 percent," he says. "But borrowing beyond your ability to repay also fuels the problem. It takes two to tangle."

The Wider Economic Consequences

Unchecked, the shylock economy poses a series of deep and far-reaching risks.

As more households become trapped in cycles of costly debt, a growing share of their income is diverted away from productive activities, ultimately depressing productivity and limiting economic mobility.

Experts say that with increasing volumes of money circulating outside regulatory oversight, the effectiveness of national monetary policy is also compromised.

And as more borrowers lose property, businesses, and even their sense of dignity through harsh recovery practices, the system risks fuelling social unrest—turning private financial distress into a wider public crisis.

Why People Still Choose Them

In many cases, borrowers don’t see shylocks as criminals—they see them as reliable and convenient.

"They are sincere," Sanga says. "They tell you their terms clearly. Banks don’t."

Borrowers also speak of speed, convenience, and proximity. The shylock is your neighbour, your colleague, or the man at the electronics shop whose phone is always reachable.

Many operate discreetly but efficiently, collecting payments through mobile money or sending agents to workplaces.

To dismantle the shylock economy, experts say Tanzania must fix its formal financial system rather than simply criminalize borrowers and lenders.

Prof Kinyondo believes the responsibility lies heavily with the Bank of Tanzania.

"My real issue goes back to government—and the BoT in particular," he says.

"Commercial banks must be supported to provide accessible, affordable, and timely credit. As long as that doesn’t happen, people will keep going to informal lenders."

Tanzania now stands between two possible futures: One where the shylock economy becomes the dominant source of credit, deepening poverty and inequality; or another where financial reform extends dignity and stability to the millions locked out of the banking system.

TNC investigations show that the shylocks are not a mystery. They are a response.

And unless the formal system evolves to meet the needs of ordinary Tanzanians, the informal one will continue to flourish—at an unbearable cost.