Financial Institution and Economic Development

1.1. Financial Institutions

Are the public or private organizations responsible for providing financial services. The financial services provided include issuing money, providing loans and keeping valuable items.


There are two types of financial institutions which are known as

1. Banks

2. Non-banks


1.2. Banks


Banks are the financial institutions which perform the following functions:


To mobilize funds from the public by encouraging them to open different accounts in the banks

To provide loans to customers or investors

To keep valuable items such as diamonds, gold and wills

To transfer money from one place to another or from one person to another through travelers, cheque, telegraph transfer etc

1.3. Typses of Banks


There are five types of banks which operate in Tanzania such as

1. Bank of Tanzania [BOT]

2. Commercial bank

3. Saving banks

4. Merchant banks


1.4. The Bank Of Tanzania


The bank of Tanzania is the government financial institution established in order to control financial services with the whole country and to operate as the bank of all banks. Sometimes it is called the central bank of Tanzania.

1.4.1. Functions of the central bank of Tanzania


Functions of the central bank of Tanzania are as follows;

Domestic monitory management.

This includes financing the government budget deficit to control money circulation to advise the government on financial matters and control money inflation.

External monitory management

This includes controlling export and importing trade to control foreign exchange rates and to promote foreign investment in the country

To provide loans

To the other banks and to supervise the operation of the non banks financial institutions

To formulate and supervise The implementation of financial policies in the country

To issue [make] the national currency; Inform of coins and notes



1.4.2. The contribution of the central bank of Tanzania in the economic development


1. By controlling the import and export trade it helps to maintain the flexible balance of payment of the country.

Balance of payment

Is the amount of money which a country earns through export trade. Usually the balance of payments of a country in terms of foreign currency and kept in special accounts called EPA.



1.4.3. EPA (External Payment Accounts)


Is a bank account which is usually provides the followings


1. It provides loans to the commercial bank such as NMB, NBC, CRDB and ACB which in turn used by the commercial bank to provide loans to their customers.

2. It provides employment to the people either directly or indirectly therefore BOT which in turn used by the commercial bank to provide loans to their customers.

3. It stabilizes the economy of the country by controlling money circulation money inflation and foreign exchange rates.

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4. It provides financial assistance to the government when there is a budget deficit so that to enable the government to meet its expected expenditure.


1.5. Commercial Bank


Commercial banks are those banks which are established to provide banking services on commercial bases [to earn profit]


The main sources of profit in commercial banks obtain through interest rates which are charged from the loans provided to the customers. Apart from the commercial banks the rest types of banks are commercial too


The contribution of commercial banks to the economic development include


They provide loans to investors of which they use to promote development of economic sector like agriculture industries mining and trade

They provide technical advice to the investors so as to enable them to operate their business in profitable means

They are used as custodian of keeping valuable items like diamonds

They accept deposits from customers and promote formation of capital because if you deposit in fixed accounts it pays a fixed interest rate for a certain period.


1.6. Non Banks Financial Institution


These are financial institutions which do not provide banking services but they are responsible to mobilize saving life insurance, insurance against risks, old age insurance and offering specific credits.


The non bank institutions mobilize savings from their customers through having special agreements between customers and their employers e.g. NSSF mobilize saving from customers which are made through reduction from their salaries


The following are the types of non bank financial institutions which co-operate in Tanzania


Insurance company

Social security institutions



1.6.1. The general functions of the non banks financial institutions


To invest in physical investments such as construction of building for business e.g. PPF house , IPS house and other buildings for renting

Provide specific credit or loans to small scale entrepreneurs for example small scale traders and SACCOS

Provide employment to the people

To provide social security inform of insurances


1.7. The insurance companies


These are non bank financial institutions which provide social security’s to the people [customers] against various risks e.g. insurance against road accidents, insurance against fire and insurance against theft.


There are many insurance companies in Tanzania most of them were established after the reproduction of privatization policy in 1991 the most famous insurance company is the nation insurance company [NI] that was established in the 1960s.


1.7.1. Functions of the insurance companies


To provide compensation against various risks such as fire, car accidents and theft. This service can help the customers to rejuvenate their businesses when they face damage

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To invest in productive sectors such as buildings and to enhance social welfare of the people

To provide employment to the people so as helping them to have reliable source of income

To collect contributions from the customers or clients under special agreements


1.8. Social Security Institution


These are non bank institutions which mainly provide and promote welfare services to the people in the communities. They provide social welfare services under special agreement between the institutions and the customers or members


There are many social security organizations which belong to the government of private owners

e.g. the national social security fund NSSF the parastal pension fund [PPF] local prudent fund [LPF]


1.8.1. functions of the social security organizations


To mobilize savings from companies and members and paying them to the retired workers /even before if there is a genuine reason

To provide specific loans and other social benefits to the members

To establish physical investment such as construction of residential houses for renting to the customers

To provide employment to the people so as to enable them have reliable source of income

To provide education loan to the members (e.g. PSPF)


1.9. Co-Operative Societies


There are many co-operative societies in Tanzania which belong to the private entrepreneurs or government institutions.




1.9.1. Functions of Co-Operative Societies

To provide small scale loans to the people with low income and who do not have valuable items to act as securities of big loans

To promote informed sectors of the economy by providing loans to small groups of people based on the members themselves that each member in a group is the security to another member

To assist the community to reduce poverty by encouraging people to start small scale businesses i.e. food vendors

To provide technical advice to the people on how to use small scale loans in profitable ways

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