The Same Loan, Both Ways: Flat Rate Against Reducing Balance in Tanzania

A borrower takes TZS 5,000,000 for twelve months at 2% a month and repays either TZS 6,200,000 or TZS 5,673,576, depending on one word in the contract that nobody explains at the counter.

The word is the basis. Interest can be charged on the amount originally borrowed for the whole term — a flat rate — or on what is still owed each month, which falls as the loan is repaid — a reducing balance. Same principal, same headline rate, same twelve months. A gap of TZS 526,424.

This page is the loan pricing file: the same loan worked both ways with every step shown, the month-by-month schedule that proves it, what a flat rate really costs once converted, and the terms a borrower settles in writing before signing anything.

What separates a flat rate from a reducing balance?

A flat rate charges interest on the original loan amount for the entire term. Month one and month twelve carry the same charge, even though by month twelve almost nothing is still owed. It is easy to calculate in the head, which is why it is quoted.

A reducing balance charges interest on the outstanding balance at the start of each month. As principal is repaid, the balance falls and the charge falls with it. The instalment stays the same, but its composition shifts: early instalments are mostly interest, later ones mostly principal.

The last two rows are connected. A flat rate is easy to calculate because it ignores the fact that the loan is being repaid. That convenience is exactly what makes the quoted number misleading.

Flat pricing is lawful. The Microfinance (Non-Deposit Taking MSPs) Regulations 2025 impose no pricing restriction, so a borrower will meet it in the market. The quoted rate looks identical either way, which is why the comparison only works where the basis is asked for and the arithmetic follows.

What does a TZS 5,000,000 loan at 2% a month actually cost?

Principal TZS 5,000,000, term 12 months, rate 2% per month, worked both ways.

The flat calculation. Interest is principal × monthly rate × number of months:

• 5,000,000 × 2% = TZS 100,000 of interest per month
• 100,000 × 12 = TZS 1,200,000 of interest in total
• Total repayable: 5,000,000 + 1,200,000 = TZS 6,200,000
• Monthly instalment: 6,200,000 ÷ 12 = TZS 516,666.67, the final instalment absorbing the rounding

Month twelve is the row to look at. A few hundred thousand shillings are outstanding and the charge is still TZS 100,000 — the same as in month one, when the full five million was outstanding.

The reducing-balance calculation. The instalment comes from the amortising formula M = P × [ i(1 + i)^N ] ÷ [ (1 + i)^N − 1 ], where P is the principal, i the monthly rate as a decimal and N the number of months. With P = 5,000,000, i = 0.02 and N = 12:

• (1.02)^12 = 1.26824179
• Numerator: 0.02 × 1.26824179 = 0.0253648358
• Denominator: 1.26824179 − 1 = 0.26824179
• 0.0253648358 ÷ 0.26824179 = 0.0945596
• M = 5,000,000 × 0.0945596 = TZS 472,798 per month, or TZS 472,797.98 before rounding

Eight decimal places are kept through the first step, or the rounding moves the answer by a shilling or two. From there, the total repayable is 472,798 × 12 = TZS 5,673,576, and the total interest is 5,673,576 − 5,000,000 = TZS 673,576.

What does the reducing-balance schedule look like month by month?

Interest each month is 2% of the opening balance. The instalment is fixed at TZS 472,798, and whatever is left after interest reduces the principal. Figures in shillings, rounded.

Three things come out of that table. The balance closes at exactly zero, which is how any schedule a lender hands over is checked. The interest column falls from TZS 100,000 to TZS 9,271. And the flat version charges TZS 100,000 in every one of those rows, including the last, when the true balance was TZS 463,527.

How much more does the flat loan cost?

The last row is the one to read twice. Choosing the wrong basis on a TZS 5,000,000 loan costs more than a tenth of the loan itself. A borrower can take a genuinely higher headline rate on a reducing balance and still pay less than a flat loan quoted at 2%.

What is the flat loan’s true rate?

The flat loan’s real problem is that interest is charged on money already repaid. By month six well over TZS 2,000,000 of principal has been handed back, and the charge is still calculated as though the full five million were outstanding.

The intuition is quick: across a twelve-month amortising loan the average balance outstanding is roughly half the principal, so charging on the full principal costs roughly — though not exactly — double.

The precise figure is better than the intuition. The question is what reducing-balance rate would produce the flat instalment of TZS 516,666.67 on the same TZS 5,000,000 over the same 12 months, and the same formula solved backwards answers it. The answer is about 3.48% per month.

Those three figures are Zatra’s own arithmetic on the two instalments above, not a figure published by any institution. They are reproducible: running the formula at 3.48% brings the instalment back to TZS 516,666.67.

So 2% a month was never 2% a month. It was about 3.48% a month, and the 24% a year it implies is really about 41.7%.

Is 3.5% a month a limit in Tanzania?

The figure of 3.5% a month circulates as though it were a ceiling on microfinance lending. It is a statement of expected practice, not a statutory ceiling, and it should not be described as one.

It comes from the Ministry of Finance, which in March 2025 reported a financial education session for staff of Rorya District Council in Mara Region, at which the leader of the Ministry’s Financial Education Experts Team gave 3.5% a month as expected practice. The Microfinance (Non-Deposit Taking MSPs) Regulations 2025 contain no interest-rate cap and no pricing restriction at all — they deal with licensing, capital of TZS 20–500 million, governance and liquidity.

Taken for what it is, a yardstick for testing a quotation, the arithmetic follows:

• 3.5% per month × 12 = 42% per year, flat
• Compounded monthly, (1.035)^12 − 1 = about 51.1% effective per year
• Fees and charges sit on top of both, which is why the Bank of Tanzania mandates full pre-contract disclosure

Now put that beside the previous section. A loan advertised at 2% a month flat has an effective cost of about 50.7% a year. The Ministry’s 3.5% a month, taken as a reducing-balance rate, works out at about 51.1% a year. To within a fraction of a percentage point, the same price. A borrower comparing “2% flat” against “3.5% reducing” and choosing the lower number would be choosing nothing at all.

That is the lesson of this page in one line: a rate without its basis is not information.

What the two Kiswahili terms actually mean

The vocabulary matters at the counter, because the same two words carry two meanings and only one is about the basis of interest.

The Ministry of Finance renders the pair as riba isiyobadilika for a flat rate and riba inayobadilika for a reducing balance. In the market, those same two words are commonly heard as a fixed rate against a variable rate — an entirely different distinction, about whether the percentage itself can move during the term.

A borrower who asks for riba inayobadilika at a bank counter may therefore be shown a floating-rate product rather than a reducing-balance one. The unambiguous term for a reducing balance is riba ya salio linalopungua — interest on the balance that is falling. Asking in those words removes the ambiguity.

What terms does a borrower check before signing?

Each of these is asked for in writing. A verbal answer on any of them is not an answer.

The last row is the shortcut. Where a lender will not give a single total repayable figure in shillings, there is not enough on the table to decide, and no amount of discussion about the percentage will fix that.

Early settlement deserves its own line. On a reducing balance, paying early genuinely saves interest. On a flat loan the interest was fixed at the start, so the same TZS 6,200,000 is repaid over a shorter period — which makes the effective rate worse rather than better.

What must a lender show before an application?

The Bank of Tanzania’s Guidance Note on Digital Lenders under Tier 2 Microfinance Service Providers, issued on 27 August 2024, requires a digital lender to display, before an application is made, the interest rates, fees and charges, the late payment penalty, the payment frequency, the loan limits and the tenure of each product.

Two points follow. First, this is pre-application disclosure. Where an application had to be submitted, data shared or approval reached before the price became visible, the sequence was wrong.

Second, the Note prohibits demanding interest upfront. A deduction from the disbursement, handing over less than the amount signed for while the full amount remains repayable, is what that rule addresses. It also raises the true rate, because interest is then paid on money never received.

The Note applies to digital lenders in Tier 2 of the Microfinance Act 2018, and whether a given app sits inside that regime is itself checkable against two published registers, set out in the licensed loan apps file. Where an instalment is being weighed against take-home pay, the net salary file works the other side of the same arithmetic.

Mandate-holders this file does not replace

The lender owns the contract, the schedule and the total repayable figure, and it is the only party that can state them. The Bank of Tanzania owns the Tier 2 licence, the Guidance Note disclosure list, the consumer complaints guidelines and the final determination on a complaint. The Ministry of Finance owns the financial education programme from which the 3.5% figure comes, and that figure is a statement of expected practice rather than an instrument. Parliament and the Minister own any pricing restriction, and the Microfinance (Non-Deposit Taking MSPs) Regulations 2025 impose none. An advocate of the High Court of Tanzania owns representation, notarisation and the commissioning of oaths. Zatra prepares, structures and coordinates the file, grants no licence and does not practise law.

What to confirm before the Client acts

• Whether the offer is flat or reducing balance, stated by the lender in writing before anything is signed, and in the words riba ya salio linalopungua where the discussion is in Kiswahili.
• Whether the lender has given a total repayable figure in shillings and the full instalment schedule behind it.
• Whether that schedule closes at exactly zero when the Client adds the principal column, as the twelve-month table above does.
• Whether any fee is deducted from the disbursement, and what sum the Client actually receives on the day.
• What early settlement costs in month six, answered in writing before the loan is taken rather than after.
• Whether the lender holds the approvals for the product being offered, confirmed on the Bank of Tanzania registers rather than on the lender’s own banner.