JUDICIAL OVERREACH: THE ILLEGALITY OF NON-COMMERCIAL, PRIVATE LOANS IN MAINLAND TANZANIA'S COURTS

Abstract

This research examines a legal contradiction emerging in Mainland Tanzania regarding informal lending. While it is common practice for individuals to obtain loans from private lenders and friends, repaying principal with interest; recent judicial decisions have imposed a strict regulatory framework. Courts have ruled that lending at interest is lawful only for entities formally registered and licenced as financial or microfinance entities by the Bank of Tanzania, thereby declaring all interest-bearing transactions by informal lenders illegal. This prohibition, ostensibly for consumer protection, persists alongside the widespread continuation of the very informal lending practices it seeks to suppress. The overbroad nature of this judicial interpretation, unfairly harms the lender and unjustly rewards the borrower. This approach severely undermines the principle of freedom of contract by arbitrarily restricting the ability of consenting parties to negotiate terms, including interest. Furthermore, it is inherently anti-competitive, as it unjustifiably eliminates a vast segment of informal credit providers from the market, thereby reducing consumer choice and access to credit. The research is motivated by a contrasting judicial perspective from Uganda and Nigeria, which affirmed that insisting on interest-free friendly loans would defeat common sense and the doctrine of freedom of contract. Consequently, the Tanzanian judicial position requires re-examination, for a law should never be wielded as a tool to effectuate or condone inequitable outcomes. A borrower who has benefitted from a loan transaction should not be allowed to plead that the contract underlying the transaction was illegal, in order to escape from his obligations to repay the loan.