The call comes a few days after the BoT cut its discount rate to 12 per cent from 16 per cent effective from March 6, this year, the first time it has lowered borrowing costs since 2013 after a steep drop in the growth of credit to the private sector last year.
“The Bank of Tanzania’s expectations are that the move (discount rate cut) will enhance credit growth and reduction in lending rates," the central bank quoted Governor Ndulu as saying in a statement on Friday after a meeting with chief executives of commercial banks in Dar es Salaam.
The central bank's decision to slash the rate it charges commercial lenders which borrow from it - one of its main monetary policy tools - came after lending to the private sector grew by just 2.5 per cent in 2016 after expanding by 26.8 per cent a year earlier, according to official data.
Key sectors of the economy that were hardest hit by the credit crunch last year included agriculture, construction, transport and communication.
The overall lending rate of Tanzania's commercial banks increased marginally to 15.66 percent in December from 15.65 per cent in November, the central bank said in its latest monthly economic review.
The International Monetary Fund (IMF) warned in January that tight fiscal and monetary policies threatened the Tanzanian government's forecast for growth of around 7 per cent in fiscal year 2016/17, which ends in June.
The government said the economy probably grew at around 7.0 per cent in 2016, slightly slower than the targeted gross domestic product (GDP) growth of 7.2 per cent last year.
Analysts said the previously targeted GDP growth of 7.4 per cent for 2017 could also be missed due to the ongoing slowdown of the economy.
"The Bank of Tanzania governor ... has urged banks and financial institutions to take note of the downward review of the discount rate from 16 per cent to 12 per cent in their operations," BoT said in the statement.
Prof Ndulu made the call during a meeting with chief executive officers (CEOs) of banks and financial institutions at the BoT headquarters in Dar es Salaam on Thursday.
The governor cautioned commercial banks that when disbursing new loans, they must ensure that only customers with a good track record are considered due to the recent sharp increase in non-performing loans (NPLs) in many banks.
"On their part, the CEOs of banks and financial institutions sought assurance from BoT as to the duration of being in force of the newly announced discount rate, lest they adjust their loan policies only for the discount rate to move upward without a warning," the BoT statement went on.
"The governor assured them that the rate will hold for a while and that any adjustments would depend on prevailing economic conditions, but assured them that such changes will not be drastic," it further said.
DonathOlomi, chief executive of the Dar es Salaam-based Institute of Management and Entrepreneurship Development, said the BoT's discount rate cut aimed at stimulating growth by encouraging banks to lend rather than investin Treasury bills and bonds.