The temporary freeze on the participation of the five banks in foreign currency trading is seen as part of ongoing regulatory measures by the BoT to curb irregular forex trading and money laundering activities.
The BoT last week shut down several foreign exchange bureaus in Arusha, with authorities arresting an unspecified number of suspects.
The central bank said it has suspended the five banks from trading in the IFEM due to alleged violations of conduct.
"The suspended banks violated some provisions of the code of conduct. They either traded at off-market rates and/or did not submit to the central bank the transactions they made ... contrary to the requirements of the code of conduct," the BoT's Director of Financial Markets, Alexander Ng'winamila, told the Financial Times.
"The measures are intended to enforce compliance to the interbank foreign exchange market's code of conduct."
Ng'winamila named the banks suspended for trading in the forex market for four weeks with effect from November 23 this year as Barclays Bank Tanzania, Exim Bank, UBA Bank, BancABC and Azania Bank.
The move comes just days after the BoT conducted surprise inspections on bureaus de change in Arusha, a tourist and gemstone trading hub, in a crackdown on illegal currency traders and money laundering activities.
The central bank raid was assisted by several members of the country's security and defence forces, including soldiers.
President John Magufuli ordered the central bank last year to tighten controls on the movement of hard currency in a bid to tackle financial crimes and protect the local currency from volatility.
Banks react to BoT's action
The BoT revoked the licenses of five “critically undercapitalised” community banks in January this year and took over the administration of Bank M in August to safeguard the stability of the country's financial services sector.
Stanley Kafu, the head of Marketing and Communications at Exim Bank (Tanzania) Limited, confirmed that his bank was among five banks that were hit by the latest regulatory action from the BoT on curency trading.
"It is true that we have been suspended for four weeks from participating in the currency market," Kafu told the Financial Times.
"We were informed that the action was taken because there were delays on our part in reporting to the BoT some transactions we did on the IFEM. However, our temporary suspension on the IFEM only applies to US dollars and shillings -- we are allowed to participate in the trading of other major currencies."
Anitha Pallangyo, who works in Media Relations at UBA Group, confirmed that the bank was temporarily suspended from the IFEM by the central bank, but declined to give further details.
Spokespersons of the other three banks - Barclays Bank Tanzania, BancABC and Azania Bank - were not immediately available for comment.
The shilling has crossed the 2,300 mark against the US dollar over the past few weeks and there are concerns among some forex traders that the local currency could further slide due to expected shortages of inflows of hard currency into the market.
There are signs that US-dollar inflows from mining, foreign direct investments (FDI), agriculture and financial aid from donors could slow down in the coming weeks and months due to several factors and thus put further pressure on the shilling.
In another development, BoT Governor Prof Florens Luoga has commended the central bank's IT experts for their dedication and patriotism in helping the government to put in place an electronic national payment system for effective management of the civil service payroll and revenue collection.
He praised the central bank's employees for working with other information technology practitioners in the public service to set up the Government e-Payment Gateway (GePG) and the Government Salary Payment Platform (GSPP).
The government has embraced various electronic systems aimed at improving public financial management, which include the Central Budget Management System (CBMS), Planning, Budgeting and Reporting (PlanReP) software and the Tanzania Interbank Settlement System (TISS).