Non-performing loans (NPLs) are a major concern for commercial banks, affecting profitability, liquidity, and overall financial sector stability. In Tanzania, rising NPLs have raised questions about the efficiency and risk management practices of banks. This study examines the determinants of non-performing loans and their relationship with bank efficiency in the Tanzanian banking sector. The study employs a quantitative research approach using secondary data collected from annual reports of commercial banks and financial statements over a ten-year period (2013–2022). Key variables analyzed include bank-specific factors such as capital adequacy, management efficiency, liquidity, and credit growth, as well as macroeconomic factors including inflation, interest rates, and GDP growth. Efficiency is measured using Data Envelopment Analysis (DEA) and other performance indicators. The findings indicate that higher capital adequacy and management efficiency are associated with lower levels of NPLs, while rapid credit expansion and high inflation contribute to increased loan defaults. Moreover, banks with higher operational efficiency tend to maintain lower NPL ratios, suggesting that efficient resource allocation and risk management practices are crucial for financial stability. The study concludes that enhancing bank efficiency, strengthening regulatory oversight, and implementing prudent lending policies are essential to reduce NPLs and promote sustainable growth in Tanzania’s financial sector. The results have significant implications for policymakers, bank managers, and investors seeking to improve banking performance and foster a resilient financial system.