The purpose of this study was to investigate the link between banking sector efficiency and financial development in Tanzania. The study applied the semi-non parametric Fourier flexible functional approach to estimates bank cost efficiency for the data covering 2022 to 2020 for twelve selected commercial banks. To establish the relationship between banking sector efficiency and financial development, the study made use of the Instrumental Variables (IV) 2SLS estimator The study made very important findings and contributions to literature. Firstly, the study found that the efficiency level of banks included in the sample averaged 76% over the period, 2011- 2020. This means that there is about 24% inefficiency in terms of cost. Thus, banks in Tanzania could actually save up to almost a quarter of their cost if they were to operate efficiently. It is also found that causality runs positively in both directions between bank cost efficiency and financial development. This means that as banks become more cost efficient, financial sector develops further and credit allocation gets more distributed in the real economy. Similarly, it is important that policy makers know that financial sector policies that deepen the financial system also result in cost efficiency in the banking sector by challenging the banking sector to be innovative and efficient in their bit to increase shareholder value. Among the other control variables, inflation is found to destabilize the financial development. Excessive government spending in the financial sector appears to destabilize banking sector efficiency. Also, a good legal environment improves financial development.