A Dissertation Submitted to Mzumbe University, Dar es Salaam Campus College in Partial Fulfillment of the Requirements for the Award of the Degree of Master of Business Administration (MBA) Corporate Management- Mzumbe University.The Small and Medium Enterprise (SME) sector carries great hopes in the evolution of all forms of the transitional economies. Only a small fraction of SMEs are successful in achieving exceptional performance and sustainable growth, The literature shows that there is still a gap for effective ways to increase the size of that fraction. The study presented here aims to contribute in filling the gap by identifying the role of financial institution in development of small and medium enterprises (SMEs) in Tanzania. The study was prompted by the fact that the development of SMEs in any country largely depends on efficiency operation of banking systems in the provision of loans. To reach the aim of study CRDB Lumumba branch and its catchment areas in Dar es Salaam was selected. The sample size of this study was 60 people (i.e. 50 business operators and 10 bank officials). Tools of data collection included questionnaire, interviews guided by structured questionnaire, and documentary sources. The SPSS version 16 was used for data analysis. The results revealed that the bank interests are so high, business operators have poor business information and credit facilities offered by the bank were not sufficient enough to allow business operators to expand their business as per their proposed business plan, hence their ability to repay credit facilities and interest in an environment of insufficient credit facilities was a cumbersome task. In order to raise and sustain the health development of SMEs bank interest rates should be low, amount of loan extended to the business operators must match the cash requirements. Finally, to verify and rely on results of this study, it is recommended that surveys like the one conducted in CRDB Lumumba bank and its catchment areas in Dar es Salaam be carried out in other parts of the country to explore more about how financial institutions can encourage development of SMEs in Tanzania. Also attempts to examine why some financial institutions fear to lend money to SMEs should be made clear.