A Research Report Submitted to Mzumbe University – Mbeya Campus College in Partial/Fulfillment of the Requirements for Award of the Bachelor Degree in Accounting and Finance – Business Sector (BAF-BS) of Mzumbe University.This is a research report on role of financial institutions in promoting innovation of Small and Medium Enterprises (SMEs) in Tanzania, the study was conducted at CRDB bank PLC Uyole branch, some staffs from Mwanjelwa branch and Mt. Livingstone branch were included. The study was specifically aimed to examine the policy of CRDB Bank in promoting innovation of SMEs in Tanzania, to assess the level of success of the CRDB Bank policy of promoting innovation of SMEs in Tanzania and to determine challenges facing CRDB Bank in implementation of the policy. Convenience and purposive sampling techniques were used to obtain the respondents in the sample. Two Samples was involved from which data were collected, first sample was extracted from CRDB staffs and another sample was extracted from a variety of SMEs owners who were CRDB bank loan beneficiaries available in Mbeya city. Questionnaire, interview and observation were the data collection methods which were used during the study to collect data from the respondents The researcher found that CRDB the bank has the policy which promotes innovations of SMEs, the policy is to advance loan as much as possible to the SMEs owners in order to enable them to increase their creativity and innovations to their businesses. The level of successfulness of the policy is satisfactory the findings revealed that challenges facing CRDB bank in implementing the policy of the bank include lack of borrowers’ collateral, lack of branch vehicles, lack of staffs, branch dependency, lack corporation among staffs and vacations and permitted leave of the staffs. The challenges vary from one branch to another, The researcher recommends that the bank should find the other way to assists Tanzania SMEs owners with no legal collateral securities but are doing legal businesses. Also the bank should insure all the branches are provided with vehicles to enable bank officials to visit the customers, the bank should recruit more staffs to those branches with few staffs. The bank should lower the loan application requirements and procedures to reduce the boredom of the borrowers.