This study presents the results on the impact assessment of credit under Kagera Agricultural and Environmental Management Project (KAEMP) on rural livelihoods of smallholder farmers in Misenye district, Kagera region. The general objective was to assess the impact of agricultural credit under KAEMP on smallholder farmers’ rural livelihoods. The specific objectives were to identify socio-economic factors within the project environment that influence the use of credit, assess the use of improved agricultural inputs between borrowers and non-borrowers and finally analyze livelihood changes resulting from the use of credit by smallholder farmers. Both primary and secondary data were collected using information search and survey. The main instruments for data collection were two structured questionnaires. The data collected were summarized and analyzed by using Statistical Package for Social Sciences programme (SPSS). It was revealed that the number of active family members and the income from off-farm income generating activities were the socio-economic factors which contributed largely to discriminate borrowers and non-borrowers. Moreover, the results show that there was a significant difference in the use of type of labour and modern agricultural inputs especially for dairy cattle keepers between borrowers and non-borrowers implying that credit influenced the use of modern inputs. In the case of livelihood indicators, results obtained in this study show significant difference on farmers’ livelihood between borrowers and non- borrowers especially on housing materials used, livestock owned, value of household assets, farm tools used and farm and off-farm income entailing that credit influenced the improvement in rural livelihood. Basing on these findings, it is therefore concluded that all efforts be made to make agricultural credit effective since rural livelihoods can be improved by agricultural credit provision and hence alleviate poverty in the rural areasiii where poverty is predominantly regarded as a rural phenomenon and subsistence agriculture is a major economic activity.