A Dissertation Submitted in Partial Fulfillment of the Requirement for the Award of Degree of Masters of Business Administration in Corporate Management (MBA-CM) of Mzumbe UniversityNon-performing loans (NPL)/Bad loans had received major concerns from both financial and non-financial institutions such as investors from inside and outside Tanzania. Henceforth, this study is aimed at discovering the effect of bad loans (NPL) on the profitability and lending potential of VICOBA in Kibaha district. The research covered five (5) village community banks (VICOBA) in Kibaha District. The study employed quantitative based and partly used qualitative research techniques as the research design. In achieving answers to the research objectives the primary data was collected through organised questionnaire, interviews and focus group discussions (FGD). Secondary data was collected through VICOBA financial reports in the recent six (6) years, annual reports and loan procedures, journals and other publications. Sample size was 145 respondents that comprised of 120 loan customers and 25 VICOBA officials. Customers were selected by using simple random sampling technique while VICOBA officials were selected using convenience sampling techniques. Data analysis was done through SPSS package where correlation, multiple regression analysis of variables in the study was prepared in the data collection analysis. The study found out that Non-Performing Loans (NPL)/ Bad loans in the Six-year period reviewed serious change as unexpected rise and fall of NPL value. NPL adversely affected the financial performance of the village community banks by reducing their operating profits, loanable funds and undermining their liquidity positions. Results show that (44%) of management’s personnel voted for insufficient credit assessment, borrower's dishonest, improper mechanism in monitoring activities and occurrence of unfavourable conditions such as changes in weather conditions since some customers are farmers. However, causes of non-performing loans related to customer operations observed (60%) of customers proposed business collapse as the core factor and others like moral hazards, inadequate business education, management and entrepreneurship skills, and marketing.