A Dissertation Submitted in Partial/Fulfilment of the Requirements for Award of the Degree of Master of Business Administration (MBA) in Corporate Management of Mzumbe UniversityThe study was conducted to investigate the challenges facing microfinance institutions in managing credits in Tanzania. The study adopted case study design and purposive sampling and stratified sampling were used to select respondents. Questionnaires and interview were used in data collection and a sample size of 60 respondents was used in the study. Findings indicated that client appraisal, credit risk control, collection policy, credit risk identification and credit risk assessment are the credit risk management practices adopted by FINCA and PRIDE Tanzania. The result further indicates that major challenges facing FINCA and PRIDE Tanzania on credit risk management are lack of resources for close follow up, disintegration of systems across departments, inconsistencies in credit risk-rating management and insufficient regulatory requirements. Moreover, the findings revealed that the reasons of the challenges were poor screening of borrowers, poor management information systems, weak appraisal of loans, lack of immediate follow-up, unclear communication about product, poor product, lack of motivations of employees and corruption at field staff level such as taking bribe for loans or frauds that can result in delinquencies. The study concludes that the financial performance of Microfinance Institutions have got the strong link with client appraisal, collection policy, credit risk control, credit risk identification, credit risk assessment and portfolio asset quality. Henceforward, the study recommends that, government should give consideration to the microfinance, allocate enough budgets and donate to MFIs in order to boost their performance for economic development. MFIs have to improve the collection policies, which instead of using lenient policies for active debt recovery; they should now use stringent policies.