Despite the current enthusiasms in applying the concept of microfinance as a povertyrnalleviation tool in many countries, the risk management aspects of micro-financingrnshould not be overlooked. This paper highlights several incidences of default risks inrnmicrofinance industry. The problem identified was that microfinance programs performrnscantily because of delay in repayment and high default rates. Hence, it was important tornestablish if these limitations prevailed in the selected 6 MFIs in Ethiopia schemed byrndetermining the default rate and the grounds of the observed trends. Therefore, in orderrnto address those issues, the researcher used primary data collected through structuredrnquestionnaire and referred secondary sources of data. As a result, the collected data andrninformation were compiled and analyzed for possible indications of problem areas. So,rnthe outcomes revealed that the MFIs default rate increased over the review period andrnaveraged 27.1 per cent as well. The core factors of default were found to be poor businessrnperformance, in terms of low profitability or business losses. Besides, credit diversion tornunprofitable uses, domestic problems, numerous dependents, and tenancy problems werernother factors that caused credit default. Further, the inference results of the descriptivernstatistics and the probit model show that education, income, loan supervision, suitabilityrnof repayment period and availability of other credit sources are important and significantrnfactors that enhance the credit repayment performance, while credit diversion andrncredit/loan size are found to significantly increase credit default. There were seriousrnproblems observed in the screening mechanism the institutions employed, i.e. borrowersrnwho are good payers like literate were rationed more, while those who contribute to therndefault problem like male and who apply for larger loan amounts were rationed less. So,rnthe lending institutions are particularly recommended to improve these problemsrnobserved in its rationing mechanism. Moreover, the processes should be worked out tornidentify borrower capacity and any obligations that may interfere with repayment.rnFinally, the selected MFIs should intensify recovery of outstanding balances fromrndefaulters through increased borrower follow-up.rnKey Words: MFIs, credit default, credit diversion, loan rationing, impact, creditworthy