Despite the current enthusiasms in applying the concept of microfinance as a povertyrnalleviation tool in many countries, the risk management aspects of micro-financingrnshould 1101 be overlooked. This paper highlights several incidences of default risks illrnmicrofinance institutions. The problem identified was that micro finance programsrnperform scantily because of delay in repayment and high default rates. Hence, it wasrnimportant to scantily if these limitations prevailed in the selected 6 MFls ill Ethiopiarnschemed by determining the default rate and the grounds of the observed trends.rnTherefore, in order to address those issues, the researcher used primary data collectedrnthrough structured questionnaire and referred secondary sources of data. As a result, therncollected data and information were compiled and analyzed for possible indications ofrnproblem areas. So, the outcomes revealed that the MFls default rate increased over thernreview period and averaged 27.1 per cent as well. The core factors of default were foundrnto be poor business performance, in terms of low profitability or business losses. Besides,rncredit diversion to unprofitable uses, domestic problems, numerous dependents, andrntenancy problems were other factors that caused credit default. Further, the inferencernresults of the descriptive statistics and the probit model show that education, income,rnloan supervision, suitability of repayment period and availability of other credit sourcesrnare important and significant factors that enhance the credit repayment performance,rnwhile credit diversion and credit/loan size are found to significantly increase creditrndefault. there were serious problems observed ill the screening mechanism thernintuitions employed, i.e. borrowers who are good payers like literate were rationedrnmore, while those who contribute to the default problem like male and who apply forrnlarger loan amounts were rationed less. So, the lending institutions are particularlyrnrecommended to improve these problems observed in its rationing mechanism. Moreover,rnthe processes should be worked out to identify borrower capacity and any obligationsrnThat may interfere with repayment. Finally, the selected MFls should intensify recovery of rnoutstanding balances from defaulters through increased borrower follow-up.rnKey Words: MFls, credit default, credit diversion, loan rationing, impact, creditworthy.