In Ethiopia poor cannot get loan from formal financial institutions due to lack of asset used as collateral. Microfinance institutions are choice-less solution since they have the advantage for poor in substituting collateral by group guarantees or compulsory savings which makes easy for poor to get access to loan. Even though these institutions are the solution for poor they have got risks which hinder their sustainability and performance. Henceforth, these risks ought to be clearly identified and prioritized so that their effect on performance will be minimized and growth and achievement of these institutions will be fostered. When these risks are handled well poor can get access to loan easily which makes them to make use of the loan to generate income for their daily expense which in turn paves way to growth and prosperity of the country. The result from the study revealed that microfinance institutions in Ambo area are affected by internal and external risks to the institutions. Credit risk is identified as a risk with high severity where as competition and customer over-indebtedness risks are low severe risks in affecting the performance of microfinance institutions.