This study focuses on the appropriate selection of best model which measure credit risk for the manufacturing firms of Pakistan efficiently & effectively. We had selected 498 manufacturing firms of Pakistan with the condition that remain listed on Karachi Stock Exchange (KSE) for at least 20 years during the data period (1974-2012). We divided data on the basis of Risk Level as; ‘Low Level Credit Risk’, ‘Moderate Level Credit Risk’ and ‘High Level Credit Risk’. We used panel logit to estimate credit risk models. We used four different models for measurement of credit risk of manufacturing sector of Pakistan. First we ‘Proposed Firm Specific Model’ by using set of firm specific variables taken from financial statements of firms. The second model was ‘Distance to Default Model’ by calculating distance to default and considered it as unique explanatory variable in the model. Third model was ‘Option Pricing Model’ in which market based variables were used. Finally, we estimated ‘Hybrid Model’ that combined the highly significant explanatory variables of all above discuss. We compared the results & performance of all credit risk models estimated in the study. From our empirical analysis we conclude that our best & more sophisticated model for the measurement of credit risk of Pakistani manufacturing firms was Proposed Firm Specific Model (Enrich of firm financial information). Proposed Firm Specific Model not only measured credit risk efficiently but also provides best defense strategy against adverse financial losses by giving early warning indicators of the deteriorating credit. We also presented Industrial & Historical credit risk analysis of manufacturing sector of Pakistan. The analysis confirms that ‘Fuel and Energy Industry; has lowest credit risk It shows that due to high demand of fuel and energy the financial position of firms of Fuel and Energy Industry is stable and growing. This also indicates the potential of more investment in the industry. The Historical Analysis shows that times period 1974-75 was highest credit risk time for Pakistan’s manufacturing sector, the probable reasons are major devaluation of currency and adverse impact of major nationalization of industrial & financial sector of Pakistan. Supervisor:- Dr. Shahid Mansoor Hashmi