The present study examines the impact of credit constraints on small and medium enterprises in Islamabad. Small and Medium size Enterprises (SME’s) are very important part of the economy. There are four types of enterprises in a country micro small and medium and large. Small and medium enterprises contribute 40% to the GDP. Since they generate 60 -70 percent employment in low income countries. According to the Economic Census of Pakistan (2005), there were almost 2.96 million units in Pakistan, 90% of total businesses in Pakistan are either Small or Medium size Enterprises. But SMEs are facing a lot of credit constraints that are creating problems for their economic growth and development. Primary data were collected through interviews. descriptive research design has been use in this study. Units of data collection for this study were SME Executives, SMEDA, Chamber of Commerce and government and commercial Banks. The results show that major constraints faced by SMEs in term of financing are high tax rates, legislative framework, high interest rates, high transaction costs, high collateral requirements, lengthy procedure and less government support. Policy recommendations are also provided in this study that government should take serious measure to reduce high tax rates and interest rates. She should take steps to restrict banks to reduce their collateral requirements and their documentation procedure should not be lengthy it should be easy to read. Supervisor:- Dr. Jehangir Khan