This study focuses on the performance of micro finance institutions (MFIs) in sustainable housing poverty reduction for the majority urban poor in Addis Ababa, the capital city of Ethiopia. The paper assesses the impact, challenges and prospects of MFIs in transforming the urban poor residents’ livelihoods through the provision of Housing Microfinance (HMF) loan product. From available data, Addis Ababa Credit and Savings Institution (AdCSI), an MFI with a customer base of 120 000, diversified its product lines to include the HMF loan product in 2006. Although findings indicate that the loan is popular with most urban poor residents, MFIs are failing to meet the demand mainly due to lack of loanable funds. As a way forward, the government through partnerships with the private sector needs to integrate MFIs into the broader financial system so as to address the financial needs of the low income people who can not be covered by commercial banks, particluarly in accessing the money to pay the 20% down payment for condominium houses. Similarly, most MFIs operating in the city need to diversify their loan products to include housing loans to tap into the lucrative market by extending the HMF loan to their clients.