To analyze how Micro Finance Institutions are managing their non-repayment risk by using Group-Based Lending approach, the deductive approach has been used in this study and the case study method is deployed. Khushhali Bank Limited, Pakistan has been taken for the subject Micro Finance Institutions. The four inter-related theories have been taken into consideration, namely Portfolio, Principal-Agent, Contract and Transaction Cost Theories, to have a detailed literature review about the threat of non-repayment risk through Group-Based Lending. The study chalked out a result that by combining diversified members in a group under Group-Based Lending approach, Micro Finance Institutions can able to minimize their non-repayment risk.