Mbinga Community Bank's customers were mainly farmers in southern Tanzania.
The Bank of Tanzania (BoT) Friday revoked the business licence for Mbinga Community Bank (MCB) citing lack of sufficient capital.
The central bank also placed Mbinga under liquidation, making it the second lender this week to fold, as the country moves to streamline its financial sector.
"The Bank of Tanzania has decided to take possession of Mbinga Community Bank, discontinue its operations, revoke its banking licence and place it under compulsory liquidation," the regulator said in a statement on Friday.
BoT appointed the Deposit Insurance Board as the liquidator and appealed to the bank's clients to be patient as DIB puts in place a compensation plan.
Mbinga, a microfinance institution, has been operating in Ruvuma in southern Tanzania. Its main customers are farmers.
The lender was licenced in 2003 and its total assets as at 2014 was Tsh383.4 million ($171,930).
The central bank said the move was taken after it determined that "the bank is critically undercapitalised and insolvent" adding that its if the lender continued its operations in its current capital and liquidity condition, it would be "detrimental to the interest of its depositors and poses risk to the stability of the financial system."
On Monday, BoT placed troubled international lender FBME under liquidation after it was accused of money laundering by the American government.
Last October, BoT put government-owned Twiga Bancorp in receivership for lack of adequate capital.