Performance appraisal, which refers to the formal assessment of employeesperformance, is considered one of the most important parts of effective human resourcesmanagement practices in any organization.As a result of its importance in anorganization, many researchers are carrying out broad researches to determine itseffectiveness.In the case of organizations in Eritrea however, little research has beenconducted in this area.The relative lack of research is therefore the primary driving forcefor this study.Thus, this research paper seeks to review how performance appraisal iscarried out in the financial institutions of Eritrea.To explore the above theme, aninterview with managers of the financial institutions was carried out.Furthermore, asample of 200 employees was selected out of which, 120 questionnaires were returned.Analysis was done quantitatively and qualitatively by the use of descriptive statistics.The data set includes employees from both genders of all age groups and of relativelyhigh educational level.The findings in this research reveal that Performance appraisal isbeen practiced in most of the institutions; however it is not meeting the requirements ofan ideal performance appraisal.Generally, insufficient knowledge and understanding ofthe application of performance appraisal coupled with poor communication betweensupervisors and subordinates were identified as the key challenges to proper and efficientperformance appraisal.As a result most of the employees in the institutions are notsatisfied with the appraisal.Thus, from the findings the study concludes that improperlyconducted performance appraisal leads to employees dissatisfaction and hence affectstheir productivity in their institutions.The results of this study are of high significance tothe management of the institutions and suggest ideas to improve it.