diff --git a/.github/workflows/rust.yml b/.github/workflows/rust.yml
index 324ed57d4..c61f71f13 100644
--- a/.github/workflows/rust.yml
+++ b/.github/workflows/rust.yml
@@ -74,8 +74,17 @@ jobs:
       - name: Build
         run: cargo build --verbose
 
+      - name: Get changed files
+        id: changed-files
+        uses: tj-actions/changed-files@v45
+        with:
+          files: |
+            **.rs
+
       - name: Run tests
+        env:
+          CHANGED_RUST_FILES: ${{ steps.changed-files.outputs.all_changed_files }}
         run: |
           chmod +x $GITHUB_WORKSPACE/scripts/build-all-apps.sh
           chmod +x $GITHUB_WORKSPACE/scripts/test.sh
-          $GITHUB_WORKSPACE/scripts/test.sh
+          $GITHUB_WORKSPACE/scripts/test.sh --local ${CHANGED_RUST_FILES}
diff --git a/.husky/pre-commit b/.husky/pre-commit
index 3ed7257d8..02b857533 100755
--- a/.husky/pre-commit
+++ b/.husky/pre-commit
@@ -4,15 +4,18 @@
 echo "Running pre-commit hook..."
 
 # Check for changes in Markdown or MDX files
-if git diff --cached --name-only | grep -qE '\.mdx?$'; then
+if git diff --cached --name-only | grep -q '\.mdx?$'; then
   echo "Markdown or MDX files have been changed."
   pnpm format:md
 fi
 
 # Check for changes in Rust files
-if git diff --cached --name-only | grep -qE '\.rs$'; then
+if git diff --cached --name-only | grep -q '\.rs$'; then
   echo "Running checks for the Rust code..."
   cargo +nightly fmt
+  # Run tests only for the changed files
+  # changed_rust_files=$(git diff --cached --name-only | grep -E '\.rs$')
+  # ./scripts/test.sh --local ${changed_rust_files}
 fi
 
 # Check for changes in the 'node-ui' directory (Next.js app)
@@ -25,4 +28,4 @@ fi
 if git diff --cached --name-only | grep -q '^packages/calimero-sdk/'; then
   echo "Running checks for the packages/calimero-sdk..."
   (cd packages/calimero-sdk && pnpm prettier && pnpm lint:fix)
-fi
\ No newline at end of file
+fi
diff --git a/crates/merod/src/cli.rs b/crates/merod/src/cli.rs
index b4a90e810..dc7415c0f 100644
--- a/crates/merod/src/cli.rs
+++ b/crates/merod/src/cli.rs
@@ -37,6 +37,7 @@ pub const EXAMPLES: &str = r"
     "Examples:",
     EXAMPLES
 ))]
+
 pub struct RootCommand {
     #[command(flatten)]
     pub args: RootArgs,
diff --git a/scripts/test.sh b/scripts/test.sh
index 35438717e..c3f5ffa00 100755
--- a/scripts/test.sh
+++ b/scripts/test.sh
@@ -5,7 +5,46 @@ set -ex
 
 cd "$(dirname $0)"
 
-# prepare apps
+# Check for valid arguments
+if [ "$#" -eq 0 ]; then
+  echo "No arguments provided. Use --all or --local followed by files."
+  exit 1
+fi
+
+# Initialize variables
+mode=""
+changed_files=()
+
+# Parse arguments
+for arg in "$@"; do
+  case $arg in
+    --all)
+      mode="all"
+      ;;
+    --local)
+      mode="local"
+      ;;
+    *)
+      if [ -n "$mode" ]; then
+        changed_files+=("$arg")
+      fi
+      ;;
+  esac
+done
+
+# Check if neither --all nor --local was provided
+if [ -z "$mode" ]; then
+  echo "Either --all or --local must be provided."
+  exit 1
+fi
+
+# Check for changed Rust files if local is specified
+if [ "$mode" = "local" ] && [ -z "$changed_files" ]; then
+  echo "No files provided for local mode. Either no changes were made or the files were not provided."
+  exit 0
+fi
+
+# Prepare apps
 ./build-all-apps.sh
 
 # Prepare contracts
@@ -13,5 +52,114 @@ cd "$(dirname $0)"
 ../contracts/context-config/build.sh
 ../contracts/proxy-lib/build-test-deps.sh
 
-# Run cargo test
-cargo test
+# Run all tests
+if [ "$mode" = "all" ]; then
+  echo "Running all tests..."
+  cargo +nightly test
+  exit 0
+fi
+
+# Run tests for changed files
+echo "The following Rust files have changed:" "${changed_files[@]}"
+# Find affected crates
+changed_crates=()
+# List of crates defined in workspace
+all_crates=($(awk '/\[workspace\]/,/^\s*$/' ../Cargo.toml | grep -E 'members' -A 100 | grep -Eo '"[^"]*"' | tr -d '"' | sed 's|^\./||'))
+echo "All workspace crates" "${all_crates[@]}"
+
+for file in "${changed_files[@]}"; do
+    # Extract the crate name by stripping the path to get the crate folder
+    crate_name=$(echo "$file" | sed -E 's|^(crates/[^/]+)/.*|\1|')
+    changed_crates+=("$crate_name")
+done
+echo "Detected crates from changed files" "${changed_crates[@]}"
+
+# Remove duplicates
+unique_changed_crates=()
+for item in "${changed_crates[@]}"; do
+    # Check if item is already in unique_array
+    duplicate=false
+    for unique_item in "${unique_changed_crates[@]}"; do
+        if [[ "$item" == "$unique_item" ]]; then
+            duplicate=true
+            break
+        fi
+    done
+    # If item is not a duplicate, add it to unique_array
+    if ! $duplicate; then
+        unique_changed_crates+=("$item")
+    fi
+done
+echo "Unique crates from changed files" "${unique_changed_crates[@]}"
+
+# array of dependencies in format crates/crate
+dep_arr=()
+for changed_crate in "${unique_changed_crates[@]}"; do
+    # Replace "crates/" with "calimero-" to find dependencies as dependencies are imported as calimero-name from crates/name
+    # e.g. In list I have crates/node-primitives but as dependency it is calimero-node-primitives.
+    calimero_package_name+=("${changed_crate/crates\//calimero-}")
+    # get list of all dependencies from the crate including external dependencies
+    dependencies=($(cargo metadata --format-version=1 --no-deps | jq -r --arg CRATE "$calimero_package_name" '
+        .packages[] |
+        select(.dependencies | any(.name == $CRATE)) |
+        .name
+    '))
+
+    for dep in "${dependencies[@]}"; do
+        # Compare dependency with list of crates from workspace to skip external dependencies
+        calimero_dep_crate_path="${dep/calimero-/crates/}"
+        for crate in "${all_crates[@]}"; do
+            if [[ "$crate" == "$calimero_dep_crate_path" ]]; then
+                echo "Found matching dependency: $calimero_dep_crate_path"
+                dep_arr+=("$calimero_dep_crate_path")
+            fi
+        done
+    done
+done
+echo "Dependencies array:" "${dep_arr[@]}"
+
+# Merge crates from changed file and their dependencies
+for item in "${dep_arr[@]}"; do
+    if [[ -z "${seen[$item]}" ]]; then
+        seen[$item]=1 # Mark the item as seen
+        unique_changed_crates+=("$item")
+    fi
+done
+
+# Remove duplicates
+crates_to_test=()
+for item in "${unique_changed_crates[@]}"; do
+    # Check if item is already in unique_array
+    duplicate=false
+    for unique_item in "${crates_to_test[@]}"; do
+        if [[ "$item" == "$unique_item" ]]; then
+            duplicate=true
+            break
+        fi
+    done
+    # If item is not a duplicate, add it to unique_array
+    if ! $duplicate; then
+        crates_to_test+=("$item")
+    fi
+done
+
+# Install the nightly toolchain
+rustup toolchain install nightly
+
+# Run tests for each module and its dependencies
+echo "Running tests for affected modules and their dependencies..."
+echo "Crates to run tests:" "${crates_to_test[@]}"
+for crate in "${crates_to_test[@]}"; do
+    # Convert from folder name to package name
+    crate_package_name=("${crate/crates\//calimero-}")
+    if [[  "$crate_package_name" == "calimero-merod" ]]; then
+        echo "Testing crate merod"
+        cargo +nightly test -p "merod"
+    elif [[ "$crate_package_name" == "calimero-meroctl" ]]; then
+        echo "Testing crate meroctl"
+        cargo +nightly test -p "meroctl"
+    else
+        echo "Testing crate $crate_package_name"
+        cargo +nightly test -p "$crate_package_name"
+    fi
+done