The anaerobic baffled reactor (ABR) is a decentralized treatment system that is commonly used for municipal wastewater treatment. Slower growth rate of anaerobic microorganisms requires extended hydraulic retention time (HRT), leading to a larger bioreactor volume. In this study, polyurethane sponge sheets were provided in a six-compartment ABR for retention and growth of biomass to improve its treatment performance at shorter HRTs. Polyurethane sponge was selected for its low cost, durability, availability, easy emplacement, and high voidage. The sponge anaerobic baffled reactor (SABR) was operated within a temperature range of 35 ± 1 °C at HRTs of 18, 12, 8, and 6 h to evaluate its treatment performance. Average removal efficiencies ranged from 60–77% for organics, 74–81% for total suspended solids (TSS), 50–66% for total nitrogen (TN), and 47–57% for total phosphorus (TP). The shortest HRT was 8 h with average removal efficiencies of 74, 63, 64, and 52% for organics, TSS, TN, and TP, respectively, to meet effluent discharge limits. With the shortest HRT of 8 h, the SABR demonstrated low volume requirements, thereby making it an efficient solution for decentralized wastewater treatment, particularly advantageous for developing countries with warm climates.