Microfinance consists of 24 NGOs, 6 microfinance institutions, 5 commercial finance institutions and 6 rural support programmes.... The government should not feel it an offload task since the individuals have started attempts at personal level, rather a combined government and individual effort can produce the results one can dream of.

May 21 - 27, 2007

With a per capita GDP of about $2600 Pakistan is considered a low-income country, although it is recorded as a "Medium Development Country" on the Human Development Index-2005. Pakistan has a large informal economy, which the government is trying to document and assess. Approximately 41% of adults are literate, and life expectancy is about 62 years. The population, about 165 million in 2006, is growing at about 1.96%.

Relatively few resources have been devoted to socio-economic development or infrastructure projects. Inadequate provision of social services and very high birth rates in the past have contributed to a persistence of poverty. Recent study has concluded that the fertility rate peaked in the 1980s, and has since fallen sharply. Pakistan has a family-income Gini index of 41, close to the world average of 39.

The high population growth in the past few decades has ensured that a very large number of young people are now entering the labor market. Among the seven most populous Asian nations, Pakistan has a lower population density than Bangladesh, Japan, India, and the Philippines. In the past, excessive red tape made firing, and consequently hiring, difficult. Significant progress in taxation and business reforms has ensured that many firms now are not compelled to operate in the underground economy.

In late 2006, the government launched an ambitious nationwide service employment scheme aimed at disbursing almost $2 billion over five years.

Pakistan government spent over 1 trillion rupees (about $16.7 billion) on poverty alleviation programs during the past four years, cutting poverty from 35 percent in 2000-01 to 24 percent in 2006. Rural poverty remains a pressing issue, as development there has been far slower than in the major urban areas.


Microfinance is a term for the practice of providing financial services, such as micro credit, micro savings or micro insurance to poor people. By helping them accumulate usably large sums of money, this expands their choices and reduces the risks they face. Suggested by the name, most transactions involve small amounts of money, frequently less than 100 USD.

The recent statistics show that almost 25 per cent of the country's population lives in absolute poverty. And within this, microfinance is recognised to be a significant poverty alleviation tool. Encouraging is also the positive growth in his sector over the past six years.

There are five Micro Finance Institutions like microfinance institutions , rural support programmes, and other NGOs doing microfinance as part of their integrated operations, and commercial finance institutions or commercial banks involved in microfinance.

Micro Finance consists of 24 NGOs, 6 Micro Finance Institutions, 5 commercial finance institutions and 6 rural support programmes. Khushhali Bank claims to have a current annual coverage of 100,000 clients.

Loans and savings are the two key services that are currently being provided by the micro-finance sector. The average size of loan taken by poor households from NGOs is about Rs16,540 at an interest rate of 18-20 per cent per annum.

Microfinance in Pakistan is relatively a new concept as compared to other countries in the region. The NGOs and Rural Support Programs have been the major players in the sector since early 1980s, covering about 5% of more than 6.5 million poor households in the country. Considering the low outreach levels of this important poverty alleviation tool and need for development of a pro-poor financial infrastructure, we adopted a microfinance policy to demonstrate government's commitment to promote this sector and facilitated establishment of Khushhali Bank, a public-private partnership, with the twin objective of substantially increasing outreach in the medium term and giving a model institution to the private sector.

The policy mainstreamed the concept of sustainable Microfinance, recognized it as an important component of country's financial system and encouraged private sector entry into banking with the poor. To give a formal shape to the policy, a legal framework for establishment of MFIs in private sector was enacted which allowed institutional diversity for provision of microfinance services. The framework is applicable only on MFIs interested in mobilizing public savings to finance their operations, the NGOs and other programs undertaking microfinance from sources other than public savings are not covered under the framework.


Presently there are two formal microfinance banks operating in the country while licensing applications for two more banks are under process and a renowned NGO is at final stages of preparation of its proposal for conversion into a formal microfinance bank; the size of formal microfinance banks is likely to grow to 5 banks by the close of this year. The outreach of these two banks has extended to 44 districts so far and 125,000 poor families have accessed credit from these institutions, amounting to Rs. 2.12 billion. Both the banks are targeting the poor women who have so far been neglected. Their recovery rates at 96% plus are also satisfactory. The PPAF has so far provided Rs. 3.02 billion in credit to 278,000 borrowers and Rs 1.11 billion for community physical infrastructure Projects.

State Bank of Pakistan, the central bank and supervisory agency for deposit taking institutions, has framed a separate set of Prudential Regulations for microfinance banks in consultation with stakeholders and microfinance practitioners to ensure sound risk management systems in microfinance banks and require them to remain focused on their core market viz. the poor and their micro enterprises. The simplicity and allowing flexibility and innovation in this emerging component of financial system while ensuring effective regulatory and supervisory oversight of MFBs are the major features of the regulations.


Bangladesh - the world leader in microfinance - is yet to have a formal framework for microfinance, then how policies and regulations could be instrumental in promoting financial services to the poor. The conducive policy environment, however, is required both for formal and informal microfinance programs. The NGOs and donors etc wouldn't initiate their programs in areas/countries having restrictive policy environment.

The microfinance initiative, however, will have to be accompanied by other initiatives like substantial investment in infrastructure, education and health, to create business, investment and capacity building opportunities for the poor and enabling them to productively avail MF services. The combined effect of microfinance and other developmental and social sector initiatives could make a visible impact on poverty and miseries of the poor.

Role of women in this sector is required to be established. No doubt, women have greater tendency to reinvest their savings, not only for expansion of their businesses, but also for education, nutritional needs and health care of their families that a strategy is needed for low income, developing countries to achieve all the Micro Finance goals.

Presently, apart from factors like a lack of infrastructure and the absence of an overall congenial business and administrative environment, hurdles like inadequate financial resources, lack of access to technology, education, business-related training, lack of social services and net working etc bar women entrepreneurs from entering the realms of the organised sector. A strategic approach is needed to address these issues, both at the individual and national level.

The question whether the inclusion of micro-finance eroded the collective spirit of cooperatives arises because of the tensions inherent in the collective community interest and the individual self-interest, the policy of using the collective savings as collateral for individual default and the dichotomies implicit in its conception of the village organisation as a hybrid credit union. While one of the objectives of a credit union is to encourage its members to save and to obtain a reasonable rate of interest on these savings, there is another objective which can be construed as being directly in conflict with this objective which is to create sources of credit at a fair and reasonable rate. The lower the interest rate charged on credit, the lower the interest allowable on deposits.


So it is concluded that the growth in Micro Finance activities will uplift the basis of the crunching demographic and poverty facts of a developing country like Pakistan. But the government should not feel it an offload task since the individuals have started their attempts on personal levels rather a combined government and individual effort can produce the results one can dream of.