Research Analyst
Apr 28 - May 11, 2008

Pakistan is a developing country, whose 25% of 160mn population is living below the poverty line. 2/3 of population is living in rural areas and their subsistence is on local farming, small scale businesses (like shop, cart etc) and livestock. Almost half of rural population is living in extreme poverty and has a little hope for better future. Rest in urban areas, majority runs micro enterprises like tailoring, parchoon shop, vegetable shop, pan shop, barber shop, mechanic workshop etc. Unfortunately it is the setback in Pakistan, the poor has little access to credit for their income generating activities. Banks reluctant to lend them due to their inability to provide collateral and risk of default. As a result, they have to resort relatives, friends and money lenders who charge them very high rates. Thanks to Government, NGO's and financial institutions who took remarkable steps and started micro financing in Pakistan, with the objective to provide sustainable micro finance services to the poor to enable them to stand on their feet and promote social welfare.

History of micro finance in Pakistan is traced back to two pioneering institutions The Agha Khan Rural Support Program (AKRSP) in 1982 and Orangi Pilot Project (OPP). AKRSP focused on rural areas where as OPP focused to reduce poverty in urban area (Karachi city). Afterwards government initiated National Rural support Program (NRSP) and Urban Poverty Alleviation program (UPAP) in 1991 for the same objective, in the 2H of 1990 specialized MFB and commercial foray into the sector. Currently there are four micro finance banks, 5 microfinance institutions,4 rural support programme, 3 NGO's and 2 commercial financial institutions and more are in pipe line due to large untapped market.

For developing countries like Pakistan whose major chunk of population lives below poverty line, micro finance plays pivotal role in reducing the same. Government of Pakistan and SBP are taking effective steps to improve its outreach owing to its potential to generate employment and reduce poverty, which I evident from growth in number of borrowers over last few years.


According to a World Bank report, Pakistan microfinance sector has been growing at notable rate. In last 7 year, number of active borrowers has increased from 60,000 borrowers to more than 1.25mn which is quite impressive but still there is huge untapped market. Government has been taken steps to improve its outreach to 3mn by 2009. Percentage of women in total portfolio has been growing and stood at 45% in the 2006, which is positive sign for an economy.







MF Providers



Active borrowers



Active borrowers

% of population


Total net-loan( FY06)

Rs Mn


Source: IBP Quarterly Journal Oct- Dec2007


Financial performance of microfinance institutions especially banks has been not satisfactory. Four out of six micro finance banks have been incurring losses due to their rising administrative expenses and rising bad debts. It is likely that bad debts will increase due to rising prices which have impaired their paying ability. In 2006, four banks incurred loss of Rs 67.7 bn. [source: NBP economic bulletin]



As I mentioned earlier, outreach of microfinance still very low in Pakistan though concept has been here for many years, where as demand for it very high, exhibits poor outreach. In Pakistan 6 mn people require financial assistance and only 5% of it have been served. It is biggest challenge for institutions to improve outreach in effective and efficient manner.


It can be inferred from current economic situation, management of good portfolio is biggest challenge for micro finance institutions optimize risk- return tradeoff. Inflation has been sky rocketing which has potential to increase delinquency rate and can impair sustainability of institutions.


To develop healthy organizational structure and culture, to obtained competent work force and to promote strong vision which instill sense of purpose and ownership among people in the organization are considered major challenges to achieve the objectives of micro finance institutions in general and micro credit in particular.


To inculcate sense of responsibility among borrowers and to educate them about their liability towards MFIs is one of the small yet important objectives. Bad word of mouth is creating problems for MFIs. In our society if one defaults on liability towards any microfinance institution and convey the same through socialization, it creates sense of irresponsibility among other borrowers which result in intentional default.


In current economic scenario, micro finance is best tool to decreases the woes of the poor. 1.25mn out of estimated 6mn micro credit market has been covered; still there is huge market untapped. Micro finance institution can capitalize on this opportunity and can achieve both organizational and social objectives.


1. MFIs should target specific sectors of the population because different segments of population vary in needs, utilization of loans and their repayment patterns. MFIs come up with sectorial products keeping in view particular needs, competency to run business and financial status of borrowers.

2. To create and develop healthy organizational structure and culture, competent work force obtained through well designed recruitment and selection criteria, and continuous development of workforce. It will create base for organizational sustainability.

3. Regulators should keep on supervising their activities, their risk exposure in order to ensure their sustainability and financial soundness and give performance benchmarks to evaluate their performance in proper way to achieve the sole purpose of micro credit.