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Microfinance in Pakistan:

Microfinance can be defined as the financial services provided to the poor

and people with less income by different microfinance providers.
Microfinance is recognized as a tool to fight poverty by providing financial
services to those people who are usually neglected by the commercial bank
and financial institutions. These financial services include credit, loans,
savings, insurance, money transfers and other financial products specifically
designed by the microfinance institutions for the poor.
Microfinance Institutions are widely known as Microfinance Banks or
Specialized NGOs. These institutions provide financial services to small and
medium sized businesses or underprivileged individuals to reduce the
poverty level in the society. In Pakistan, there are a number of Not for Profit
NGOs and Rural Support Programs that are providing microfinance services.

Evolution of Microfinance in Pakistan:

Microfinance in Pakistan started with Orangi Pilot Project in Karachi and Agha
Khan Rural Support Programme (AKRSP) initiated by two different NGOs in
1982. After that in 1990s a number of NGOs started to provide microfinance
services in Pakistan to alleviate the poverty level in Pakistan. Kashf
Foundation was established in 1996 with the sole purpose of exclusively
providing microfinance services.
During the Musharrafs regime special measures were taken by the
government to alleviate poverty in the country and microfinance was
selected as the key objective to serve the purpose. As a result of
governments efforts Pakistan Poverty Alleviation Fund (PPAF) was
established in collaboration with the World Bank in 2000 while establishing a
microfinance bank named as Khushhali Bank. Since then microfinance
institutions are working on diversifying their product offerings like enterprise
loans, leasing, housing finance, personal loans, and insurance and
remittance services.
Due to government initiatives in microfinance sector, major developments
have been made which caused a major increase in the number of clients
from 100,000 to 1.4 million from 2001 to 2007 according to the annual report
of Khushhali Bank 2007.

Microfinance providers in Pakistan:

There are four types of microfinance institutions currently operating in
Pakistan. First we have the Specialized NGOs, then we have Rural Support
Programs to alleviate poverty level in the rural areas in Pakistan, third we
have Non Government or private NGOs, and finally we have Commercial
Financial Institutions (CFI) who are providing services to small and medium
sized entities of businesses in Pakistan.
Currently there are many microfinance institutions working in Pakistan and
some of them are:

Kashf Microfinance Bank

Khushhali Bank
Network Microfinance Bank Limited
Pak-Oman Microfinance Bank Limited
Rozgar Microfinance Bank Limited
Tameer Microfinance Bank Limited
The First Microfinance Bank Limited
Orangi Pilot Project
Community Support Concern and many more.

There are some institutions which are specifically working to alleviate

poverty in the rural areas or the Rural Support Programs. Some of them are
as follows.

Lachi Poverty Reduction Project

National Rural Support Programme
Punjab Rural Support Programme
Sarhad Rural Support Programme
Thardeep Rural Support Programme.

Role of Microfinance in Poverty Alleviation in Pakistan:

Nowadays, world is facing this huge challenge of poverty reduction. United
Nations has recognized the impact of microfinance in poverty reduction.
Studies have also described that how can poverty be fought with the help of
microfinance. Microfinance helps underprivileged people to meet the basic
necessities and protects them against possible risks. The use of microfinance
financial services helps in the economic welfare of people with less income.
Microfinance also encourages women to take part in the economic stability of

the household which empowers women and promote gender-equity and it

also improves their well-being. The level of impact of microfinance varies
with the period of time the clients have access to the financial services.
Microfinance provides individuals with an opportunity to open small business.
It not only supports the economic conditions of the poor but also helps them
improve their standard of living with access to good education and health
facilities. The flowchart given below shows how microfinance can help in the
poverty alleviation.

Fig: Mechanism of Microfinance in Poverty Alleviation [Souce: State Bank

Quarterly Report FY05]

Challenges to Microfinance:
Improper Regulations:
In the microfinance sector as such no work has been done in Pakistan for the
regulations and restrictions. Some rules were made in the initial stages which
also require changes so government should take steps in making the
regulations and reforms.

Increasing Competition:
As many microfinance institutions are working in Pakistan there is a lot of
competition. Plus now the customers have a lot of awareness so they are
demanding more and more services.

MFIs Profitability:
Due to the special circumstances of the clients, microfinance institutions
cannot charge a high rate of interest and this minimizes their margin of profit
to a large extent. So, they face problems in covering the cost of their

Innovative and Diversified Products:

Microfinance is not just restricted to micro credit. It comprises of various
diversified products but in case of some microfinance institutions they are
just restricting themselves to micro crdit option.

Stability of MFIs:
Stability of MFIs depends largely on the stability of banking sector and now it
is high time MFIs should stand independently.

Limited Management Capacity in MFIs:

There is a difference in management of an NGO and that of MFIs. The

institutions which are converted from NGOs to MFIs do not have sufficient
managerial capability to run this kind of an institution.

Political Interference:
The role of landlords in the rural areas negatively affect the microfinance

High Transaction Cost:

High Transaction Cost is also a very big challenge as the volume of
transactions is small whereas the fixed cost on those transactions is high.

Policy Environment:
In microfinance sector there is no coordination between the government and
private sector in terms of policy development and improvement.

Low Level of Knowledge:

The working and efficiency of MFIs depends largely on the human resource
working in the institutions. Unfortunately they lack the knowledge of running
such institutions.

Opportunities in the Microfinance sector in Pakistan:

Poverty Alleviation:
It has been proved from studies that microfinance is a key to alleviate
poverty. Secondly, it doesnt only help reduce poverty but also helps in
enhancing the standard of living of the people.

Impact on Health, Social Capital and Economy:

Microfinance helps in the improving the living standards of people by giving
them the health and education facilities which ultimately effects on the

Microfinance as Development Tool:

Microfinance prevents risks faced by the clients and helps the poor to
stabilize themselves. So, it ultimately helps in the economic development of

Opportunity for Commercial Banks:

Microfinance is a very good opportunity for commercial banks to invest their

Women Empowerment:
Microfinance provides women with an opportunity to empower themselves
and helping in improving the conditions of their household. On a positive
note the repayment rate of women is very high which is a very big
opportunity for the investors.