Introduction

Although Pakistan’s economy enjoyed relatively stable growth during the 1990s poverty and income inequality continued to rise¹; the most recent official estimates are that roughly one-third the population was below the poverty line at the start of the millennium. (GoP, 2003:12) (see chapter 8 for more details). In response to these widely cited figures, the government of Pakistan established poverty reduction as its overarching objective and recognizing the potential role of microfinance in alleviating poverty, embarked on a Microfinance Sector Development Program (MSDP) to broaden and deepen the microfinance sector to provide a broad range of financial services in a sustainable manner.

Microfinance is still relatively new to Pakistan, both in concept and practice. Prior to embarking on the MSDP, the main providers of microfinance were NGOs² and government sponsored rural support networks³ or, in at least one case, a traditional commercial bank with a specialized microfinance window. With the exception KASHF, a well-known NGO operating out of Lahore, none of these institutions are specialized microfinance institutions and none have demonstrated financial sustainability (Pakistan Microfinance Network (2003).⁴ Despite the achievements of these institutions⁵, total their total outreach is still less than 5% of the estimated 5.6 million poor households in Pakistan that require microfinance services (see Table 9.1 [ PDF 100.9KB | 2 pages ]).

To reach these un-served households, in 2001 the government of Pakistan established a regulatory framework that promotes the rapid expansion of microfinance throughout the country. The effect of this legislation has been to dramatically increase the outreach of microfinance in Pakistan. The Khushhali Bank, a retail microfinance bank established in August 2000, was the first licensed microfinance bank established under the MSDP, and the bank now serves over 230,000 active clients: more than the number of clients reached by all the NGOs and rural support programs in total before 2001⁶. It has achieved this substantial outreach while remaining commercially oriented and focused on achieving financial sustainability. In addition to Khushhali Bank, there are now several other licensed microfinance banks⁷ in Pakistan and others are in process of applying.

This chapter examines empirically the poverty impact of Pakistan’s microfinance sector development program by looking at the impact of Khushhali Bank’s lending program on the welfare of poor households in the country. It does this by drawing on the results of an original national household survey undertaken specifically for this purpose during 2005.

Comment(s)

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1. Khan Hidayat Ullah
   (posted 23 November 2006 / 10:14:28 PM)
   
   Econometric Model Selection:
   
   I went through your paper and really liked the approach adopted by you while found your results interesting as well.
   
   I have one comment to make. When it comes the components of microfinance pertaining to the term of loan, e.g., amount, duration and repayment mode, in practice these factors are determined by the both the borrower and lender through negotiation between line staff of MFI and Managers of CBOs. This results into adoption of resolution by members in joint meeting held by field staff MIF and CBO.
   
   Keeping these factors in view, the claim that an explanatory variable relating to terms of micro-credit is exogenous becomes doubtful. This creates endogenity problems in the model and the results which are estimated by this model can not be claimed as unbiased.
   
   In you model you have used variables like amounts of loan and times of loans borrowed in past, which brings in endogenity problem in the model and leads to biased estimates, if I am correct? I would like to know how you addressed this problem in your econometric model. If not what kind of instrumental variable you intend to use in order to deal with situation will.