Conclusion

Our review of microfinance contributions to the MDGs concludes that microfinance institutions have been effective in contributing, directly and indirectly, to all the eight MDGs. Microfinance contributes to improving income and reducing hunger (MDG 1), providing children school education and training (MDG 2), and paying for health services (MDG 4 – 6). The main beneficiaries of microfinance services are women, so MFIs contribute to women's empowerment and gender equality (MDG 3). As for the environment (MDG 7), MFIs are increasingly combining environmental programs with their financial services, although the contribution may be indirect. For MDG 8, since Target 12 calls for the development of open, rule-based, non-discriminatory financial systems, the expansion of microfinance programs themselves is the achievement of MDG 8. The extent of microfinance impacts on each MDG, however, is context specific.

Our impact study on Khushhali Bank further provides concrete evidence of the pathways and degree of MFI impacts on the MDGs. The study confirms that KB has been effective, overall, in reaching out to the poor and has rapidly expanded its outreach to remote rural areas of Pakistan, consistent with the government's poverty alleviation program. Differing from most MFIs, which lend mainly to microenterprises and small traders, KB's lending is predominantly geared to agricultural households with limited microenterprise activities.

Using the PSM to address the selectivity bias generally existent in surveys of this nature, we found that Khushhali Bank's lending program contributes significantly to income generation activities such as agricultural production and, in particular, animal raising (MDG 1).

The impact of the program appears to have limited significance on other MDGs—education, health, female empowerment, and so forth. This is due in part to the fact that two-thirds of KB clients are from agricultural households in poor communities with limited nonfarm activities. In addition, since 70% of KB clients in the survey were first-time borrowers and went through only one loan cycle, it is not surprising that the impacts on other MDGs are yet to be realized.

Highly significant is the borrowing households' increased use of pesticides. While pesticides lead to improved productivity and income, inappropriate use may lead to negative outcomes on health and the environment. With globalization's increased requirements for food safety standards in the export market, it is recommended that Khushhali Bank collaborate with extension agencies to make available to their clients integrated pest management (IPM) and training and information on the appropriate use of pesticides.

It could be said that an impact study of this nature on Khushhali Bank in 2005 may have been premature as a majority of the clients went through only one cycle of borrowing. At the same time, it is remarkable to note that only with a loan of 10,000 PRs (US$150), these households could improve their agricultural income significantly. The income generated will, no doubt, eventually lead to the development of nonfarm enterprise and overall development of the rural communities.

In the aspect of methodology, this study points to several lessons for future impact studies. Despite KB's strict poverty-targeting program used in client selection and despite the survey's design to address the selectivity bias, our study found that selectivity bias indeed still existed in the sampled households. The fact that MFIs tend to lend to clients of better-off households is not surprising since achieving financial sustainability is an important aspect of microfinance operations. When it comes to reviewing results of impact studies, one must first interpret impact studies that do not take into consideration program-placement bias and selfselection bias. It is noteworthy that the PSM technique resulted in different outcomes when compared to that of OLS or Logit estimation used by Montgomery. The difference is especially noticeable in the case of income generation, education, and female empowerment. In addition, impact studies that use cross-sectional data might be prone to incorrect inference. Since the impacts of microfinance programs are spread over a period of time, the element of time should be included to reflect the true impact of microfinance.

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