Introduction

The member states of the United Nations have committed to achieving the Millennium Development Goals (MDGs), including the goal of halving extreme poverty by 2015. Microfinance is recognized as an effective development intervention for poverty reduction. The Consultative Group to Assist the Poor (CGAP) estimates that of the nearly three billion poor/low income people who could benefit from formal financial services, only 500 million have access. In rural areas, such access is needed most for agricultural activities. In urban areas, possible microfinance clients are mostly vendors, small traders, cottage industry workers, and low-wage earners.

While microfinance is recognized for its ability to reduce poverty, to what extent and how to implement it is unknown, due in part to common methodological problems of all impact studies.

This study aims to assess the impact of Khushhali Bank (KB), the leading microfinance bank in Pakistan, on specific targets consistent with MDGs. This study is the second study using the same set of data, but it adopted a different research methodology. The first study, conducted by Montgomery in 2005, assumed no self-selection bias occurred, whereas this study adopted econometric methods to address that issue. This study aims to facilitate Khushhali Bank's adjustments to maximize Pakistani poverty reduction. Following the Introduction, Section II reviews literature on the impacts of microfinance on MDGs and research methodologies used in impact studies. Section III describes the case study, the Khushhali Bank, the survey, and a summary of client characteristics. Section IV discusses the issue of selectivity bias and the use of Propensity Score Matching. Sections VVII estimate and discuss the impact of Khushhali Bank's lending program on key welfare indicators. Section VIII presents the conclusions.

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