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Pakistan Microfinance Sector Analysis

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The aim of this study refers to highlighting the key challenges and prospects for the microfinance sector of Pakistan. Being practiced since last few years, microfinance is considered to be an imperative financing practiced by financial institutions for the development of country's economy. This study has been carried out using the following four steps: present scenario of microfinance in Pakistan, identification of internal and external challenges, prospects in microfinance, and policy recommendations to boost microfinance sector in Pakistan. In this research, microfinance framework has been used to better understand the process of building a sustainable microfinance institution. The findings have been obtained through Primary data which has been collected by sending 80 questionnaire surveys to microfinance sector. The companies that have participated are banks and other financial institutions. This research contributes in three ways. First, microfinance institutions will be facilitated in highlighting the challenges and prospects that are being neglected in the process of analyzing the problems and opportunities faced by this sector. Second, other financial institutions and banks, realizing the significance of this business, will get encouragement to enter this sector with more innovative products and better standard practices. Thirdly, it will help the country in coming up with new strategies for micro financing. Moreover, microfinance sector may start conducting more training sessions to enhance the skills of the clients which will impact positively on this sector.


Statement of the Problem

Poverty cannot be illustrated, it can be experienced. One knows more about it when he is starving and can not manage to pay for food. He and his children want new cloths on festivals but can not buy these, due to low income. He is sick, but he is not able to buy medicine. He wants to send his children to school, but can not bear the expenses. He wants to be appreciated in society, but is treated poorly by the institutions of the state and society. He is voice less and incapable (Gobind M et al,2008). Poor people save all the time, although mostly in informal ways. They invest in assets such as gold, jewelry, domestic animals, building materials, and things that can be easily exchanged for cash. They may set aside corn from their harvest to sell at a later date. They bury cash in the garden or stash it under the mattress. They participate in informal savings groups where everyone contributes a small amount of cash each day, week, or month, and is successively awarded the pot on a rotating basis. Some of these groups allow members to borrow from the pot as well. The poor also give their money to neighbors to hold or pay local cash collectors to keep it safe. However widely used, informal savings mechanisms have serious limitations. It is not possible, for example, to cut a leg off a goat when the family suddenly needs a small amount of cash. In-kind savings are subject to fluctuations in commodity prices, destruction by insects, fire, thieves, or illness (in the case of livestock). Informal rotating savings groups tend to be small and rotate limited amounts of money. Moreover, these groups often require rigid amounts of money at set intervals and do not react to changes in their members' ability to save. Perhaps most importantly, the poor are more likely to lose their money through fraud or mismanagement in informal savings arrangements than are depositors in formal financial institutions. The concept of microfinance was launched to help the poor population of the world. The significance of microfinance cannot be neglected for the development of any economy. Microfinance encourages poor households to consume their funds in productive activities by providing them small amount of loans. Poor household refers to low-income people who traditionally lack access to banking and other related financial services. The concept tend to empower would-be entrepreneurs to take up a trade for living, allow them to start earning, and thus to provide their families with income stability. The income that generates from such businesses not only helps in expanding those activities but also contributes to the income of the household bringing benefits for the whole family.

In Pakistan, about one-third of the population is 'œun-banked'?, or lacking access to finance, which if appropriately tapped can offer tremendous opportunities to both banking institutions and businesses. As a step towards mainstreaming the un-banked, SBP has envisaged increasing the size of micro and small enterprise (MSE) financing from one million borrowers to four million borrowers, and from Rs.1 billion to four billion by the year 2010. In this context, increasing institutional outreach and sinking micro financing in to the sector are considered pivotal strategies. Other areas of interest include regulatory regimes, product and process innovations, relationship management and monitoring, and market intelligence data (Sohailuddin Alavi, 2007).

According to ILO (2005) cited by Dahri (2007) it is concluded that the reality for most of the world's poor is that they have to work often for long hours, in poor working conditions and without basic rights and presentation- at work that is not productive enough to enable them to themselves and their families out of poverty, it is 'œdecent and productive'? employment that matters, not employment alone. In developing countries, so many strategies have been put into practice and research has been done but it is felt that it is not enough and research should remain continue in light of latest reports and research to highlight the challenges and opportunities of microfinance. These studies are helping in bringing new strategies into practice. As Pakistan is also a developing country, further suggestions would help to overcome the challenges faced by microfinance and avail the opportunities that exist for this kind of financing. To keep these things in mind attempt has been made to identify the internal, external challenges and opportunities as special objective in this study.


"The great challenge before us is to address the constraints that exclude people from full participation in the financial sector. Together, we can and must build inclusive financial sectors that help people improve their lives."(Kofi Annan, 2007). However, poverty is a widespread problem found in the rural areas of Pakistan, as almost 28 per cent of the total rural households is categorized as poor. In this regard, the provision of credit, especially micro-credit, has now become an effective tool and a successful strategy for poverty eradication. In Pakistan over the past few years, the number of active borrowers has increased by 85 per cent while total outstanding loans grew by 115 per cent (Economic Survey of Pakistan, 2005-2006).

The broader definition of microfinance includes not only microcredit but also other financial services, which can be offered to the poor. Interested economists found soon that not only small credits but also other services connected with lending could improve economic lives of the poorest (Bauer, Chytilova & Morduch, 2008). Most MFIs connect their credit services also with educational or saving programs or business trainings, retraining scheme or technical trainings. Logically, the investments can turn out to be more profitable when the people have access to training, which can enhance their skills. Historically, the goal of microfinance was the alleviation of poverty. For many years, microfinance had this primary social objective and so traditional MFIs consisted only of non-governmental organizations (NGO), specialized microfinance banks and public sector banks. Although the Microfinance sector has reached a maturity stage over the last three decades, but the capacity of operational level staffs has not enhanced to that extent (Hassan & Islam, 2008)

A variety of studies have found a few key strengths and positive impacts produced by the implementation of microfinance programs in poor and impoverished areas of the world. First, microfinance programs can be an effective way to provide low'?cost financial services to poor individuals and families (Stephens & Tazi 2006). Second, such programs have been shown to help in the development and growth of the local economy as individuals and families are able to move past subsistence living and increase disposable income levels (Khandker, 2005). MFIs should take initiatives to upscale their Microenterprise clients to SME level and provide necessary support to link these clients with mainstream financial institutions. The MFIs should take responsibilities of their client's managerial skill development training (Hassan & Islam, 2008).

In addition, many studies (primarily microfinance institution impact studies and academic researcher qualitative or case studies) have shown that microfinance programs were able to reduce poverty through increasing individual and household income levels, as well as improving healthcare, nutrition, education, and helping to empower women. For example, standard of living increases, which help to eradicate extreme poverty and hunger, have occurred at both the individual and household levels as a result of microfinance programs (Khandker, 2005). Furthermore, it has been demonstrated by some research that microfinance programs increase access to healthcare, making preventative healthcare measures more affordable to the poor (Morduch, 1998). Finally, it has been shown that such programs can help borrowers to develop dignity and self-confidence in conjunction with loan repayment, and self'?sufficiency as a means for sustainable income becomes available.The Microfinance Summit Campaign Report (2006) estimates that there are now more than 3,000 microfinance institutions, serving more than 100 million poor people in developing countries. The total cash turnover of these institutions world-wide is estimated at $2.5 billion and the potential for new growth is outstanding.One individual who gained worldwide recognition for his work in microfinance is professor Muhammad Yunus who, with Grameen Bank, won the 2006 Nobel Peace Prize. Yunas and Grameen Bank demonstrated that the poor have the ability to pull themselves out of poverty. Yunus also demonstrated that loans made to the working poor, if properly structured, had very high repayment rates. His work caught the attention of both social engineers and profit-seeking investors (Grameen Bank, 2008). Some key strengths and positive impacts of microfinance programs in poor and impoverished areas of the world that; Microfinance programs can be an effective way to provide low-cost financial services to poor individuals and families (Stephens& Tazi 2006). Such programs help in the development and growth of the local economy allowing individuals and families to move past subsistence living, and therefore increases their disposable income levels (Khandker 2005). Negative impacts of microfinance and microcredit programs are that; microfinance programs benefit the moderately poor more than the destitute, and thus impact can vary by income group (better-off benefit more from microcredit) (Jonathan & Barbara 2002; Morduch, 1998; Dugger, 2004). Both formal and semi-formal financial institutions cover a very small share of MFI's markets as compared to informal market (Aleem, 1990). Hassan and Islam (2008) in a study conclude that, uplifting of client, managerial skill development programs for both client and staff of MFI and governmental policies can uplift the MFI growth which in turn has positive impact on overall macroeconomic growth of country. Moreover, the studies conducted on micro-credit were mainly based on the impact assessment of the programme. Realizing the situation, there is a need for an empirical study to analyze the factors that determine challenges faced by MFI's and future prospects in microfinance programme.

Objectives of the Study

The objectives of the study are:

  • To explore the present scenario of MF in Pakistan
  • To identify the challenges faced by MFIs in Pakistan
  • To identify the internal and external constraints of MFIs in Pakistan.
  • To provide policy recommendations to boost MFIs sector in Pakistan


Conceptual Frame Work

Utilizing the above mentioned details, a framework is suggested for MFI.

Generic Framework for Building Sustainable Micro Finance Bank (MFB)

Source: SOHAILUDDIN ALAVI (2007) 'œMicrofinance in Pakistan: Challenges and Prospects'?, journal of the Institute of Bankers Pakistan Volume 74, Issue No. 3 page 52-61

Data Collection

In this research study, primary data has been obtained from questionnaire survey. The primary data here has been collected through a comprehensive questionnaire in this research.

Primary data

There are several choices for primary data collection i.e. survey (questionnaire), interview, observations and experiments. These choices are shown in below figure. The primary data here has been collected through a comprehensive questionnaire in this research.

Primary Data Sources Source: Ghauri, P. & Gronhaug, K. (2005). 'œResearch Methods in business Studies'?, 3ed. Prentice Hall.

Size of the Sample

The questionnaire was distributed to 80 executives in four different MFIs. These executives have the responsibility of key customers' identification, analysis and operational activities involved in the management process. Out of the 80 respondents 54 (67.50%) have responded. The author has done the convenience sampling due to the limitations.


We have divided this Questionnaire into three segments;

  • External Challenges
  • Internal Challenges
  • Prospects

First and second section measure challenges, both internal and external faced by MFI and third section addresses the future prospects for MFI. Each section is based on separate research objectives. Only closed-ended questions are included in the questionnaire. In closed-ended questions Likert-scale method (Proctor, T. 2005) is used for response. Seven different scaling options are included in Likert-scale method to minimize the response biasness. The scales: strongly agree, agree, slightly agree, neither agree nor disagree, slightly disagree, disagree and strongly disagree are assigned ranks from 1- 7 respectively.


Data and Sampling

As we have limited MFIs in the country so author has distibuted 80 questionnaires and 54 responses are received (67.50%) from Karachi, Islamabad and Lahore cities.

In the above section, the six factors highlighted addressees the external challenges of MFI's in the market of Pakistan.

  • Govt.'s due importance to the sector
  • Staff trainings by the MFIs
  • Utilizations of the loans
  • Importance of clients' skills development by the MFIs
  • Islamic point of view
  • Local norms

It's clear from the table 1(b) that 'œGovernment is giving due importance to MFI'?, out of 54 respondents' 78% response positively and 22% in negative. It means Government considers MFI as a very important sector in the country development process. Second question is about Microfinance Institutions' staff's training level; there is 50% response in positive and 50% in negative. This indicates that MFI staff working in market needs adequate training. Ultimately, their training may draw some positive impact on MFI sector in specific, and at large it may benefit the country's economy. Third and the most important factor about the utilization of loan money by client, surprisingly 70% of respondents say that loans are used for investment purpose by client and not for personal consumption. However, 30% of respondents believe that loan taken by client is used for their private consumption. The fourth question is about MFI attitude towards client's skills development shows; only 26% of responses are positive and 74% responded negatively. This result indicates a gap for policy makers of MFI's concluding that they are not putting due efforts in their business because their client is usually not only poor but also lacking management and other skills. Further research can be done on the level of skill of client and the growth of their business and relationship with MFI. The second last question in the first section addresses the perception of the client about financial institute in religious perspective; 80% of respondents are positive that financial intuitions are largely perceived as non-Islamic. This issue can be resolved by focusing on the establishment of Islamic MFI's or marketing the concept of microfinance more aggressively. Final question is about the norms restrictions on the financial sector, again 53% of responses are positive about the existence of such norms and 43% are negative. We may say that in future these norms may go to decline.

Internal Challenges

The section 2 of the challenges is about the key internal challenges faced by MFI. We have discussed six different internal challenges; the first and probably the most important challenge is about the availability of other cheaper financial resources. 74% of the respondents agree that the availability of other cheaper source of finance is a great challenge for them and 36% responded in opposite. This indicates the fact that the cost of borrowing is high for small borrowers. Effort should be done to make small loans available at some competitive cost in comparison to other financial products. About the limited physical presence of MFI, 87% response is positive and only 13% is negative, which again reveals the gap for policy makers that the limited presence may be the major cause of low performance and growth of MFI sector. The third question is about the general inability of MFIs about risks and standard practices; 52% responded positively about the situation but 48% do not agree. We may say that there is a great need for MFIs to mitigate the risk factors and adopt the standard practices. The fourth question is about the incompatibility of conventional banking with the need of microfinance product; 52% of respondents are positive about the inaptness of conventional banking with microfinance product need while 48% do not agree that there is incompatibility of microfinance need and traditional banking. So we may say that a second majority of MFI believes that conventional banking system can also cater to the need of microfinance product. The second last question of this section is about the availability of quality human resource in comparison to other financial institutions; 48% of the respondents are positive about the availability of quality human resource due to scare funds while 52% do not agree. This shows that availability of quality human resource is not much of an issue in MFIs. Final question is about the lacking in value chain and delivery process of microfinance product; a majority of 59% is positive that there are lacking in value chain and delivery process, but 37% are of opposite view and 4% are uncertain about the answer to this question.


The third and the last section is about the opportunities for MFIs, first question is about the promotion of different kinds of business through MFIs; 56% of respondents are positive that MFIs are promoting all kinds of business and 44% do not agree. The second majority of respondents believe that MFIs are not addressing all kinds of business. Hence, there is a need to look at the different kinds of businesses served by MFIs. In the question about the role of MFI,s in reduction of poverty, 83% are positive about the role of MFI in poverty reduction, while a minority of 17% do not agree. The fourth question about the role of MFI in economic growth of country; 100% respondents advocate that MFIs are working for the economic development. 100% respondents are positive that MFIs are not only working against poverty but also playing some other roles too in economy. Finally a 70% of respondents are positive about the alliance of commercial banks and MFIs , 13% do not agree about the alliance and 17% are uncertain.


In this study, conclusions will be drawn on the basis of literature review and analysis made through market research. The reasearch is divided into two parts: conclusions and recommendations.


From this study we conclude that;

Government is providing due importance to MF sector.

MFI's staff needs training which can impact positively on MF Sector.

A majority of 70% believe that loan is utilized in investments activities rather than personal consumption.

MFIs have very low attention toward its clients' skill development.

A majority of population perceive MFIs and other financial services against their religious beliefs.

Lastly norms and culture poses threats to MFIs and Banks.

Cost of microfinance is relatively high in compassion to other financial products.

Standards of practices and processes need improvement in MFIs.

Alliance of commercial banking and microfinance is viewed as positive.


MFIs' staff working in market needs adequate training. Ultimately, their training will draw some positive impacts on MFI sector in specific and may also benefit the economy of the country at large. MFIs are not putting due efforts in their business because their client is usually not only poor but also lacking management and other skills. Further research can be done on the level of skills of the client and growth of his/her business to elaborate the different skill levels. There may be a need of Islamic MFIs or marketing the concept of microfinance more aggressively to avoid the potential biasness in financial organizations. Effort should be done to make small loans available at some competitive cost in comparison to other financial products. There is a great need for MFIs to mitigate the risk factor and adopt the standard practices.

Limitation of Research

This study had the following limitations

The author was not able to distribute the questionnaire to company executives all over the country.

Time period to conduct the study was very limited.

Some of the respondents did not answer the questions seriously

Sample size was limited to 3 cities only which cannot be easily applicable to all population of Pakistan.

The questionnaire was sent to respondents through e-mail. It was not feasible for the author to conduct the interviews personally.

All respondents can't maintain same level of accuracy in answering the questions due to lack of time and interest. It may create little discrepancy to some extent in formulating the conclusions.




Kofi, Annan. UN secretary,.2007. Avalibale at :


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Pakistan Statistical Profile

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M. Bauer, J. Chytilová, J. Morduch., 2008.Behavioral Foundations of Microcredit: Experimental and Survey Evidence from Rural India. American Economic Review,59 (1) pp71-86

Rashed Al Hasan., K.M. Zahidul Islam., 2008. Bridging the Gap between Microfinance and SME Financing in Bangladesh: Unlocking the Potentials. Daffodil International University Journal of Business and Economics, 3.(1), pp 41-57

Shahidur R. Khandker., 2005.Microfinance and Poverty: Evidence Using Panel Data from Bangladesh .The World Bank Economic Review, 19(2), pp263-286

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Grameen Bank. Available at: http://www.grameen-info.org/

Dugger, Celia W. 2004. 'œDebate Stirs over Tiny Loans for World's Poorest.'? New York Times.

Morduch, J., and Haley, B. (2002), '˜Analysis of the Effects of Microfinance on Poverty Reduction', NYU Wagner Working Paper No. 1014

Available at:


Briefing Note

Summary of the Poverty and Social Impact Assessment: Pakistan Microfinance Policy May 2006 Available at: www. pipl.com/directory/name/Tazi/Hind

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