Background of the Pakistan economy

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Pakistan is a country in South East Asia having 1,046-kilometre (650 mi) coastline along the Arabian Sea in the south and is bordered by Afghanistan and Iran in the west, India in the east and China in the far northeast. Strategically it is located in a position between the important regions of South Asia, Central Asia and the Middle East.

Pakistan is a country in South East Asia comprising an area of 796,096 sq km. The total population of the country is 176,242,949 (July 2009 est.) people, it is the 6th most populous country in the world and has the second largest Muslim population after Indonesia. Pakistan is a federal parliamentary republic consisting of four provinces and four federal territories. With over 170 million It is an ethnically and linguistically diverse country with a similar variation in its geography and wildlife. With a semi-industrialized economy, it is the 27th largest in the world in terms of purchasing power. Since gaining independence, Pakistan's history has been characterized by periods of military rule, political instability and conflicts with neighboring India. The country faces challenging problems including poverty, illiteracy, corruption and terrorism.

Pakistan has the 7th largest standing armed force. It is designated as a major non-NATO ally of the United States. It is a founding member of the Organization of the Islamic Conference and a member of the United Nations, Commonwealth of Nations, Next Eleven economies and the G20 developing nations.

In international ranking Pakistan's economy stands at 28th rank and its currency is Pakistani Rupee (PKR) and 1Rs. = 100 Paisas. Its fiscal year is July 1-June 30. The major trade organizations are ECO, SAFTA, ASEAN, WIPO and WTO. If we look at GDP it is $197 billion (nominal) (2010) and $506 billion (GDP-PPP) (2010), while the GDP growth rate is 6.5% (Q1) and GDP per capita is $1200 (2010, IMF). When we divide GDP by sectors, we find out that agriculture contributes 19.6%, industry put in 26.8%, and services presents 53.7% (2007). The Inflation (CPI) is 11.17% (2009-2010).

About 23% ((2007) of Population below poverty line having about 55.88 million Labour force and unemployment is 11.2% (2009).

Economic Indicators in Pakistan

If we look at the economic Indicators during the year 2009-10 for Pakistan we will find out that its Exports (billion $) 19.63, Imports (billion $) 31.05, Trade balance (billion $) -11.42,

FDI (billion $) 2.21, Foreign investment (billion $) 2.14, Worker remittances (billion $) 8.91

Forex reserves (billion $) 16.07, Exchange rate (RS / US$) 86.21, GDP growth 4.10% and Inflation rate is 11.17%. (Source: State Bank of Pakistan (SBP), Federal Bureau of Statistics (FBS), Federal Board of Revenue (FBR),

Exports (Billion $)


Imports (Billion $)


Trade Balance (Billion $)


FDI (Billion $)


Foreign Investment (Billion $)


Worker Remittances (Billion $)


Forex Reserves (Billion $)


Exchange Rate (Rs. / US$)


GDP Growth




The legal environment in Pakistan

Pakistan has legislations and regulations governing economic organizations and is mainly operated under the supervision of the State Bank of Pakistan, the central bank of the nation.

Liberalization of the Pakistani economic sectarian policies has enabled microfinance institutions to develop with relatively little interference from the government. The government in conjunction with major donor organizations have been working hard to develop the micro economic sector which is seen as the backbone to rural development and national economic growth. It has therefore taken a participatory position in restructuring the sector.

The Pakistani Banking Environment

The economic system in Pakistan has grown substantially benefiting from multi branched monetary improvements and the modification has been pursued persistently and vigorously over a decade or so and have supported economic growth. The inefficiencies and weaknesses, which were typical of banks' operations in the pre modifications era, have been reduced radically. We have now started to realize the dividends of modifications in the form of a healthier, sounder and stronger banking system.


They include:

Macroeconomic performance and priorities

Deregulation and market forces

Product innovation


Technological advancements

Universal banking

Risk Management and Mitigation

Changing character of and demands on the controller


This chapter will explain the various concepts or theories used in the thesis and its applicability to the research at hand.

The choice of concepts is an attempt to illustrate how the Kashf Foundation microfinance institution can develop its existing operations to maximize profits, a search for theories related to the topic and considered relevant were chosen. The selection and the development of these theories are based on similar writings in the microfinance field by Joanna Ledger wood and Victoria White (2006) strategies of "Transforming Microfinance institutions". The question of how the Kashf Foundation microfinance institution could increase profits and reach out to more customer was then considered and appropriate issues for the research topic with corresponding theories used. The theories chosen are expected to enhance the current operations of the Institution to increase profits and which has an effect on more customer reach. The theories that were derived based on the rationale of this research work are summarized as under.

The concepts

The diagram below is an assumption of a microfinance institution set-up with an interpretation of the various concepts (in blue) influencing its operations, then the institution (in the other colour)

Activate Savings



Institution in profits

Regulation and






The shaded portion in the middle is the institutional set up consisting of its network of activities. The portion with the human resource development relates to the institutions efforts in potentially utilizing its human resource department.

This could be interpreted to be where the institution invests into its human capital in anticipation of profitable feedback. The portion with the marketing and competitive positioning simply explains the institutional efforts in effectively employing certain marketing strategies that will enhance its operations. Key to this are for instance, its sales personnel efforts and the introduction of new ways of reaching out to more customers, both the low and high income earners. At the moment, the institution is infamous due to lack of promoting and publicizing its activities to attract potential customers (KASHF FOUNDATION annual profile, 2007).

The increase in customer categories is expected to have an effect on the institutions cash inflow. For instance, where more high level earners are targeted, there is a possibility of increase in cash inflow. The portion with the effective supervision and regulation is a managerial tool which will reduce the loss of profits and increase employee performance. It is also expected to control internal malpractices such as theft and fraud. The part with mobilizing savings represents the institutional efforts in moving away from its traditional way of only accepting deposits and develops new ways such as accepting deposits in the form of savings. This is one main concept that can increase the institutional cash inflow because; the institution can accumulate capital and engage in diverse saving accounts that can yield interest to maintain its activities. This simple analysis of the diagram is a guideline to maintain the KASHF FOUNDATION in increasing profits and reaching out to more customers.


At the moment Human resource development has great concern all around the world.

According to Ledger wood and White, human resource could be seen as one of the focal point of the microfinance institution. They further explained that without an effective human resource operations, organizational activities will malfunction, Ledger wood et al (2006, pp

273-4). It could also be noticed that for most institution to achieve maximum profits, human resource management must be effective. Human resource could also be perceived as a critical position to identify variables that may affect individual and organizational performance as stated by Swanson et al (2001, pp 4). For a microfinance institution, the human resource department can play significant roles such as daily internal and external routines, employee management and many valuable human resource activities. This element of change is brought about for the rationale of not only the institutional development but also on employee development and even customers. Research conducted on the Pakistani an business environment shows that most employees perform way below the required level due to inadequate management practices such as lack of motivation and appraisal (Glewwe, 1996, pp 267-290). The human resource department is responsible for employee management which can be a major drive for total institutional profit and large market reach.

Adaptation of the organizational culture is increasing now with very rapid rate and a microfinance considering efficient operation must express concerns in significantly changing the corporate culture and enforcing dynamism. Basically; the institution must have set routine practices which must be based on effective delivery of the economic facilities. Staff for instance must be motivated by the need to reach out to the larger customer reach and also engage in profitable routines. Management must be encouraged to deliver the best to ensure institutional success and avoid failures or inadequacies, Ledgerwood et al (2006, pp 274).There must should also be good interpersonal relationships amongst staff at all levels.

Personal relationships are very important in micro financing institutions. A microfinance institution must ensure that employees are given the right tools for maintaining good customer relationship and retention whiles seeking new groups. Employees on the field must be able to educate the customer on the various ways of achieving economic stability and give the right skills and knowledge. This can be done only when employees have good communication with customers. According to Ledgerwood et al (2006, pp 273), an attempt to increase efficiency in potential customers and also creating avenues for new customers is very vital. The effect on this could be short and long term profits on behalf of the institution.

Dynamic policies are very important in the field of microfinance. Microfinance as said is ever changing and policies must enforce change and willing to adapt to current trends. The institution must be able to avoid bureaucracy, one main hindrance to institutional growth and adapt very quickly. In Pakistan for instance, such an institution could be characterized with the normal Pakistanian bureaucratic methods where even loan approvals for disbursement can take longer periods which is not appropriate if success should be achieved, Aryeetey et al, (2007, pp 4-15).

Ultimately the human resource department can entrust this in the hands of a good human resource manager whose main role will be to improve administrative efficiency and responsiveness to employees and other managers. Thus he or she ensures coordination with the other departments and employees on strategic steps in the delivery of best and productive facilities. Ledgerwood et al (2006,pp280-3) also mentioned that institutional culture can be modelled to enforce change since the client base for these institutions is much more unpredictable and needs regular adjustments. Staff must be trained to focus on the job and to achieve stated institutional goals whiles meeting customer needs. There must also be value creation where employees are regularly monitored on their performance and ensured that there is adequate delivery with resources at their disposal.

In microfinance business building commitment to change is very necessary. The transformation process must include radical change. This is because customer needs and expectations are constantly changing and because market competitors are never far behind, a microfinance institution cannot afford not to change. This must include radical institutional and leadership change. Top management must be champions to change and enforcing development of customers and employees. According to Ledgerwood et al, (2006, pp 276-7) the process of building commitment to change can be facilitated through developing an organizational communications strategy. They went on to explain that it must encourage open communication channels between senior managers and front line office and between customers and staff so as to be more open to change. Staff must be trained on the importance of internal and external communications, with the internal focus on inter personal relationship existing with staff members and the external regarding dynamic and efficient client management.

Adapting the Organizational Structure is also an important ingredient for microfinance institutions. For an effective and efficient human resource department, the microfinance organization must evaluate whether it has the right organizational structure to suit new business strategies. Organizational structure is more than just arranging hierarchically on an organizational chart. It must outline desired pattern of activities, expectations and exchanges, among all levels of staff in the organization and relationships outside it. Also if there are old ways of operating which is a hindrance to progress, efforts must be made so as to fit into an easier and in line with current strategies that can yield results. There must be free and easy access to information and authority must be easily delegated Ledgerwood et al, (2006, pp278). For instance, in a case where there are bottlenecks for clients to acquire loans, efforts must be made so as to be easier to access or new customers reach could be targets. The client base for this type of organization consist more of illiterates and must have very clear procedures so as not to lose their trust.

Ensure the Right Staff, according to Ledgerwood et al (2006, pp284), once the right institutional structure is established, the responsibilities of dynamic job descriptions must be assigned to staff with positive results expected. These positions must be filled with employees that have the right skills and attitudes for the job or at the minimum have the capability to learn the skills. The institution must demonstrate that it has the commitment and willingness to invest in developing and nurturing skills in awe to efficiently render these facilities to its customers. Redundant staff can be fired and replaced with a more competitive one to increase effectiveness and development. On a more important note, the microfinance institution is not expected to operate on reasons of short term benefits but on a longer term benefits which will result in achieving an edge and optimize profit, Ledgerwood et al, (2006,pp284-5).


Communication appears to be taken for granted within most institutions. Within an institution, it can be used to create relationships and serve as a link to all sections.. For instance, a microfinance personnel's job involves mostly face-to face-interpersonal relationships therefore this person must be given the required skills and knowledge on how to handle or persuade a customer to believe in what he has to offer. Top management must be willing to constantly communicate with lower level employees on how the client can acquire small loans, give them the necessary tools and skills to turn these loans into profitable business, Ledgerwood et al(2006,pp98-9).Communicating to new and diverse customer groups on the attractiveness of the economic offering of the institution. As stated above, information's could be embedded in employee working codes, new information's trends regarding the various systems and other internal relationships that must be designed through effective communication. In this way employees feels accepted by the institution giving off their best.

This can foster growth and help the institution expand. Regular meetings can be held and presentations can be organized to obtain customer views on how the business is functioning, for instance, how daily on-the ground activities is going with the sales force. Poor communication can be disastrous and can keep the organization out of focus.

In this field you should have to build the right skills mix. There must be institutional commitment to training personnel on how to handle the facility provided. This must be a core activity focused on building the skills to enable the institution achieve its stated goals. It has been suggested by researchers that training must be viewed as an investment, not as an expense. According to Berridge (1992), resources need to be committed to building internal training courses as well as identifying appropriate external training opportunities. Training programmes could be steered towards field sales employee and customer development considered as the institutions external task. The institution must be balancing the in-house training and external training which will be focussed on strategic methods of meeting clients' needs in the best and efficient way whiles increasing opportunities for profits as a result of this. On -the -job training is also a good strategy where learning occurs on the job, as specific skills are internalized, deepened, expanded, and supplemented through day-to-day experiences. For the microfinance sales personnel, newly recruited sales personnel can train with experienced workers to gain insight of daily activities and relocated to other areas for further expansion. This can foster expansion of the customer size and increase institutional prospects.

Motivated Staff are the essential part of any successful organization and employees play an important role as far as growth is concerned. From author, s experience as a microfinance sales personnel it is advisable for a microfinance firm to motivate employees through providing incentives such as bonuses, prizes, rewards and promotions to boost the morale in them. A microfinance institution can be faced with employee redundancy because it failed to adhere to complains and dissatisfaction and does not recognize employee performance, Ledgerwood et al (2006, pp 290). This sometimes is as a result of non-recognition of the employee and lack of appraisal strategies. These factors are important and must be taken seriously by the institution. In cases where the microfinance firm fails to perform as expected, workers can defect to other economic institutions for fear of risking their job security; therefore the best is expected from the firm both on the institutional level and by the employees.

Mobilization of Savings and the value of the various savings accounts if operated by microfinance institution.

This is a concept which can create wealth in terms of cash inflow for a microfinance institution demanding a lot of economic inputs for consistent and profitable business operations, Ledgerwood et al (2006, pp 3).This strategy is much more concern with profit driven intentions of the microfinance institution as to how it can raise more capital to maintain its customer reach. Questions like, how the organization can have continued cash inflow and outflow to meet operational needs in some of the best and efficient ways must be the main focus. There are number of steps involved in it,

At step 1 Provision of savings facilities to the general public are considered.

Microfinance institutions are supposed to be funders to their customers, basically low income earners as well as deposit-taking entities, Ledgerwood et al (2006, pp14). With this new development, savings accounts should be operated on a liberal level where other institutions, individuals,' shareholders and many other categories of customers will hold stock seen as an investment and which will increase cash inflow.

At Step 2 Building of trust is also very important in this field. As stated by Ledgerwood, for credit, the microfinance institution must trust the client, but for savings, it is the client who must trust the institution, Ledgerwood et al, (2006, pp5). This means that the savings mobilized from the poor savers or the public must be perceived as trustworthy, secure, stable, and receptive to the needs of the clients. Interest charged must be reasonable.

At Step 3 Diversify portfolios to taping up into the capital market. The microfinance institution must be able to generate profits from all levels of customers. A question one asks is that, can economic institutions that want to be economically self-sufficient, fund their business substantially by only mobilizing voluntary savings from the poor? Not if they limit their savings facilities to that level.

At Step 4 Proper management of funds took place. Mobilizing savings from the public takes considerable time and proper sequencing as stated by Ledgerwood et al, (2006,pp5-6). A microfinance institution should not be in a rush to finance expanding portfolio such as issuing further loans or for other reasons. This is a critical process that takes considerable time, effort, human and economic resources, and patience to profitably manage these funds.

At Step 5 Capital control systems introduced or implemented. Savings mobilization seen not only as a facility and a source of funds but also a liability can be a good strategy of accruing capital for the microfinance firm, Ledgerwood et al (2006,pp 13). An institution like the KASHF FOUNDATION microfinance firm can mobilize savings from the public whiles paying careful attention to protecting savers funds from risks that include internal corruption, theft, loan defaults, investments losses, and others. Microfinance institution tends to concentrate on preventing some of these risks, but may not focus sufficiently on all. Yet they are vulnerable to all these potential dangers. Continuous vigilance is required for the following associated risks.

In regulation and supervision there is explanation of regulative measures that are needed by the microfinance institution to enhance its profit maximization. In it,

Internal Auditing very important in this field, as stated by Ledgerwood et al (2006, pp23), there must be key institutional policies governing all departments especially regarding economic matters. One such a critical area that can ensure organizational efficiencies is a well mechanized auditing system. This is one main strategy of checking out economic loop holes such as embezzlements and other economic loses. There must also be well mechanised institutional responsibilities for external factors such as the customer economic management and control policies. Accounting standards can be an example of control tool which can be coded as a data and well monitored to increase maximum outcome. As stated earlier on, policies such as employee working codes, organizational required performance such as accountability, documentation of accounting records, communication and many other control mechanisms must be uniform and clearly stated to keep the organization in focus, Ledgerwood et al (2006,pp 276). There must also be cooperation at different levels, for instance, accounting, marketing, and finance departments to increase the rate of accuracy within the entire institution.

Borrowers and Savers Protection Policies should be included in microfinance institutions.

This has drawn the attention of many researchers and other stakeholders who feel that the borrowers and savers must be protected from vulnerabilities such as unethical lending practices. A microfinance institution which has clearly stated policies to protect its client's base is sure to operate profitably and efficiently since client base will be protected and retained. On a more important note, fraud will be reduced, Ledgerwood et al (2006, pp24-5).

The institution must also have clearly stated accounting standards to get customers educated on their rights for better treatment and assurance of protection from misappropriations.

There should be an external controls auditing in microfinance institutions. The microfinance institution can also operate in accordance with national regulatory policies so as not to violate certain standards and also to open other opportunities. External auditing can be one main routine practice to check up efficiencies in a economic institution however, the regularity and efficiency of this activity is very important. According to Ledgerwood and

White, this will assess the microfinance institutions credibility to economic statements and other management reports as stated by Ledgerwood et al (2006, pp 292).In other words, there must thus be external experts who must periodically monitor the economic welfare of the microfinance institution. This is because in most situations recorded entries within the institution can be misleading and which goes with loses to the particular institution. At the national level, there must be policies that either encourage the operations of these institutions or restrict them in certain ways more importantly when it's going in a direction to violate customer's protection rights which is normally done by the central bank. A required deposit from the microfinance institution is kept at the central bank which then serves as a security to customers and the institution mostly in cases of economic instabilities.

Marketing and Competitive Positioning is too much important at the moment in financial market. Marketing in this sense explains management discipline and organizational function responsible for understanding and conditioning the microfinance operating environment to keep its focus outstanding so that the clients' desire and institutional preferences are met. It can also be considered a good factor for the unforeseen occurrences in the future of such business.

Communication strategy and promotion is very essential to create publicity as said earlier on. Microfinance basically involves the poor and demands intensive communication to create a link and a good relationship between the customer and the microfinance institution. According to Kotler marketing communications is the means by which firms attempt to inform, persuade, and remind clients, directly or indirectly about the products and it usages Kotler et al (2006,pp536). From the microfinance point of view, it can be said that the clientele training is also part of the process where through well managed communication methods, individuals are trained on how to efficiently use the funds they acquire to create wealth.

On Marketing Intelligence KASHF FOUNDATION can developed its strategies and operations based on the client's needs and competitive realities. Clients needs involve (demand for individual credit, group loans) etc, .Thus customers must be segmented according to their special needs to better serve them. A microfinance firm can strategically collect market information's about aspiring clients. A microfinance institution can influence its positioning to develop sustainable competitive advantages and then communicating that point differentiation aggressively. This process will access the organizational strength and weaknesses against those of its competitors and differentiate the institution in ways that prospective client finds meaningful Steel et al (June 2003). This process must be based on marketing intelligence about clients' needs and preferences, competitor's strategies such as other small microfinance institutions, the organizational strengths, and the context within which it works. This information's can be gathered on the client such as,

Client profiles: What are the demographics and income levels of clients? Microfinance institutions like the small banks typically have a good understanding of the demographic profile of the client they serve, including their age, gender, educational level, marital status, household size, and location. This information is often available from secondary sources such as country census information, or by reviewing and analyzing the organizations' database. For transforming such institutions, this information is a starting point for clarifying and segmenting the target market.

Needs and preferences: Which products or facility delivery channels do clients prefer? A microfinance institution typically have some intelligence on clients needs, derived from the credit officers` relationships with clients. Qualitative market research can build on this research by allowing the institution explore more directly the wants and preferences of its clients. Quatitative market research can be used as a follow-up to qualitative research to determine the degree and frequency of the observed desires in the greater population.

Beliefs and attitudes: Microfinance institutions typically have a weak understanding of the beliefs and attitudes of their clients unless they have actively conducted market research.

Beliefs and attitudes beyond those related to the economic institutions need to be considered.

In Pakistan for instance, there are lot of traditional beliefs by the locals which must be considered for instance, a microfinance institution willing to disburse funds within a certain locality must first seek permission from the queen or king of that area, the believes and attitudes which can affects its products and other important factors. It is believed that a default by any society member to pay back a loan for instance is subjected to consequences when the societal heads are concerned.

Information's regarding the organizations environment:

Competition: Most at times, higher interest rates in the long run results in negative impacts.

Competition is important in this sense to know what makes other economic institutions successful and adapt and enhance existing strategies. This deep understanding involves gathering the following intelligence on all of its competitors (both regulated and unregulated) Mission and objectives: What are the organizations market share, its target market and profit margins?

What is their business strategy: What are competitors' business strategies and the mechanics of their business models? These can give the firm an opportunity to strategise its operations to have an edge on the environment.

Growth profitability: The organization must examine its strengths and weaknesses and compare it to others who are successful on the market.

Capabilities: What can the institution do, such as the ability to make and collect loans, attract clients, and motivate staff, or improve its management information system and technological capabilities, the learning capacity and flexibility of its staff, and the location and capacity of branch network?

Competencies: With regards to this, certain questions like what the organization can do well are asked. What can be exploited for future competitive advantage? For example, the ability to disburse loans is a capability, but it becomes an institutional competency to do it quickly and error free. What has helped the institution grow? The transforming organization should determine its key areas of expertise, such as credit methodology, client relationships, and trained personnel, and define those it might need to strengthens, such as operations, and risk management.

Image Building This aspect focuses basically on the personality of the microfinance institution. What differentiate it from traditional economic institutions? Typically, the microfinance institution must try to balance its social goals with new demands for profitoriented investors. The microfinance organization needs to understand its existing culture and then define the one it wants to have as a regulated, formal economic institution.

Market segmentation and targeting: According to Kotler, markets must be segmented to distinguish it a set of customers from others. This should be in terms of needs and preferences. He further stated that within these segmented markets, there is the niche which defines set of customers with very distinct need, (Kotler 2003, pp 279-280). A microfinance firm must have a set target market with exclusively designed strategies and activities directed towards it, which then becomes potential customers. This creates some level of security for the firm and the clients as well. Typically, the customer base for a microfinance institution like the KASHF FOUNDATION constitutes more of the poor who are into small scale business such as subsistence farming, fishing, store operators, sewing, and market women and as well individuals who wish to enter into self employment. These set of customers can be seen as the niche for the institution. It is appropriate to segment the market into these categories identifying special needs such as levels of loans to be given, ability to repay loans, and many other factors peculiar to each group. In this way, these clients can be well served and better mechanisms put in place to manage them. The organization must also seek to enter into wider areas to increase customer size. Market research can be organized to ascertain the viability of the market and attract diverse and profitable customers. As said earlier on, other targeted group can be other organizations, shareholders, and the elite individuals in the society who have the desire to invest their funds managed as savings and which can yield profits if well managed.