Although Pakistan’s economy enjoyed relatively stable growth during the
1990s, poverty and income inequality continued to rise;1 the most recent
official estimates are that roughly one-third of the population was below
the poverty line at the start of the millennium (GOP, 2003a: 12) (see
Chapter 7 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 new program, 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 institutions,5 their total outreach is still less than 5 per cent of the
estimated 5.6 million poor households in Pakistan that require micro-
finance services (see Table 8.1).
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 inAugust 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 2001.6 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 the 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.