Microfinance in Pakistan.

Byline: NAZIR AHMED SHAIKH

The concept of Microfinance is not new as it has had its occurrence in the long past. The term `microfinance' and `microcredit' are often used interchangeably but in reality, there is a difference between the two. Microcredit is the extension of small loans to entrepreneurs too poor to qualify for traditional bank loans. Microfinance is a broader concept encompassing not only the extension of credit to the poor but also the provision of other financial services like savings, cash withdrawals, and insurance. Hence, microcredit is a component of microfinance.

Since the 1990s, Pakistan, Microfinance (MF) has started gaining importance, as a tool of social mobilization and poverty reduction in Pakistan. Indeed the enhanced international emphasis, in particular the increased funding from IFIs for MF, encouraged both the public and private sectors to develop the microfinance sector in the country. The significant increase in international funding enabled Non- Government Organizations (NGOs) to expand their operations and was also a major driving force for the establishment of specialized microfinance institutions in the formal sector i.e. MFBs.

Microfinance: The potential market

There is no common international standard to estimate the potential market of microfinance. Every country estimates the market size according to its objectives and focus of the sector. In Pakistan, the potential market for MF is generally being considered around 8 million households, which is approximately one-third of the total household in the country. A little is known about the methodology to come upon this market size, though practitioners in this area explain that the potential market is roughly the population below the poverty line.

Pakistan is a lower-middle-income country, with a GDP (nominal) of $347 billion a GDP per capita (nominal) of $1,666, and a GDP per capita (PPP) of $5,973. Pakistan's growing working-age population requires the government to provide adequate services and increase employment and coupled with economic, governance, and security challenges, as well as its susceptibility to natural disasters, economic growth continues to be a struggle.

Brief History

Established in 1982 by the Aga Khan Foundation, Aga Khan Rural Support Program (AKRSP) was the first Integrated Rural Development Program of its kind, outside the government domain. It has focused its development interventions on the Northern Areas of Pakistan. The first large-scale practical implementation and conceptualization of development frameworks such as "social mobilization" and "group lending methodology" can be traced to AKRSP's microfinance model initiated in 1982. AKRSP organized and mobilized Village Organizations (VOs) and animated them as partners in developing the health, education, and income-generating initiatives in the Northern...