Microfinance in Pakistan: A paradigm shift

The microfinance story in Pakistan, a testament to the fact that given the political will and undeterred resolve, it is possible to achieve a paradigm shift, where the needs of the marginalised and the disadvantaged become a priority and where commercially driven mandates can be customised to serve the core poverty reduction agenda of the state.
Pakistan experienced an unprecedented level of support and Investment over the past six years that led to the establishment of a financial system, perhaps for the very first time that is truly focused on reaching out to the economically less privileged and provide them with services to better manage their precarious lives.
The Microfinance Sector Development Program of the Government of Pakistan and Khushhalibank has been successful in catalysing the environment for the growth of microfinance in the country. Since 2001 Khushhalibank has become the fastest growing micro credit provider and emerged as the country's largest microfinance institution with a nation-wide presence and outreach.
The critical role that access to financial services plays in reducing poverty is now much better understood by policymakers and has become a key part of the global and domestic development agenda, including achieving the Millennium Development Goals.
Around the Globe and particularly in South Asia, Microfinance Institutions are revolutionising access to financial services to some of the poor and excluded segments of the market and establishing a niche within the financial services Industry.
Not only are these Institutions reaching out to the majority of the population specially in our part of the world but their performance in terms of efficiency, productivity and portfolio quality continues to amaze all financial pundits as they emerge as the new and dominant players in the financial services Industry. The environment and financial Infrastructure around these Institutions continues to evolve rapidly in terms of reporting standards, performance monitoring, customised ratings, audits, regulation and supervision.
Pakistan continues to be at the forefront of these developments and the Microfinance Sector Development Program (MSDP) has had a profound impact on Microfinance (MF) in Pakistan through the establishment of a pro-poor market-based, formal financial sector oriented system. MSDP facilitated the enactment of the Microfinance Policy and Khushhalibank Ordinance 2000 and a Microfinance Institutions (MFI) Ordinance 2001. These Ordinances led to improved transparency and institutional diversity of the MF sector by introducing the concept of banking operations into MF and facilitating banking services to the poor which focuses on autonomy to develop, market, and service products on a sustainable basis with good governance.
MSDP has also contributed to the development of State Bank of Pakistan's regulatory and supervisory capacity for MF. The new regulatory framework has facilitated the emergence of six licensed Microfinance Institutions at district and national levels. With the support and guidance provided through MSDP, SBP has established a separate policy unit for MF and is proactively promoting a sound environment for sustainable MF operations within the country.
Within the overall MSDP framework Khushhalibank is the lead microfinance Institution in Pakistan and has since its establishment in August 2000 rapidly expanded its micro credit outreach and has well established its position as the largest MF bank in the country in terms of its clients and portfolio.
The Bank has serviced over half a million households with cumulative disbursements of over Rs 8.0 billion through its branch network in 83 districts which include those with high poverty incidence. The majority of KB clients are in rural areas (60%) and includes the very poor and roughly one-third of the beneficiaries being women.
Performance analysis of microfinance Institutions reveals a multi faceted balancing act that requires leveraging a large distribution network requiring front-end Investments with deferred paybacks to deliver services cost effectively at the client's doorstep in order to scale outreach while ensuring positive returns and impact on the lives of the clients.
The Asian Development Bank Institute (ADBI) based in Tokyo, Japan last year framed this as a hypothesis for a study which was designed to yield related empirical evidence. To test this hypothesis, the ADBI chose to analyse the impact of the Khushhali Bank, currently the largest retail microfinance bank within the country and one of the fastest growing in the region.
The study states that "Khushhalibank has shown that it can scale up outreach while remaining focused on the core goals of operational and financial sustainability.
THE STUDY REPORTS THAT KHUSHHALIBANK BORROWER'S:
(i) Enjoyed increased assets, inputs and sales from their income generating activities;
(ii) Spent more money for education and health especially for children; and
(iii) Increased their decision making ability as they became more proactive in terms of participation in community and financial matters especially in the context of empowerment of women.
The study concludes by stating that "These findings hold promise for the millions of poor households in Pakistan and demonstrate that given a supportive regulatory environment, it is possible for commercial microfinance banks to meet a "double bottom line" of simultaneously pursuing profits and a humanitarian social mission. Perhaps other countries can follow the path of Pakistan in promoting the development of a sustainable microfinance sector that improves the welfare of the poor."