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Home > Financing Best Practice > A Silent Revolution Not to Be Silenced: An Overview of the Microfinance Sector and Its Impact in Pakistan

Financing Best Practice

A Silent Revolution Not to Be Silenced: An Overview of the Microfinance Sector and Its Impact in Pakistan

by Zohra Khan

Executive Summary

  • State-run plans for poverty reduction in the poorest of the developing countries—particularly Pakistan—have largely failed, primarily due to lack of commitment to the development of customized strategies that have regard to the constraints of the region.

  • Governance structures to monitor the formulation, implementation, and evaluation of poverty reduction policies and practices are deficient. There is scarce capacity to recognize deficiencies or enforce best practices.

  • The private sector has emerged as the leader in developing the social sector, rural financial structures, and the specialized microfinance sector.

  • The establishment of the microfinance sector revolutionized the financial sector in rural areas. However, during the last three years the pace of diversification of the base of the microfinance sector has dawdled compared to the rate of opening of new microfinance outlets.

  • There is a need for stronger governance structures that will guard against manipulative commercialization, build the capacity of professionals, diversify products, increase regional collaborations, and meet the need to ensure complete disclosures to beneficiaries regarding interest rates and ancillary costs.

  • The economic downturn globally and natural devastations during the preceding half decade in Pakistan, particularly the earthquake in 2005 and the floods of 2010, have hit microfinance institutions hard. Yet microfinance institutions may rebound and develop in the right direction if a rational strategic plan is implemented for the provision of an appropriate range of financial services to the poor.


Since its establishment in 1947, Pakistan has struggled to achieve long-run economic stability. There are multiple explanations for this that range from regional conflicts and natural calamities to severe failures of governance. Among the latter can be noted corruption, mismanagement of resources, “hypothetical” economic development measures, and lack of good governance generally. However, the concept of access to finance has strengthened, acting as a catalyst to the development of the financial sector. Due to its simple yet effective structure, microfinance is seen as a potent weapon in the fight against poverty. There is a lack of awareness among financial market practitioners, who have yet to see that—apart from commercially viable microcredit and microenterprise—global financial markets will be the main tool available for policy initiatives that seek to foster development and eradicate poverty.

The Microfinance Revolution

Microfinance institutions have been particularly successful in Africa, Latin America, and Asia. The microfinance sector in Pakistan established its roots later than in other countries in South and South East Asia, but it is catching up. There are still some issues that need to be addressed, such as access, sustainability, efficiency, risk management, and innovation. However, the most vital and intricate area is financial sustainability. The microfinance sector has yet to demonstrate its potential in terms of its impact on society and poverty. These issues, however, are characteristic of an early-stage microfinance sector.

First Generation

The first generation of microfinance services in Pakistan, in the late 1980s and 1990s, comprised the following:

  • Some small and localized nongovernment organizations (NGOs) that provided credit to groups of borrowers.

  • The Aga Khan Rural Support Programme (AKRSP) in the northern region of the country.

  • Other rural support programs (RSPs).

The RSPs, which constituted the main mechanism and approach to microfinance, made a major contribution to the microfinance sector by accessing lines of credit from commercial banks, thereby providing microcredit to low-income people living in rural areas. The Orangi Pilot Project (OPP) developed an individual lending methodology adapted to urban low-income areas by targeting entrepreneurs in the Karachi region. The Microfinance Institutions Ordinance 2001 was promulgated by the Government of Pakistan to support the development of the sector by introducing a definition of a microfinance institution. To encourage private–public partnerships, Khushhali Bank, Pakistan’s first licensed microfinance institution, was established. In addition, the private sector also set up microfinance banks, with the result that three such banks were operational during 2001–04. A number of development finance institutions (DFIs) were restructured, and Zarai Taraqiati Bank was relaunched. The regulator, the State Bank of Pakistan (SBP), has played a key role in the evolution of microfinance policy. A separate microfinance support division was established at the SBP to facilitate and guide and to solve problems.

Support by Multilateral Donors

Clearly, the focus on development of the microfinance sector had the aim of alleviating poverty. Numerous multilateral and bilateral donors also extended support in this regard. For example, a Lahore-based organization, the Kashf Foundation, was supported by the UK Department for International Development (DFID) with the provision of £3.2 million over five years for the project. While Kashf is seen as one of the most dynamic, creative, and financially sustainable institutions, the funding from donors also gave considerable autonomy to experiment and implement. Other donors have also been involved in supporting microfinance and related poverty-alleviation programs. For example, the Pakistan Poverty Alleviation Fund (PPAF) was established in 2000 as a not-for-profit private company sponsored by the Government of Pakistan and the World Bank. It was inspired by the success in Bangladesh of the Palli Karma-Sahayak Foundation (PKSF), which has a narrower focus on microfinance.

Advent of the First Micro Finance Bank

The First Micro Finance Bank Ltd was set up in 2002 as the first private-sector microfinance bank in Pakistan. It is a premier noncommercial bank licensed by the State Bank of Pakistan and sponsored by the AKRSP, the Aga Khan Fund for Economic Development, Geneva, and the International Finance Corporation. It was created through a structured transformation of the credit and savings section of the AKRSP, an institution that laid the foundations of the microfinance sector in the country in 1982, beginning in the Northern Areas and Chitral. The Pakistan Microfinance Network, a network of organizations engaged in retail microfinance and dedicated to improving the outreach and sustainability of microfinance in Pakistan, receives funds for its publications and activities from the DFID, the Swiss Development Corporation (SDC) under the Financial Sector Strengthening Programme (FSSP), and the Aga Khan Foundation, Pakistan.

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Further reading


  • Reitman, Anna, and Asma Azmi. “Pakistan’s microfinance sector: Rebuilding the flood hit nation.” Microfinance Focus (September 7, 2010). Online at:
  • Zafar, Roshaneh. “The ill-advised political interference in Pakistan’s microfinance sector.” Blue Chip 57 (February–March 2009). Online at:


  • Avgouleas, Emilios. “International financial regulation, access to finance, systemic stability, and development.” BWPI Working Paper 49. Brookes World Poverty Institute, University of Manchester, June 2008. Online at: [PDF].
  • Dingcong, Clarence G. “Documentation of product development processes in selected MFIs—Integrative report.” Microfinance Council of the Philippines. Online at: [PDF].
  • Gibson, Susan. “The people part: Common sense advice in motivating microfinance clients and staff.” Catholic Relief Services Microfinance Unit, September 2000. Online at: [PDF].
  • Institute of Microfinance. “Microfinance in SAARC countries: Overview report.” November 2010. Online at:
  • Jansen, Anicca. “Microfinance: It’s more than little loans.” Presentation for USAID economic growth officers, October 5, 2005. Online at:
  • MicroCapital Institute. “Commercial microfinance in South Asia: Bangladesh, India, Nepal, Pakistan and Sri Lanka.” 2005. Online at:
  • Oxford Policy Management (OPM). “Poverty and social impact assessment: Pakistan microfinance policy. Final report.” May 2006. Online at: [PDF].
  • Weiss, John, and Heather Montgomery. “Great Expectations: Microfinance and poverty reduction in Asia and Latin America.” ADB Institute Discussion Paper 15. Asian Development Bank Institute, September 2004. Online at: [PDF].


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