How Effective Is Microfinance in Reaching the Poorest? Empirical Evidence on Programme Outreach in Rural Pakistan

By Ghalib, Asad K. | Journal of Business Economics and Management, June 2013 | Go to article overview

How Effective Is Microfinance in Reaching the Poorest? Empirical Evidence on Programme Outreach in Rural Pakistan


Ghalib, Asad K., Journal of Business Economics and Management


1. Introduction

Financial services access is associated with giving access to capital and providing job opportunities to the poor. Offering such services underpins their ability to increase and diversify incomes, build human, social and economic assets and improve livelihoods in ways that reflect the multidimensional aspects of poverty (Sananikone 2002). Despite efforts to provide access to financial services, it has often been argued that both formal and informal sectors in the developing world have failed the people (Chowdhury 2008). As the rural poor have very limited access to the organized and formal financial sector, they resort to private money lenders in order to finance their immediate needs. Unfortunately, credit market isolation coupled with an inelastic demand for credit, allow such private moneylenders to decide freely what interest rate to charge (Sundrum 1992; Gupta and Chaudhuri 1997), thus forcing their low-income borrowers to pay much higher interest for credit than would be necessary if commercial microfinance were widely available through financial institutions with broad outreach (Robinson 2001). Studies by Dowla (1998) reveal that interest rates being charged by the informal sector are simply exorbitant and may vary anywhere from 10 to 120 percent per annum for initial investment, and up to 240 percent for working capital financing. Banerjee and Duflo (2011: 158) put such high interest rates in context by citing the example of a 'daily loan' obtained by a typical vegetable vendor in India from a money lender at an interest rate that amounts to 4.69 percent per day. On these terms, the equivalent of a $5 loan, if unpaid for a year, accumulates to a debt of nearly $100 million.

The restraints and inadequacies in the financial sectors, as noted above, have led not only to the evolution of Microfinance, but also towards its immense popularity all over the developing world as a key tool in development-related programmes (Chowdhury 2008). The underlying premise of microcredit is to provide credit without borrowers having to surrender their assets as security in case of non-payment.

Microfinance has gained rapid popularity in Pakistan as a tool to assist the poor to work their way out of poverty. This study assesses the type of the poor that are being reached by microfinance providers in the country by measuring the depth of its outreach across rural parts. By means of administering an extensive household questionnaire to both microfinance borrowers and non-borrowers, their relative poverty levels are assessed. A poverty index is constructed, which enables ranking of all surveyed households. Survey findings reveal that outreach is substantially low, thus providing evidence that the poorest are not being effectively targeted and adequately reached. The paper further provides a number of polices that can be implemented in order to efficiently target, reach and serve the poorest as a measure to successfully combat poverty. This research makes an important contribution to the limited empirical studies carried out in Pakistan that assess microfinance programme outreach. As opposed to assessing the geographical coverage of various microfinance programmes (the breadth), it assesses the type of the poor being served by MFIs. The paper consists of four sections: following this introduction, section two briefly explores current literature on poverty targeting and outreach. Section three expounds the methodology and geographics of the surveyed region. It also details the empirical work carried out in the study. The concluding section draws together the major points of the paper, comments on its findings and discusses policy implications.

2. Combating poverty by targeting: findings from empirical studies

Development policies are either targeted at certain specific individuals or segments of the society ('targeting'), or are designed to influence the entire population ('universalism'). …

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