This paper discusses the role of financial institutions in poverty reduction in Pakistan.
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Paper Summary:
This paper explains that the challenges faced by institutions pursuing the expansion of micro-finance in Pakistan are as complex and varied as the causes of poverty, which are lack of access of the poor to public services, poor governance, gender discrimination against women, and the absence of risk mitigation measures. The author points out that micro-finance provides very poor families with very small loans, also known as micro-credit, initial savings of $35, and a first-time loan of about $295, with an interest rate of 18-20% per annum, to help them engage in productive activities or grow their tiny businesses. Micro-finance also can include a broader range of services such as credit, savings, and insurance because the poor lack access to traditional, formal, financial institutions. The paper relates that commercial banks are well suited to providing micro-credit to the poor because they can handle large numbers of transactions and have the capacity to track a large number of loans; highly localized, non-government organizations (NGOs) also can play a vital role in the provision of micro-finance services, but they are riddled with institutional inefficiencies.
Table of Contents
Introduction
Poverty's Dimensions and Causes
Micro-Finance and Poverty Reduction
Role of Financial Institutions in Providing Micro-Finance
Challenges and Recommendations
Conclusions
From the Paper:
"Pakistan has seen steady growth in the agricultural sector, averaging over 4 percent per year from 1993 to 1999. Despite this, the incidence of poverty in rural areas increased by 7 percentage points over the same period. The overall growth of the sector is not translating into reduced poverty at the rural level. There are two possible reasons for this disparity. First, the unpredictability of the agricultural sector could have led to fluctuations of consumption in rural areas, as well as asset depletion of the rural poor as they continue to try and meet their consumption needs. Second, rural poverty is also closely linked to the distribution pattern of assets, especially land assets, which is a prevalent problem in rural Pakistan."
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