Received: 10 December 2018 Revised: 17 November 2019
DOI: 10.1002/ijfe.2038
RESEARCH ARTICLE
Microfinance and poverty reduction: New evidence from
Pakistan
Arshad A. Khan1 | Sufyan U. Khan1,2
Aftab Khan1 | Jianchao Luo1,4
1
College of Economics and Management,
Northwest A & F University, Yangling,
Shaanxi, China
2
Institute of Soil and Water Conservation,
Northwest A&F University, Yangling,
Shaanxi, China
3 ever, when the poor people are involved in the broader scale (different types of
School of Management, Xian Jiaotong
University, Xi'an, China
4
Shaanxi Rural Financial Research
Centre, Yangling, China
Correspondence
Jianchao Luo, College of Economics and
Management, Northwest A & F
University, Yangling 712100, Shaanxi,
China.
Email: jchluo@nwsuaf.edu.cn
Funding information
National Natural Science Foundation of
China, Grant/Award Numbers: 71873100,
71573210
Int J Fin Econ. 2020;1–11.
Accepted: 18 June 2020
| Shah Fahad3 | Muhammad A. S. Ali1 |
Abstract
Microfinance is key to reducing poverty in Pakistan. While comprehensive
finance is frequently considered as, it creates inclusive growth and poverty
reduction in poor communities, and can be boosted by ease of finance. How-
poverty level), can this microfinance work? We used an econometric model to
test the symmetry approaches of the comprehensive financial organizations
and the poor in poverty reduction activities to find the answers. Keeping this
in view, we studied different determinants related borrowers for the poverty
reduction with respect to access to Micro finance institutes (MFI) and produc-
tive loan. Despite some limitations, such as those arising from potential
unobservable important determinants of access to MFIs, significant positive
effect of MFI productive loans has been confirmed. The significance of “treat-
ment effect” of coefficients has been verified by probit model. In addition, we
found that loans for productive purposes were more important for poverty
reduction by MFB (Microfinance banks) than MFI. However, in urban areas,
simple access to MFIs has larger average poverty-reducing effects than the
access to loans from MFIs for productive purposes. This leads to exploring ser-
vice delivery opportunities that provide an additional avenue to monitor the
usage of loans to enhance the outreach. Therefore, the results showed by
probit model that access to MFI was better in urban areas and male borrowers
thus achieved more loan. Therefore, it is suggested that for the poverty reduc-
tion, there is a dire need to improve and localize the Microfinance institutions
in rural areas as well as to promote group lending methodology to avoid risk
of getting loans and increase the number of both male and female savers.
Thus, the saving value will be increased and side by side interest rate will be
significantly achieved. Hence, it is concluded that the goal of providing sus-
tainable financial services implicitly implies that MFIs provide financial ser-
vices to the poor, whenever they find it profitable to do so. The removal of
subsidy and the absence of interest rate restrictions could make the market for
the poor become even worse as the market occupiers may act in their own
interest. The powerful push will be needed from national economic and social
impacts for the increasing support for microfinance.
wileyonlinelibrary.com/journal/ijfe © 2020 John Wiley & Sons, Ltd. 1
2 KHAN ET AL.
KEYWORDS
borrowers, loan, microcredits, Pakistan, poverty, savings
1 | INTRODUCTION
Poverty is a global issue, which has been widely discussed
by the academicians, researchers, and remained the cen-
tre point of the policy makers since long (Javed, Akhtar,
Quddus, & Khanam, 2015). During the mid of 19th cen-
tury, the poverty reduction was linked to better macro-
economic performance at the national level with the
participation of poor. However, at that time up to 1980s,
it has been acknowledged by the researchers that poor
mostly participate in the informal sector of micro-enter-
prises, street vendors, home workshops, market stalls,
and so on, which were not addressed by the government
policy makers (Hossain, 1978). Before the mid of 19th
century, the poverty reduction has been institutionalized
with the establishment of World Bank in 1944 which has
granted loans to developing countries' governments and
institutions through its structural adjustment programmes.
However, these programmes were found highly unsuccess-
ful in terms of helping the poor societies and thus in pov-
erty reduction (Harper, 2007; Morduch, 2000).
The failure of the formal institutions in poverty
reduction accounted for a shift in the thinking related to
development and leads to the emergence of microfinance
(Abrar, 2016). It focused on the poor society related to
the informal sector through credit provision. Basically,
microfinance is the provision of small loans and other
financial services including savings and insurance to
reduce poverty (Iqbal et al., 2015). Usually, the financial
services are provided to small enterprises and self-
employed people of the low-income groups (Iqbal et al.,
2015). Microfinance has its specialty that it provides
access of the poor people to credit system, which have
been traditionally deprived from other formal sources of
credit (Schreiner, 2001).
The provision of credit to the poorest segments of
society creates economic opportunities for them, which
leads to poverty reduction and well-being (Yunus, 1999).
Thus, microfinance serves as a significant tool for poverty
reduction as it creates employment and income genera-
tion, and bring about social well-being among the poor
segments of society (Elias, Ahmad, & Patil, 2015). Miled
and Rejeb (2015) reported that a country with higher
MFIs' gross loan portfolio per capita tends to have lower
levels of Poverty Head Count Ratio and higher level of
per capita, confirming the role of microfinance in poverty
reduction at the macro level and that poorer countries
need to focus more on the equalizing effects of
microfinance. The microfinance services like micro-
credit due to the mentioned special characteristics,
improved the living standards of people, increased
income and employment generation through entrepre-
neurship and smoothening seasonal consumptions
among the various societies of the developing world
(Ali, Aleemi, Tariq, & Lakhani, 2014; Littlefield,
Morduch, & Hashemi, 2003).
The existing literature on the impact of microfinance
can be broadly divided into three categories. The first cat-
egory examines the impact of microfinance on poverty
(Tedeschi, 2010). The second strand of literature deals
with the impact of microfinance on women's empower-
ment (Garikipati, 2012). The third series of studies high-
light other effects of microfinance, such as the impact on
education, health, nutrition, consumption level and build
assets (Deloach & Lamanna, 2011; Hazarkia &
Sarangi, 2008; Kouassi, 2008). It is evident that
microfinance was emerged as poverty reduction tool and
thus widely adopted in both the developed and develop-
ing countries of the world (Žiaková & Verner, 2015).
Microfinance has brought positive impact to the life of
clients, boost the ability of poor individuals to improve
their conditions and others have indicated that poor peo-
ple have taken advantage of increased earnings to
improve their consumption level, health and build assets
(Leatherman, Metcalfe, Geissler, & Duford, 2012). How-
ever, due to its special features and important bearing on
the poverty reduction, it was mostly attracted in the
developing countries (Ali et al. 2014; Littlefield
et al., 2003). Like others, Pakistan has also adopted the
microfinance to combat wide spread poverty in 1990s
(Lalik, 2015). However, the microfinance sector started
its momentum since the inception of 21st century with
the microfinance regulatory act 2001 in the country. The
microfinance mandate in the country is to serve the poor
with the provision of financial services and thus cater
wide spread poverty (Setboonsarng, Leung, & Cai, 2006).
The poverty is high in the country as 23% of the total
population live below the poverty line. The poverty statis-
tics are found higher among the rural dwellers. More-
over, the poverty is also more feminized due to their low
levels of education, health and unpaid work in the agri-
culture sector Awan and Sheikh (2015) The microfinance
services are available both in the urban and rural areas
through peer groups in the country (Pakistan). The peer
groups of the country included banks, Non-
Governmental Organizations (NGOs). The main objective
KHAN ET AL.
of this study is to make an analysis on how microfinance
can be used as more effective poverty reduction strategy
and to see which modality works relatively better in
reducing poverty in Pakistan.
2 | MATERIALS AND METHODS
To achieve the study objectives, secondary data for the
duration of 2007 to 2016 were obtained from Micro-
watch, Pakistan Microfinance Review, and Mix-market,
the authentic sources of microfinance. Data were
obtained about the microfinance services, microfinance
peer groups/providers, and about the selected indicators
of poverty reduction as discussed below. The obtained
data were further presented and discussed using descrip-
tive statistics and percentages to draw the conclusion
about main query of the study.
2.1 | Indicators of poverty
Poverty can be reduced when poor people were
reached by the microfinance institutions in the country
(Abrar, 2016). It is evident that poverty is characterized
in rural areas, among the small holders, and among
women with and within the households (Ali,
Abu-Hadi, & Ali, 2013). So, targeting them can reduce
poverty in the country. Based on the literature review
and availability of data a total of five indicators were
selected to assess the role of microfinance in poverty
reduction. Here, in this study, the role of micro-credit
was termed equivalent to the role of microfinance in
poverty reduction in Pakistan. The indicators of pov-
erty reduction included number of active borrowers,
sex-wise borrowers, area-wise borrowers, lending
methodology of microfinance institutions, and sector-
wise borrowers, which are discussed briefly in the fol-
lowing sub-sections. The conceptual framework of the
study is given in Figure 1.
2.1.1 | Active borrowers
The number of active borrowers serves as an indicator of
poverty reduction. It is assumed, that the more number
of active borrowers, the more the poor people is served
(Abrar, 2016). The large number of borrowers indicates
the better breadth of outreach of microfinance institu-
tions, which further shows for the participation of poor
in the microfinance programmes. So, in this study, the
active number of borrowers was used as an indicator of
poverty.
3
F I G U R E 1 Theoretical framework of the study (Constructed
by Authors) [Colour figure can be viewed at
wileyonlinelibrary.com]
2.1.2 | Sex-wise borrowers
Sex of the household head indicates the poverty status of
the respective household. It is believed that female-
headed households experience elevated levels of poverty
as compared to male-headed households, especially in
the patriarchal societies of Pakistan (Abrar, 2016).
Female comprised more than half of the country's popu-
lation and they work same as male do but their work is
not recognized and mostly unpaid. Women also do not
own the productive assets like land, property and so
forth. which also accounted for their high levels of pov-
erty within the household as compared to men
(Fernando, 2006). It is believed that provision of micro-
credit to women by the microfinance institutions will
reduce poverty. So, in this study, the number of women
active borrowers was used as an indicator for assessing
the role of microfinance in poverty reduction.
2.1.3 | Area-wise borrowers
Poverty is more profound not only the developing coun-
tries like Pakistan, but also within the rural areas of the
Pakistan. The rural areas have limited number of
employment and business opportunities along with low
levels of education, health and other facilities, which
accounted for high levels of poverty. The absence of
sound rural development policies at national levels aggra-
vated the situation. Microfinance as poverty reduction
tool is introduced in the country to combat rural poverty.
So, in this study the area-wise coverage/borrowers of
microfinance were termed as the poverty reduction indi-
cator. The large number of rural borrowers indicates the
better role of microfinance in poverty reduction.
4 KHAN ET AL.
2.1.4 | Sector-wise borrowers
Microfinance target borrowers from the different sectors
of the economy. These sectors included agriculture,
small-scale industries, trade, housing and so forth. in the
country. It is believed that the more number of borrowers
in the agriculture and small-scale enterprises, more the
poor population is served and thus reducing poverty in
the country. Thus, sector-wise active borrowers served as
an indicator of microfinance role in poverty reduction.
2.1.5 | Lending methodology
The lending methodology of microfinance institutions
serve as an important indicator of poverty reduction.
Lending is of two types: individual and group. The group
lending maximized the outreach of microfinance while,
the individual lending provides financial stability to a
microfinance institution (Abrar, 2016). Group lending
does not require collateral thus; free the clients from the
collateral and increasing outreach of microfinance
(Olivares-Polanco, 2005). Increased outreach and collat-
eral free microfinance services enable the poor to access
and participate in it thus, splitting the vicious circle of
poverty.
2.1.6 | Model specification
There is no agreement about the best fitting method to
analyse the impact of microfinance on poverty reduc-
tion. Researchers worldwide used different methodolo-
gies to observe the reduction in poverty by
implementing microfinance (Deressa, Hassan, &
Ringler, 2011; Fahad & Wang, 2018; Paudel, Botzen, &
Aerts, 2015). However, probit model was used in this
study because of there is possibility of correlation
between explanatory variables which indicates the
nature of the normal distribution of the data. As a con-
sequence, the unobserved error terms of this research
will likely experience stochastic dependence, ignorance
of which may lead to biased or incorrect estimates of
the choice probabilities and parameter estimation
(Ullah, Jourdain, Shivakoti, & Dhakal, 2015). Using of
probit model in that case gives more significant results,
which is easily interpretable and more understandable
to wide group of readers and stakeholders of such kind
of studies (Fahad & Wang, 2018; Ghazanfar, Qi-wen,
Abdullah, Ahmad, & Lateef, 2015; Wheeler, Zuo, &
Bjornlund, 2013). Again, the above models are in line
with the research problems, stated objectives, and
largely patterned from existing literature. Thus, the
dependent and explanatory variables in the models are
consistent with approaches of previous studies and to
the extent of the availability of data for measurement.
Our main hypothesis is to assess that access to
microfinance institutions (MFIs) reduces poverty. We use
the treatment effects model for the effect of access to
MFIs and productive loans on poverty reduction. We
employ the treatment effects' model version of the
Heckman sample selection model (Heckman, 1979),
which estimates the effect of an endogenous binary treat-
ment. This enables us to compensate for sample selection
bias associated with access to MFIs. The access to MFI is
estimated by a probit model. The merit of the treatment
effects model is that sample selection bias is explicitly
estimated by using the results of the probit model. The
selection mechanism by the probit model above can be
more explicitly specified as (e.g., Greene, 2003):
D
i = γX i + ui , ð1Þ
and
D
i = 1, if D
i = γX i + ui > 0, ð2Þ
D
i = otherwise,
where
   
1 γ
Pr Di = =ɸ , ð3Þ
Xi Xi
   
0 γ
Pr Di = = 1 −ɸ , ð4Þ
Xi Xi
and
D
i = 1 if D
i = γX i + ui > 0,
D
i is a latent variable. In our case, Di equals 1 if a
borrower has access to MFIs and 0 otherwise, Xi is a vec-
tor of borrower characteristics and the instrument for the
participation equation that is, the proportion of bor-
rowers with access to formal banks, U, denotes the stan-
dard normal cumulative distribution function.
3 | RESULTS A ND DISCUSSION
Microfinance is providing three types of its services in
the country including micro-credit, savings, and
insurance.
KHAN ET AL.
3.1 | Barrowers and poverty
The active borrowers are the key factor in the reduction
of poverty. The data analysed from 2007 to 2016
(Figure S2) declared that in the recent year 213.2% of
active borrowers were increase compared to that of the
previous years. The active borrower's reports from MFI,
MFB and RSP stated that MFB showed good response in
the increase of active borrower's. NGOs producing more
active women borrowers in the recent year compared to
MFI and MFB. Pakistan serves active borrowers. We pro-
vide the probit results for the treatment effects model to
investigate the impacts of access to MFIs and borrow
(Table 1) and then productive loans on poverty (Table 2).
Because of the fundamental differences of environment,
industrial structures, household characteristics and activ-
ities between urban and rural areas, we derive the esti-
mations for total borrowers and then for gender (Male
and female), areas (urban and rural areas), and sector-
wise borrowers. The results of the probit model imply the
category of characteristics, which are the key determi-
nants underlying access to, and use of, microfinance ser-
vices. As regards the previous, Jaffee and Rusell (1976)
extant a credit market model consisting of two types of
borrowers. They include; honest borrowers, who accept
loans only if they perceive they will be able to make
repayments, and dishonest borrowers, who as long as the
cost of default is sufficiently low would default on their
loans. Therefore, it is assumed that male borrowers prefer
large loans relative to female borrowers and that the
bank is aware of the proportion of male and female bor-
rowers in the market. Still faced with the problem of
adverse selection, the bank is forced to place limits on
the amount of loan granted in order to induce self-
selection of borrowers and limit the probability of default.
Hence, the bank is better off with rationing credit than
with increased interest rates (Stiglitz & Weiss, 1981). It is
common thought that male is dominant in terms of own-
ership, land, property education and decision-making
and thereby easily access financial services (Ali
et al., 2013). Besides, the financial and economic varia-
tions within the societies limit women's participation in
the financial market (Khanum & Almahadi, 2015).
3.2 | Borrowers access to MFI
The valuation results of the probit model in Table 1 are
normally instinctive in the case of all borrowers where
the dependent “MFI-Access” is the dependent variable
(Table 1). The results were significant in areas wise study.
If a borrowers deals with formal banks, this is less proba-
ble to be an MFI client. Formal banks availability is
5
significant and positive in urban areas and negative and
significant in rural areas. That is, borrowers in areas
where formal banks are not available are more (less)
likely to be MFI clients in rural (urban) areas. However,
some studies have shown that MFIs have not reached the
poorest of the poor in Asian countries (Weiss &
Montgomery, 2005) or in Bolivia (Mosley, 2001). The
challenge in serving the poorest of the poor is to identify
who might benefit from stand-alone financial services or
from non-financial services with or without finance,
before participating in market-oriented finance
(Meyer, 2002). In Bangladesh, Rutherford (2003) found
that despite the widespread presence of MFIs, their share
of total money management activities is relatively small.
This indicates the need for microfinance institutions to
move away from being product-based organizations to
reflect the heterogeneity of the demand structure for
financial services/products by poor. The impact of
microfinance on poverty reduction has been measured in
terms of several dimensions, such as improved income,
employment and household expenditure, and reduced
vulnerability to economic and social crises. These mea-
surements have tended to focus on a specific geo-
graphic area, an institution or a small client group and
are difficult to generalize or draw conclusions that
reach across borders, income levels, gender or socio-
economic status (like rural areas) (Patrick, 2004). Thus,
MFI need to be more active and spread their works
especially in the rural areas to play role in poverty
reduction.
3.3 | Productivity of microfinance
institutions
However, in Table 1 where “MFI_Productive” is
expected, insufficient variances are perceived. The coeffi-
cient evaluation of “Female” (borrower) is negative in,
that is, a household with a male head is more likely to
take a loan for productive purposes (Table 2). The results
indicate that micro-credit is more accessible to male com-
munity than the female in the study region. This is
because male own productive assets to provide collateral
and also more aware about financial facilities than
female thus can easily access and avail micro-credit
(Okojie et al., 2009). The current study results are
endorsed by (Elias et al., 2015) who institute that micro-
credit accessibility was increased by male compared to
that of women and this is due to male's ability to provide
security as women do not own fruitful resources ple, land
and property which can be used for security. Further-
more, women need their husband permission for
accessing micro-credit and become an active women
6 KHAN ET AL.

TABLE 1 Results of Probit model on the determinants of access to microfinance

Dependent variable: Whether a borrower has access to a MFI (“MFI_Access”)

Mean SE t-value Co-eff. Z-value

Gender-wise borrowers
Male 54.9 0.023 53.47*** 1.23 53.47***
Female 45.1 0.034 26.17*** 0.89 26.17***
Area-wise
Rural 46.3 0.011 −0.20 −0.0023 −0.20
Urban 53.7 0.045 17.33*** 0.78 17.33***
Sector-wise
Agriculture 22.7 0.012 7.58*** 0.091 7.58***
Livestock 17.3 0.032 2.56*** 0.082 2.56***
Trade 31.1 0.045 0.68 0.031 0.68
Services 9.0 0.009 −0.98 −0.0089 −0.98
Manufacturing/production 6.6 0.007 −4.87*** −0.0341 −4.87***
Housing 0.1 0.001 −45*** −0.0450 −45***
Others 13.2 0.0012 −0.41 −0.0005 −0.41
Gross loan 20.5 0.034 −26.76*** −0.91 −26.76***
Savers 15.1 0.045 0.95 0.043 0.95
Saving accounts 10.4 0.001 89*** 0.089 89***
Saving by gender
Male 29.8 0.012 91.66*** 1.10 91.66***
Female 11.4 0.033 −2.36*** −0.078 −2.36***
Active borrowers peer group 28.9 0.098 19.28*** 1.89 19.28***
Active saver peer group 4.5 0.012 75.83*** 0.91 75.83***
Active borrowers lending model 50 0.030 36.66*** 1.01 36.66***

Note: *Significant at 5% level. **Significant at 1% level. ***Significant at 10% level.

borrower which also considered for the limited approach-
ability (Okojie et al., 2009). Micro-credit scheme lends
mostly to low-income workers. They lend small loans
that require no collateral and are illiterate friendly with
less paper work and convenient repayment schedules
(Khandker, 1998). McGregor (2000) observe that, the con-
venience and other attributes of micro-credit have gain
micro-credit scheme worldwide recognition as reliable
instrument for combating poverty. McGregor (2000) posit
that success stories of individuals and micro-credit
scheme the world over indicate that the scheme could be
a viable tool for poverty reduction.
The results obtained from probit model may reflect
the fact that, although microfinance focuses on women,
male-headed households are more likely to take loans for
productive purposes. The coefficient estimates of vari-
ables on “sector wise borrower” are positive and signifi-
cant. Households with more agriculture, livestock heads
are more likely to take MFI loans for productive
purposes, while trade, housing and so forth., does not
matter for simple access to MFI.
The development track record of Quarterly update of
microfinance outreach in Pakistan, from 2007 to 2016,
showed that at the end of 2016 the total gross loan portfo-
lio of the industry stood over PKR 200 Billion, indicating
a healthy growth of over 10% than the previous
(Figure S4). Growth picked up slightly as the sector's out-
reach grew by over 6% as compared to the previous 4.8%.
Savings have increased by 15%, from PKR 162.6 billion in
the previous quarter to PKR 186.9 billion by the end of
the calendar year. The increase in the value of savings
can be supported by the increase in the number of savers,
which have increased to almost 31 million from 28 mil-
lion (Figure S5). Figure S7 showed, average loan balance
from 2007–2016, furthermore, MFB's also remains the
highest among peer group and has increased (Table 3).
The end of the calendar year marked no change in the
share of female borrowers from the previous, which stood
KHAN ET AL. 7

T A B L E 2 Results of Probit model on the determinants of decay to MFI also affects poverty which alternatively
access to microfinance (amount of productive loan) affected saving of that area (Li, 2010). The number of
savers and saving account for women is low this is due to
Dependent variable: Whether a borrower has taken a
loan for productive purposes (“MFI_Productive”) the more distance from MFI (Kasali, Ahmad, &
Ean, 2016). According to Pagura (2003), the interest
Coefficient Z-value income indirectly increases the effective rate of borrow-
Gender-wise borrowers ing. In addition, the potential of losing savings in the
Male 0.0045 0.129 event of NGN1500 and 5% initial deposit of the approved
Female −0.0001 0.078 loan amount before loans are granted for individual and
Area-wise
group loans respectively. Second, with every weekly loan
repayment made, there is an associated mandatory
Rural −0.0021 −2.13***
weekly savings (Owolabi, 2015). This mandatory savings
Urban −0.045 −3.91***
balance serves as loan guarantee (cash substitute) which
Sector-wise the clients cannot withdraw from until they have paid off
Agriculture 0.51 1.91** their credits. Our results would remain the same if the
Livestock 0.34 1.24 variables on having access to other financial services
Trade 0.012 0.97 were omitted. The positive coefficient implies that the net
benefit of having access to MFI is significant and positive
Services −0.002 −0.54
in urban areas even without controlling for sample selec-
Manufacturing/production −0.003 −0.019
tion bias. The last panel of Table 2 shows the treatment
Housing −0.005 −1.33 effects or the average poverty-reducing effects in
Others −0.013 −0.96 accessing MFIs or taking loans for productive purposes.
Gross loan −0.0043 −0.091 In both instances (access to MFIs and productive loan)
Savers −0.0056 (−1.23) and for both urban and rural areas significant average
Saving accounts 0.034 1.01
poverty-reducing effects are observed. Incidentally, the
results on the size and sign of the poverty-reducing
Saving by gender
effects in each case are very similar to those derived by
Male 0.09854 (1.91)**
kernel matching for PSM. This would support our results
Female −0.0975 (−1.23) based on PSM with the caveat that both methodologies
Active borrowers peer- group 1.045 (4.56)*** have their own limitations. That is, on average, having
Active saver peer group 0.9054 (1.45) access to MFI or taking loans from MFI reduces poverty.
Active borrowers lending model 1.42 (2.98)***

Note: *Significant at 5% level. **Significant at 1% level. ***Signifi- 3.4 | Role of bank loans in the reduction
cant at 10% level.
of poverty

at 53%. This indicates that the male Active Savers with
their value of savings rising from 6% then average of the
previous year's comparison (Figure S6). While the female
in the last year (2016) decreasing value of saving to 5.1%
than the average previous years. While this represents a
form of collateral for the MFI, has some drawback of
mandatory savings; namely that, it leaves clients unable
to access their own savings in times of difficulties and
results in clients forgoing interest income that would oth-
erwise be earned on an individual savings account. Over
all loan and saving determinants are interrelated with
each other. As we documented that MFB showed greater
saving over many years, similarly, MFB serves role in get-
ting more loans. Therefore our focus is to motivate the
MFI in rural and urban areas for the ease of getting loan
and to save more money, due to this activity the interest
rate will need to be down in the initial phase distance
The availability of agriculture and livestock business is
highly significant in all cases as this increases the
demand for loans for productive purposes. In rural areas,
transactions with formal banks and loans from money-
lenders show positive and significant signs (Figure S3),
that is, other financial services serve as complements to
MFI loans for productive services (Table 1). On the other
hand, the coefficient estimate of loans from formal banks
is negative and significant in urban areas (Table 2). That
is, those who cannot get loans from the formal banks
tend to obtain MFI loans for productive purposes in
urban areas. Formal bank availability at village level is
negative and significant in rural areas. Rural households
living in a village with more difficult access to formal
banks are more likely to take MFI loans. Additionally
Figure S3, showed important role in mitigating informa-
tion cost and moral hazard problems. The trade followed
8 KHAN ET AL.
TABLE 3 Institutional microfinance affects group and individual borrower
MFI
Group Individual
Active borrowers peer group 28.9 (0.098) — 40.0 (0.045)
Active saver peer group 4.5 (0.012) — 56.1(0.002)
Active borrowers lending model 73.9 (0.032) 26.1 (0.037)
by agriculture showed good percentage than the rest com-
ponents. In 2009, sector-wise borrowers showed good
results however, the role of sector borrowers is decreased
about 19.3, 24.35, 25.4, 9.9 and 0.54% in agriculture, live-
stock, trade, Therefore MFI need to be fully implemented
in rural and urban areas to activate farmers and motivate
them for loan for the betterment of agriculture and live-
stock, side by side MFI need to play a key role to improve
the production sector and housing schemes. The transport
is important factor for all these components. In the
Philippines, Floro and Yotopoulos (1991) find that personal
kinship relationships played an important role in mitigating
information cost and moral hazard problems. Microfinance
helps these informal micro-enterprises through micro-
credit. The micro-credit approach to poverty reduction is
“the provision of small loans to individuals, usually within
groups, as capital investment to enable income generation
through self-employment” (Jacobsen, 2009). Similarly, find-
ings from Northern Nigeria showed that group and credit
transactions occurred between kinsmen. This makes infor-
mation on default easily obtainable; thus, ameliorating the
moral problem. However, field observation shows that this
is not always the case. Empirical findings suggest that not
all lending groups are formed through peer selection. For
example, in the case of FINCA affiliates in Peru, potential
borrowers are added to a list of other potential borrowers,
which then forms a group, disregarding the importance of
an existing relationship between members (Karlan, 2003;
Marr, 2001). Hence, members had limited and shallow
information about the level of risks of their peers. Likewise,
while homogeneity among members in terms of social class
is expected to enhance cooperation and consensual
decision-making, this can also be a downfall as this can be
channelled negatively. Particularly with groups comprising
of close relatives and members with strong social ties, it was
often the case that when information of possible threat to
repayment was obtained, it was often hidden or not dis-
closed to the group or the MFI officers (Marr, 2001).
3.5 | Treatments effect model
Based on the regression results of the probit model in
Table 4, we estimate treatment effects models and
MFB RSP
Group Individual Group Individual Others
— 28.5 (0.091) — —
— 41.5 (0.078) — 1.5 (0.08)
— — —
present the results in Table 2 for the total sample and for
urban and rural areas, separately, where whether the
household had access to MFI is estimated in the probit
model (Table 1), and for those where the households
obtained a loan for any productive purposes (Table 2).
Although a more positive significant relation were noted
for savers, and their saving accounts in peer group bor-
rower, compared with individual (Table 3), and the
results obtained from the probit model described that
The MFBs also maintain the largest chunk of the active
saver by peer group 91% and RSP 9% but no has perfor-
mance by MFI. Additionally, effective monitoring
requires that group members maintain good knowledge
of the use of loans by their peers. However, achieving
perfect knowledge is a difficult and costly process. Even
when this information is available, divulging such infor-
mation may attract negative consequences as such a
member may be labelled as an informant. Hence, service
users weigh the net effect of monitoring before deciding
to monitor their peers. Plethora of literature shows that
micro-credit schemes are potent tool for poverty reduc-
tion across the world (Izugbara, 2004).With regards to
the implementation, empirical evidence from Malawi
and Peru find a partial and passive peer monitoring pro-
cess (Marr, 2001; Simtowe, Zeller, & Phiri, 2006). Overall,
the transfer of liabilities and responsibilities from MFIs
to the service users also implies a shift of the responsibil-
ity for these costs (Armendáriz & Morduch, 2010). The
greater the information, monitoring, and enforcement
costs, the lesser the effectiveness of group lending in ame-
liorating them. With this mixed result, it is important to
explore how effective group lending is in ameliorating
and transferring the information, monitoring and
enforcement costs to the clients. Particularly for clients,
how do they deal with these costs, how does the practice
of group lending affect the utility or disutility they experi-
ence with using microfinance and in turn their potential
for capability expansion? These are important questions
that need to be addressed.
The results obtained from probit model showed that
the development track record of Quarterly update of
microfinance outreach in Pakistan (2007–2016), represen-
ted, that group active borrowers were more than individ-
ual borrowers (Table 3). Therefore, to overcome in
KHAN ET AL.
TABLE 4 Regression analysis for loan, saving and peer group variables with respect to different micro-financial groups
MFI
Gross loan 0.881**
Savers 0.892*
Saving accounts 0.934**
Saving by gender
Male 0.991*
Female 0767
Active borrowers peer group 0.893**
Active saver peer group 0.911*
Active borrowers lending model 0.984*
Note: * Significant at 5% level. **Significant at 1% level. ***Significant at 10% level.
poverty reduction an approach should need to be plan,
for the betterment of group borrowers. Armendáriz and
Morduch (2010) said that group lending refers to a lend-
ing technique where the “poor” who often lack access to
mainstream financial services are required to come
together as a group for the purpose of accessing financial
services. It is a key component of microfinance, which
enables MFIs to mitigate the information, transaction,
monitoring and enforcement costs associated with lend-
ing to the poor (Ghatak, 1999).
In line with this notion, this study agrees that institu-
tional relations are critical to comprehending how vari-
ous social groups achieve expansion of their different
capability sets. For instance, for microfinance clients, the
lending group plays a crucial role in the extent to which
microfinance clients can successfully take advantage of
MFIs to access microfinance. Acceptance in a lending
group offers the opportunity to obtain credit while the
exclusion from a lending group restricts the access to
resources. This implies that beyond ameliorating infor-
mation and transaction costs, group lending increases the
social capability of the poor. However, latter it is recog-
nized that microfinance programmes can play long term
and significant role to reduce poverty, MFIs need to be
successful in extending loans to poor borrowers, while at
the same time being able to at least cover the costs of
their lending activities, that is, they may need to focus on
being financial sustainable in the long run. Micro-credit
schemes are adjudged as a solution to multiple social
problems facing many countries today. It provides a new
paradigm for thinking about social and economic devel-
opment (Fisher & Sriram, 2002). Armendáriz and Labie
(2011) This is the recognition that access to micro-credit
for the poor is currently and perhaps also in the future,
dependent on their participation in the group, such that
changes to the entire group are very much likely to affect
individual capabilities (Owolabi, 2015).
9
MFB RSP
0.992** 0.781*
0.934** 0.801*
0.945** 0.789
0.958** 0.891*
0.879* 0.789
0.901** 0.678
0.944** 0.856*
0.978** 0.972**
3.6 | Path to microfinance
commercialization
Commercialization of microfinance is an ideology that
hints at the use of market-based theories with a steer or
shift towards profitability of MFIs. The seeming sustain-
ability of this approach is reliant on governments' commit-
ments to the liberalization of the financial markets with
reduced targeting of loans, institutional governance and
capacity of the MFIs, better pricing of financial products,
and knowledge of the market (Gonzalez Vega, 1998). It
also requires the ability to adopt innovative lending tech-
niques11 that curtail costs and risks; appropriate products
that meet the needs of the poor and attract low-income
borrowers and savers; innovative operating and informa-
tion systems; specialized staff training; interest rates that
guarantee institutional profits; and others (Quach, 2005).
4 | CONCLUSION
The national-level cross-sectional household data set in
Pakistan in 2007–16, the current analyses of study showed
that the impact of Micro Finance Institutions (MFIs) on
poverty reduction, based on the Borrowers Ranking (BRI)
Indicator. The treatment effects model, a version of the
Heckman sample selection model, and probit model are
employed to estimate poverty-reducing effects of access to
MFIs and loans used for productive purposes. Although
due to some shortcomings, for example, arising from
potentially unobservable important determinants of partici-
pation in microfinance programmes, significantly probit
model confirmed positive effects of MFI access, a result,
which suggested that in poverty reduction, the MFIs has a
significant role. However, considering the results for urban
and rural areas, some remarkable annotations emerge. For
borrowers in rural areas, MFIs is observed for more poverty
10
reducing, while MFIs excess clear as compelling loans from
MFIs for productive purposes than in the case of simply
having access to MFIs. In urban areas, higher average
poverty-reducing effects due to easy access to MFI and thus
achieving more loans from MFIs for productive purposes.
The finding of this study provides further impetus to the
existing evidences on the impact of microfinance institu-
tions on the household poverty. In rural areas, while signifi-
cant poverty-reducing effects are observed in all cases,
taking loans for productive purposes has a larger impact in
raising the borrower indicator for those above the poverty
threshold. In conclusion, to challenge, these more recent
and supposedly more accurate mixed results of the impact
of microfinance. Although savings look promising, micro-
credit appears not to be the golden bullet to poverty reduc-
tion that it has been made out to be, beyond evaluating the
impact of microfinance, future research can gain more
value by identifying how, and under what circumstances do
microfinance interventions benefit the poor.
A C K N O WL E D G E M E N T
The study is supported by: “Research on the Effectiveness
Evaluation, Risk Control and System Construction of the
Agricultural Credit Guarantee Policy” the National Natural
Science Foundation of China (NSFC) January 2019-2022,
No. 71873100. Sponsor and Host: Jianchao Luo. This reseach
is also supported by, "Research on the Effect Evaluation,
Operational Pattern, Supporting Policy of the Contracted
Management of Farmland Mortgage Finance", The National
Natural Science Foundation of China (NSFC), Jan 2016-
Dec 2019, No. 71573210. Sponsor and Host Jianchao Luo.
DATA AVAILABILITY STATEMENT
Data sharing is not applicable to this article as no new
data were created or analyzed in this study.
ORCID
Jianchao Luo https://orcid.org/0000-0002-4866-7002
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SU PP O R TI N G I N F O RMA TI O N
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How to cite this article: Khan AA, Khan SU,
Fahad S, Ali MAS, Khan A, Luo J. Microfinance
and poverty reduction: New evidence from
Pakistan. Int J Fin Econ. 2020;1–11. https://doi.org/
10.1002/ijfe.2038