Microfinance Fuelled by Foreign Funding in Pakistan

Abstract

The microfinance sector of Pakistan is flourishing since early 2000s and it has grown to an appreciable level. Like many developing economies, foreign funding from developed countries has been the major source of funding for the sector. We investigate the impact of foreign funding on the performance of microfinance sector of Pakistan. The performance of the sector has been gauged in terms of its outreach of micro credit, micro savings and micro insurance as well as its profitability.  Our analysis shows that foreign funding either as disbursements from Pakistan Poverty Alleviation Fund (PPAF) to non bank Microfinance Institutions (MFIs) or as part of the asset base of the microfinance sector, has a positive and significant relationship especially with the micro credit services of the industry. We find that foreign funding has largely fuelled the present levels of growth of the microfinance sector of Pakistan and such grown up industry would have been nearly impossible without foreign support. However, it is now important to focus more on developing domestic funding sources upon which the industry can rely for its future growth.

Keywords: Foreign funding, microcredit, microfinance, outreach, Pakistan Poverty Alleviation Fund, profitability.