Empowering the excluded: decoding microfinance boom and beyond

• Digital innovation and inclusive lending are transforming microfinance into a sustainable development engine

Pakistan’s microfinance sector stands as a cornerstone of financial inclusion, providing vital credit, savings, and insurance services to millions who remain excluded from conventional banking systems. With a gross loan portfolio surpassing PKR 500 billion by late 2023 and active borrowers numbering over 9 million — nearly half of them women — the sector has demonstrated remarkable resilience amid economic turbulence, including floods, inflation, and political instability. This comprehensive exploration delves into the historical evolution of microfinance in Pakistan, traces its progress through the decades, examines its current status as of early 2026, and outlines promising future prospects, underscoring its pivotal role in poverty alleviation and economic empowerment. ​

The roots of microfinance in Pakistan can be traced back to the 1970s, when the country grappled with widespread rural poverty and limited access to formal credit for smallholder farmers. During this period, the Zarai Taraqiati Bank Limited (ZTBL), formerly known as the Agricultural Development Bank of Pakistan, emerged as a pioneering institution by offering subsidized loans targeted at agricultural development. These early interventions were largely state-driven, focusing on group lending models inspired by international successes like the Grameen Bank in Bangladesh. However, their impact was constrained by bureaucratic inefficiencies, high default rates, and a lack of tailored financial products for the unbanked poor. The real momentum for microfinance began to build in the 1980s with grassroots innovations.

The Orangi Pilot Project (OPP) in Karachi’s urban slums introduced community-managed credit systems, emphasizing low-cost, replicable models that empowered local residents to finance small enterprises such as tailoring and livestock rearing. Simultaneously, the Aga Khan Rural Support Program (AKRSP), launched in Gilgit-Baltistan in 1982, pioneered participatory development approaches, linking credit with skill-building and infrastructure projects to bolster rural livelihoods. These initiatives marked a shift from top-down lending to bottom-up, community-centric strategies, laying the ideological foundation for modern microfinance in Pakistan. ​

The 1990s witnessed a proliferation of Rural Support Programs (RSPs), which became the backbone of microfinance expansion. Established in 1989, the National Rural Support Program (NRSP) scaled up group-based lending across Punjab, Sindh, and Khyber Pakhtunkhwa, reaching thousands of households with microloans for agriculture, livestock, and microenterprises. Other RSPs followed suit: the Sarhad Rural Support Corporation (SRSP) in 1990 focused on Khyber Pakhtunkhwa’s tribal areas, while the Balochistan Rural Support Program (BRSP) addressed arid-zone challenges. By the mid-1990s, these organizations had disbursed billions in loans, with repayment rates hovering above 95%, proving the viability of trust-based lending without collateral. This era also saw the entry of non-governmental organizations (NGOs) like Kashf Foundation (1996), which specialized in women-only microfinance, recognizing gender disparities in financial access. Kashf’s model of center-based lending, where women formed peer groups for mutual accountability, not only boosted female entrepreneurship but also challenged cultural norms around women’s economic participation. The decade closed with growing recognition from international donors, including the World Bank and Asian Development Bank, which began funding pilot projects to refine product offerings like savings accounts and micro-insurance.​

A watershed moment arrived in the early 2000s with the formalization of the sector through regulatory and institutional reforms. The establishment of the Pakistan Poverty Alleviation Fund (PPAF) in 2000 as an apex wholesale financing institution revolutionized funding flows, channeling grants and loans from donors to partner MFIs and RSPs. PPAF’s rigorous partner selection and capacity-building programs ensured sustainability, enabling outreach to remote areas. In 2001, the State Bank of Pakistan (SBP) promulgated the Microfinance Institutions Ordinance, creating a dedicated licensing framework for Microfinance Banks (MFBs). This paved the way for Khushhali Microfinance Bank (originally Khushhali Bank) in 2000, Pakistan’s first state-owned MFB, mandated to serve the poorest segments with subsidized funding from the government. By 2005, several private MFBs had emerged, including NRSP Microfinance Bank and Tameer Microfinance Bank (later acquired by Telenor), blending commercial viability with social missions. The SBP’s prudential regulations, introduced progressively, emphasized simplified Know-Your-Customer (KYC) processes, group lending, and caps on loan sizes to protect vulnerable borrowers. These developments coincided with post-9/11 aid inflows, accelerating sector growth; by 2007, the gross loan portfolio (GLP) had crossed PKR 50 billion, with active borrowers exceeding 1.5 million. ​

The late 2000s and early 2010s marked a phase of rapid scaling and diversification. The global financial crisis of 2008 highlighted microfinance’s resilience, as domestic demand for credit surged amid remittances and agricultural booms. In 2008, the Pakistan Microfinance Investment Company (PMIC) was launched as a second-tier lender, providing liquidity and guarantees to MFBs and MFIs, particularly for women-led enterprises. The establishment of the Microfinance Sector Development Fund in 2009 further supported product innovation, such as agricultural microinsurance against crop failures. By 2010, the sector’s GLP reached PKR 112 billion, with borrowers numbering 2.2 million, of which 40% were women—a testament to targeted outreach. Key players like Akhuwat Islamic Microfinance, founded in 2001 by Dr. Muhammad Amjad Saqib, gained prominence with its interest-free (Qard-e-Hasna) model rooted in Islamic principles. Akhuwat’s volunteer-driven operations and mosque-based branches enabled explosive growth, disbursing over PKR 50 billion by 2015 to 2 million families, achieving a staggering 99.9% recovery rate. Meanwhile, commercial MFBs like Finca Microfinance Bank and U Microfinance Bank introduced branchless banking via mobile wallets, foreshadowing digital transformation. Challenges emerged, however: the 2010 floods devastated portfolios, pushing portfolio-at-risk (PAR) rates above 5%, prompting SBP to enforce stricter provisioning norms.​

Entering the 2015-2020 period, microfinance experienced a compound annual growth rate (CAGR) of over 22%, driven by regulatory easing and fintech integration. The SBP’s National Financial Inclusion Strategy (NFIS) in 2015 set ambitious targets: 50% adult account ownership by 2020, with microfinance as a key pillar. GLP ballooned from PKR 150 billion in 2015 to PKR 393 billion by 2021, while borrowers grew from 7 million to 8.1 million. Deposits surged similarly, reaching PKR 300 billion, signaling maturing institutions. Akhuwat alone scaled to 7 million loans disbursed, while NRSP Bank and Kashf deepened rural penetration. The COVID-19 pandemic in 2020 tested the sector; SBP’s moratorium on repayments and restructuring facilities preserved stability, with PAR contained below 4%. Post-pandemic recovery was aided by the Ehsaas Emergency Cash program, which partnered with MFBs for disbursements, enhancing trust. Women borrowers crossed 40% of the total, empowered through products like livestock loans and home-based enterprise financing. Digital adoption accelerated: Telenor’s Easypaisa and JazzCash embedded microloans in mobile wallets, disbursing nano-loans (under PKR 50,000) to urban youth.​

As of early 2026, Pakistan’s microfinance sector boasts a robust current status, with GLP exceeding PKR 500 billion by December 2023 and projected to hit PKR 600 billion by year-end 2025, per SBP and PMIC data. Active borrowers stand at 9.3 million, including 4.3 million women (46%), spread across 130+ districts, with rural clients comprising 42-65% of portfolios. Deposits have climbed to PKR 596 billion, held in over 108 million accounts—a 16% year-on-year increase—dominated by MFBs like Mobilink Microfinance Bank (23% market share), HBL Microfinance (18%), U Microfinance (17%), and Khushhali Microfinance Bank (16%). In January 2025, SBP reported MFB GLP at PKR 258 billion with 1.55 million borrowers, reflecting portfolio cleanups but steady nano-loan growth (average size PKR 58,000). Akhuwat remains the outreach leader, serving 3.5 million families with PKR 265 billion disbursed cumulatively and 595,000 active loans worth PKR 53 billion as of February 2025, maintaining its hallmark 99.93% recovery. Khushhali reported Rs 1.8 billion in sustainable asset management (SAM) for FY25 despite economic headwinds.

The sector’s ecosystem is diverse: 11 licensed MFBs (e.g., NRSP Bank, UBL Micro, Apna Microfinance, Sindh Microfinance Bank) control 74% of GLP, while 20+ non-bank MFIs like Kashf, Damensheh, and WASO focus on niche segments. Fintech hybrids, including digital MFBs and platforms like Easypaisa, operate over 4,000 agent networks, driving urban nano-lending. PAR rates hover at a healthy 1.5%, bolstered by digital underwriting and peer guarantees. SBP’s January 2025 analysis highlights nano/micro-loan targets via agents, while PMIC’s FY23 initiatives guaranteed women agri-loans, aligning with SDG 1 (No Poverty) and SDG 5 (Gender Equality). Recent partnerships, such as Bank of Punjab with NRSP for youth and agriculture loans under PM Youth Business Scheme, exemplify public-private synergy.

Progress through the years paints a trajectory of exponential yet adaptive growth. From modest PKR 20 billion GLP in 2005, the sector hit PKR 112 billion by 2010 (24% CAGR), PKR 393 billion by 2021 (21% YoY post-2015), and PKR 500+ billion by 2023. Borrowers followed suit: 1.5 million (2007) to 9.3 million (2023). Deposits evolved from negligible to PKR 596 billion, enabling self-funding. Post-2022 floods and 22% inflation, FY24 stabilized with 5.6% GDP support in late 2025; FY25 shows cautious optimism, with digital channels offsetting rural slowdowns. Women participation rose from 20% in 2005 to 46% today, reducing poverty odds via education and market access, as evidenced by KMBL studies in Sargodha. Economic impact is profound: microfinance boosts household incomes by 20-30%, female labor participation (currently 26.9%), and GDP through consumption multipliers.​

Despite achievements, challenges persist. High operational costs yield lending rates of 35-45% (versus KIBOR benchmarks), deterring scalability; branch overheads plague traditional MFBs, while telecom-led digital ones fare better. Defaults spiked in 2023-24 from floods and underwriting lapses, trimming capital adequacy ratios (CAR) to ~10%. Penetration remains low—9.3 million borrowers versus a 40.9 million underserved market. Digital reliability issues, despite Raast’s instant payments since 2021, hinder trust; rural gender gaps and climate risks exacerbate vulnerabilities. PACRA’s FY25 outlook is negative, citing volatility, though resilience is noted.

Looking ahead, future growth prospects gleam brightly for 2026 and beyond. SBP’s digital onboarding (2021), non-bank licenses (2022), and nano-loan mandates position the sector for fintech explosion, with investments from Ant Group and Sequoia fueling platforms like Raqami and Mashreq digital banks. Projections: GLP to PKR 700+ billion by 2027, borrowers to 12 million, driven by agent banking and blended finance. Climate-resilient products (e.g., flood insurance) and SME linkages will dominate. PMIC’s guarantees and SBP’s NFIS 2.0 aim for 70% inclusion by 2030. Risks like macroeconomic instability loom, but proven adaptability—99%+ recoveries at Akhuwat—suggests microfinance will anchor Pakistan’s poverty fight, potentially halving extreme poverty rates.​

In weaving history with progress, Pakistan’s microfinance exemplifies transformation from fringe philanthropy to a regulated powerhouse. Policymakers must prioritize risk-based pricing, bank-led scaling, and affordable digital inclusion to unlock full potential amid 40%+ poverty shadows.

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The author, is a freelance writer, columnist, blogger, and motivational speaker. He writes articles on diversified topics. He can be reached at sir.nazir.shaikh@gmail.com