Serving the Poorest of the Poor: The Poverty Impact of the Khushhali Bank's Microfinance Lending in Pakistan

This paper empirically examines the poverty impact of Pakistan's microfinance sector development program by looking at the impact of Khushhali Bank's lending program on the welfare of the poor households in the country. It draws on the results of an original national household survey undertaken specifically for this purpose.

The paper examines:

• The poverty impact of microfinance;
• The problems encountered in constructing a control group;
• The two kinds of biases inherent in any empirical impact evaluation:
  • Program placement bias;
  • Self-selection bias.
• Different methods to control for these biases;
• The microfinance operations of Khushhali Bank.

The paper finds that participation in the bank's microcredit program has positive impacts on:

• Both economic and social indicators of welfare, as well as income-generating activities;
• Financial sustainability of the bank;
• Expenditure by the very poorest of borrowers on their children's education;
• Non-expenditure indicators of children's health;
• Agriculture for the poorest borrowers;
• Sales and profits for urban borrowers.

The paper concludes that:

• Even the poorest of the poor benefit from microcredit;
• A profit-focused institution has achieved positive poverty reduction effects;
• Commercially oriented micro-institutions can indeed reach the very poor.