A Study of Informal Finance Markets in Pakistan

This paper describes the informal finance markets (IFMs) of Pakistan and suggests implications for policy makers and the microfinance sector.The paper states that:

• IFMs have a long history, pre-dating formal markets, and a strong presence in most of rural and urban Pakistan;
• IFMs include borrowing and lending among close relations, rotating savings and credit associations, money lending, suppliers' credit, etc.;
• They also include savings and informal transfers;
• IFMs have the following characteristics:
  • High interest rates;
  • Gap between lending and deposit rates;
  • Low levels of default;
  • Widespread rationing and segmentation.
• IFMs have various contract enforcement mechanisms. These include:
  • Social sanction and market limitations;
  • Scrutiny of new clients through testing loans;
  • Discretion and individual goodwill.

The paper recommends that:

• Policymakers should:
  • Develop more linkages between formal and informal markets, to speed up financial liberalization;
  • Design and help expand MFIs that will take advantage of local level information.
• MFIs should:
  • Study IFMs to understand their own markets, develop their core niche, explore the options for cross-subsidization between markets, and develop viable and demand- driven products and practices;
  • Reap the advantages of clustering.

The paper concludes with a look at the possible role that the Pakistan Microfinance Network can play in developing IFMs for microfinance.