A microfinance institution can double its loan portfolio, expand its borrower base and report another successful year without a single customer graduating into a larger, more productive enterprise. The institution has grown; whether its borrowers have progressed economically is another matter. It is a distinction that Pakistan’s financial inclusion debate has spent the better part of three decades avoiding.
The industry’s performance is measured through outreach, disbursements, portfolio growth and repayment rates. These are legitimate indicators of financial intermediation. Yet none establishes whether credit has improved productivity, enabled capital accumulation or reduced dependence on repeated borrowing. A borrower returning every six months to finance essentially the same economic activity remains a commercially viable customer for the lender.
The incentives are hardly aligned. Financial institutions are rewarded for expanding and retaining their clientele, while economic graduation may eventually take the customer beyond the products they offer. An industry can prosper without its borrowers becoming any less poor.
The empirical evidence offers little support for treating microcredit as an instrument of economic transformation. A 2015 synthesis of six randomised evaluations by Abhijit Banerjee, Dean Karlan and Jonathan Zinman found generally modest positive effects, but little evidence of transformative outcomes.
Closer to home, Xavier Giné and Ghazala Mansuri tested the constraints facing microfinance clients in rural Pakistan. Participants were offered business training and access to loans up to seven times the average loan size. Larger loans had little effect. Business training, however, improved business practices, reduced enterprise failure and improved financial decisions, although the benefits were concentrated among men. More credit, it turned out, was not necessarily the missing ingredient.
Pakistan’s economic structure provides the context for understanding these findings.
The Economic Census 2023 recorded 7.14 million establishments, approximately 95 percent employing fewer than ten workers, alongside 10.9 million household-based economic activities. The Agricultural Census 2024 identified 11.1 million farms, nearly four-fifths operating on less than five acres. The Labour Force Survey 2024-25 found that 36.1 percent of employed persons were own-account workers and another 19.1 percent were contributing family workers. Employers accounted for just 1.3 percent.
These are snapshots of an economy dominated by small establishments, fragmented agricultural holdings and self-employment. They cannot establish whether credit has improved the fortunes of individual businesses. But they do raise an uncomfortable question about the development model built around financing them.
Has three decades of microfinance enabled these economic units to overcome their limitations, or merely helped sustain their existence?
Much of the development discourse has substituted the language of entrepreneurship for the economics of self-employment. A person unable to secure remunerative wage employment opens a kiryana store, begins raising poultry or starts trading from home, and is promptly celebrated as an entrepreneur. Another loan follows, accompanied by another success story about enterprise creation.
But permanent microenterprise is not necessarily entrepreneurship. It may simply be unemployment disguised as self-employment, financed through debt and sustained by unpaid family labour.
There is nothing undignified about running a small business. But necessity-driven self-employment should not be mistaken for entrepreneurial dynamism without examining the underlying economics. An enterprise that cannot generate a sustainable surplus, accumulate productive capital or raise earnings beyond subsistence cannot be transformed merely through the vocabulary used to describe it.
Successful economies certainly rely on SMEs. The difference is that many smaller enterprises operate as specialised suppliers within larger production networks, benefiting from organised procurement, technology and access to markets. Their competitiveness comes from the productivity of the value chains in which they participate, rather than their designation as small businesses.
A kiryana store may sustain a family. Financing another kiryana in the same neighbourhood does not necessarily expand purchasing power. Where demand is constrained, additional credit may merely redistribute existing trade among more vendors.
Economies grow by rewarding productivity, specialisation and scale. Small firms need not become large, but the production systems supporting them must become more efficient. Farmers can benefit from aggregation, mechanisation services and organised market access without expanding their individual landholdings. Small manufacturers can specialise within industrial supply chains. Scale can reside in the value chain.
Yet much of Pakistan’s financial inclusion framework remains concerned with financing isolated economic units, with limited attention to the productive arrangements that might enable them to grow.
The contradiction becomes more pronounced in the treatment of women’s economic empowerment.
Financing another buffalo, a few goats or a poultry operation is routinely presented as women-led enterprise development. But a loan issued in a woman’s name establishes little about who controls the asset, sells its output or retains the earnings. According to the latest Labour Force Survey, 49.7 percent of employed women are contributing family workers. Financing additional household production may therefore increase women’s workload without necessarily improving their economic autonomy.
Livestock ownership can improve household welfare, and there is evidence that appropriately designed asset-transfer programmes can generate lasting improvements. A 2015 study published in Science, covering six countries including Pakistan, found sustained gains from programmes combining productive assets with training, consumption support and other assistance. The results cannot be attributed to livestock ownership alone.
For women, economic graduation should also mean greater control over earnings, access to remunerative employment and the freedom to move into more productive activities. Financial inclusion that perpetuates dependence on unpaid household labour is a narrow conception of empowerment.
None of this makes microfinance responsible for Pakistan’s fragmented productive structure. Unreliable energy, weak infrastructure, poor market access and the shortage of productive employment constrain enterprise development in ways that credit alone cannot resolve. Nor should the welfare benefits of liquidity and consumption smoothing be dismissed.
But livelihood preservation must be evaluated as livelihood preservation. It should not automatically acquire the policy privileges and performance claims of structural transformation.
This distinction should determine how development finance is allocated and evaluated.
Pakistan’s credit information infrastructure provides a starting point. The State Bank’s eCIB, supplemented by licensed credit bureaus, could help track the migration of borrowers from microfinance into larger formal credit facilities. Differences in reporting requirements and coverage, particularly for non-bank lenders, would first need to be reconciled.
A borrower-graduation measure could establish what proportion of microenterprise borrowers progresses into larger financing facilities over three to five years, how many remain dependent on successive small loans, and how many exit the formal credit system.
A larger loan is not itself proof of graduation. Equally, the absence of borrowing may indicate either successful capital accumulation or business failure. Credit histories would therefore need to be matched with periodic enterprise and household surveys measuring profitability, productive assets and employment.
More importantly, these outcomes should influence the allocation of concessional financing, public guarantees and other development-backed risk capital. Programmes intended to support enterprise growth should demonstrate a credible pathway towards productivity improvement, commercial viability and integration into larger value chains. Their performance should be judged against those objectives, with borrower progression measured over time.
Where the objective is livelihood protection, the intervention should be evaluated for its contribution to financial resilience, income stability and the prevention of distress. There is a legitimate case for both types of intervention. But treating them as interchangeable obscures their economic purpose and weakens accountability for public support.
The implication for capital allocation is straightforward. Financing productive suppliers, processors, aggregators and growing enterprises should receive greater attention where the objective is structural transformation. Credit guarantees and concessional facilities should help overcome the constraints preventing viable businesses from expanding, rather than simply subsidising the indefinite renewal of subsistence credit.
The financial inclusion industry can continue expanding while the productive economy remains stubbornly micro. Whether that constitutes success depends on what the industry is being asked to achieve.
There is nothing wrong with helping people survive. The problem begins when survival is sold as transformation.