Rural Finance for Growth and Poverty Alleviation in Pakistan

This paper highlights the importance of the rural sector in Pakistan's economy and argues that a healthy and well-functioning rural finance system can help in achieving two policy objectives:

• Accelerating agricultural growth;
• Reducing poverty.

The paper studies the rural finance sector of Pakistan in detail and presents its performance and structure. The three areas, which drive the demand for credit in the country, are:

• Agricultural investment;
• Consumption smoothing by households;
• Non-farm investments.

The paper lists the problems associated with rural finance in Pakistan:

• Existing institutions delivering formal credit are facing a serious financial crisis and cannot be sustained;
• Present rural finance system does not cover adequately the smallholders, who will be very important for future growth;
• Increase in the growth rate of agriculture will further increase the demand for credit.

In order to generate credit for the growing demand, it is important to look at sources of credit. The paper identifies some of these sources and details their performance and problems:

• The Agricultural Development Bank of Pakistan (ADBP);
• Commercial bank;
• The cooperative sector;
• The informal sector.

The paper concludes by providing some policy recommendations:

• Creating a prudent regulation and legal framework;
• Encouraging a competitive environment;
• Making credit available to target groups such as for smallholders, for non-farm activity and for women.