Impact of Microfinance on Poverty Alleviation in Developing Countries: The

Case of Pakistan

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By

Dr. Moodhi Raid

Assistant Professor of Economics
Business Studies College
Arab Open University, Riyadh (Saudi Arabia)

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Email: [email protected]

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Dr. Nisar Ahmad
Associate Professor of Economics
University of Sargodha (Pakistan)
Email: [email protected]

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Dr. Hisham Alhawal
Assistant Professor of Economics
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Business Studies College
Arab Open University, Riyadh (Saudi Arabia)
Email: [email protected]
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Dr. Jumah Alzyadat

Assistant Professor of Economics
Dar Al Uloom University (Saudi Arabia)
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[email protected]
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Abstract
This study investigates the role of microfinance in developing countries like
Pakistan especially to reduce poverty. The impact of microfinance on poverty
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reduction is analyzed taking into consideration three core dimensions of poverty that
includes health, education and living standards. Three ordinal logistic regression
econometrics models are specified for estimation. The estimations are based upon the
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primary data of microfinance rural clients of Khushhali Bank, which is a micro

finance bank (MFB) in Pakistan. Results explain that micro finance provided from
MFB to poor households lead to increase employment opportunities, assets of poor,
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savings and their livestock possession. Livestock possessions have positive and
significant relation with increase in access to education while possession of land has
no association with education in first model. Second model shows positive and

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 significant association between money received from MFB and increased access to
healthcare. The empirical results of third model explain that money received from

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MFB has positive and significant effect on improvement in living standards. We

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conclude that microfinance improves the healthcare facilities, education and living
standards of the poor clients. Policy makers may recommend enhancing the access of
credit and microfinance to poor people living in the rural areas of Pakistan to mitigate
poverty. For overall poverty reduction, provision of microfinance is necessary

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especially to the poor segment of the society.
Keywords: Micro finance, Khushhali bank, Poverty alleviation, Rural areas of

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Pakistan, Ordinal logistic regression

JEL classification: G29, O12, O16, J16

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1. Introduction
Microfinance is the provision of wide-ranging financial services such as loans,
savings, deposits, payment services, insurance and money transfers to low-income
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and poor households and their micro-enterprises who are expelled from the formal
financial systems (Ledgerwood, 2002). Microfinance is generally termed as financial
services for low-income individuals having no access to proper banking services.
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Consultative Group to Assist the Poorest (CGAP, 2008) define microfinance as

financial services for poor and low-income clients. Yunus (2007) describe microcredit
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as the provision of small loans to those entrepreneurs who are too poor to become
eligible for conventional bank loans. According to Pitt and Khandker (1998),
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microfinance is termed as the provision of financial services to low-income clients

including the self-employed. Gatto (2021) explain that microfinance comprises upon
microcredit, financial payment easing, savings, micro pension & insurance and
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remittances assistances.
Poverty is a principal challenge to the economic growth in developing
countries today and microfinance is recognized as an effective tool for poverty
mitigation in these countries. Microfinance is the provision of small amount of loans
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to poor primarily for entrepreneurial activities (Bateman, 2010). The basic idea of
microfinance is the expansion of financial services to poor households to start and
extend income generating activities to increase income to alleviate poverty. The
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developing countries need to provide better access to financial services to the poor
because widening and deepening the outreach of financial services accelerate

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 economic growth in the light of Millennium Development Goals (Haq, 2008). Gatto
(2022) explores the role of microfinance as a resilience policy to meet the SDGs and

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UN Agenda 2030.

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Outreach to financial services is linked with provision of job opportunities and
access to capital to the poor. Although efforts have been made for provision of
financial facilities to the poor but informal and formal financial sectors have not
succeeded to serve the poor in rural areas in developing countries (Chowdhury, 2008).

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The limitation for social protection and income generation is the provision of
inadequate access to credit services in developing countries (Beck & Demirguc-Kunt,

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2005). According to Gupta and Chaudhuri (1997), informal and formal sectors are the
two available sources of credit to the poor in rural areas in an under developed
economy. Informal sector comprises of credit sources like moneylenders, traders,

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landlords, relatives and friends while formal sources include commercial banks,
cooperatives and regional rural banks etc. According to Armendariz and Morduch
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(2005), formal financial institutions like banks are reluctant to extend their services to
rural poor due to certain problems. A typical borrower of unorganized market has
very limited opportunity to get credit from formal market (Sundrum, 1992). So,
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money lenders become the only choice of a borrower to fulfill immediate needs
operating in informal credit markets. Therefore, these moneylenders are usually the
major source of financing in rural areas (Bhaduri, 1977 & Rao, 1980).
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We find fewer studies on the topic in case of rural households in Pakistan.

Therefore, this study is an addition in the literature through estimating the role of
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microfinance as financial services for poor people living in rural areas who do not
have collateral for conventional banks loaning. Further, this study highlights the role
of microfinance to alleviate poverty through better access to education, healthcare and
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living standards.
2. Literature Review and Hypothesis of Study
Mahmood et al. (2016) examine the role of microfinance to raise standards of
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living and income generation activities in Pakistan. Their findings are based upon data
collected from two districts of Punjab, Pakistan namely Layyah and Dera Ghazi Khan.
They explain that poverty reduction is possible through the raise in per capita income
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and however, improvement in living standards can meet through increase in

expenditures of the households. Qamar et al. (2015) explain the relationship of loan
facility to poverty reduction in Pakistan using data from two microfinance institutions

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 i.e. Khushhali bank and National Rural Support Programme (NRSP) with a sample of
396 borrowers. The results explain that microfinance has positive and significant

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impact on household expenditures. However, this impact is insignificant on household

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assets. Azam and Azid (2015) explore the role of microfinance in poverty reduction in
Pakistan with data from Punjab Rural Support Programme (PSRP), which is a
microfinance institution. A sample of 476 clients is taken from selected 20 villages of
11 districts in province of Punjab. Results indicate that targeted respondents are

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socially deprived and poor. The loan disbursement has positive contribution towards
poverty eradication.

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Further, Sani et al. (2017) explore the impact of microfinance institutions in
poverty reduction in Pakistan. The data of 80 low income households is collected
through questionnaire from clients of First Micro Finance Bank, Finca Micro Finance

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Bank, Khushhali Bank, Kashaf Foundation and Apna Micro Finance Bank in Lahore.
The results show a significant impact of microfinance on poverty reduction. Samer et
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al. (2015) investigate the role of microfinance and its impact on eradication of poverty
in Malaysia. Results explain that microfinance significantly increases the household
income of established or old women borrowers than new clients in the study area. It
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also helps the women borrowers to improve their socio economic condition. Bismark
et al. (2016) investigate the role of institutions providing micro financing in central
Ghana for poverty reduction and conclude that microfinance has positive impact on
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income, assets, savings and business development. Microfinance also contributes

significantly towards women empowerment and business capital.
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Recent literature explains that microfinance is vital to reduce poverty in poor

households. Kasali (2020) explain the impact of microfinance on poverty reduction in
case of South-west Nigeria. Their findings are based on primary data collected
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through stratified sampling. The Propensity Score Matching (PSM) method is used for
the findings and results of study explains that microfinance contributes to reduce
poverty. Study also explain poverty reduction tools other than microfinance, for
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example Do et al. (2021) explain that foreign direct investment is a poverty

eradication tool as it creates employment opportunities for poor households and
unskilled labour and ultimately reduces poverty. Pham and Huynh (2020) find that
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credit helps enterprises to purchase technologies and to employ skilled labour.

Enterprises can also use new production devices to expand their business and
profitability. Expansion in business also reduces poverty.

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 Based upon literature review, following three hypotheses are formulated and
experimented in this study.

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H1: Microfinance increases the access to education of the household.

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H2: Microfinance improves the access to healthcare facilities of the household.
H3: Microfinance improves the living standards of the household.
3. Data and Methodology
3.1 Data and Variables

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Primary data of rural microfinance clients of Khushhali Bank is collected from
four branches of Khushhali Bank located at tehsil level in Bhakkar, Pakistan through

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structured questionnaire. Five point likert scale from strongly disagree to strongly
agree is used in the questionnaire. The duration of field survey is from April to June
2021. The data collection method mostly used in survey study is questionnaire

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(Saunders et al., 2011). Since questionnaire method is used in this study, therefore, the
participants taking part in survey were informed in written as well verbal that their
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information will kept secret and purpose is research based. This questionnaire is
approved in the research committee of department of economics, University of
Sargodha, Pakistan.
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Questions about three core dimensions of poverty described by Pakistan’s
multi-dimensional poverty, which are health, education and living standards. Also
income, consumption expenditures and self-employment are included in the
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questionnaire. Nine indicators of poverty are included in the study to explain the three
dimensions of poverty which are health, education and living standard with indicators
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like years of schooling, access to health facilities, sanitation, water, walls, cooking
fuel, electricity, assets, land and livestock along with demographic variables like
gender, age, family size, marital status and residence status etc. Monetary measure of
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poverty is also included in the study which is indicated by income and consumption.
A tool for poverty reduction, which is self-employment that generates income through
financial resources, provided by microfinance bank (MFB) is also included in the
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model. Self-employment is indicated through investment in small business,

agriculture inputs and livestock.
The brief explanation of variables is provided below.
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3.1.1 Gender of Clients

The women clients of microfinance are more preferable borrowers than male
borrowers in some developing countries like Bangladesh (Pitt & Khandker, 1998) and

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 Indonesia (Hawariyuni et al. 2014). The female borrowers have shown higher
repayment rates than male which results in preference of women while lending by

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MFIs. Pitt and Khandker (1998) found larger effects of microfinance programmes on

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the behaviour of poor households when women were borrowers in Bangladesh. Okten
and Osili (2004) discovered that females are preferred for grant of microcredit in
Indonesia.
3.1.2 Age of Borrowers

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Age of borrowers among demographic factors is used in most of the empirical
studies in microfinance (Nouman et al. 2013). Moreover, Li et al. (2011) explore a

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positive but insignificant relationship between microcredit accessibility and age of
borrowers in China. While Tang et al. (2010) analyze the effect of age and witness a
significant and positive result on rural credit markets in China.
3.1.3 Family/Household Size

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Large family size is a credit constraint. The poor households in rural areas
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with larger families have to make more struggles to meet their daily basic needs
instead of paying their regular loan repayments as they are advised by their
microcredit providers (Okurut, 2006). Moreover, Okurut (2006) said that household
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size has positive and significant influence to credit accessibility during two national
assessment periods in South Africa.
3.1.4 Education
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Education is an essential ability that has the basic and influential importance
for an individual wellbeing. Universal primary education is the second goal of MDGs.
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So, education has been included as an indicator for measurement of multidimensional

poverty. Funds are utilized particularly for income generating activities and rarely for
consumption expenditure, children education and savings (Balkenhol, 2006).
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Improvement in educational attainment directly reduces poverty and also improves

income generating methods, brings awareness to improve access to health facilities
and reduction of family size causing positive role in poverty reduction through
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education (Psacharopoulos & Woodhall, 1985).

3.1.5 Health
Health is also an important determinant of the wellbeing of the people. Three
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goals of MDGs are related to health. Several capabilities are mainly determined by the
health condition of individuals (Naveed & Islam, 2012).

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 3.1.6 Living Standards and Basic Needs
According to Glewwe and Gaag (1990), a household is considered poor if he

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cannot meet his educational, medical, food, clothing and other needs. The basic needs

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have close relationship with income (Goldstein, 1985). An adequate income level
through provision of financial sources can help the poor to acquire all the basic human
needs for the welfare of their family and themselves.
3.1.7 Income of Rural Households

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Li et al. (2011) in a study explore that household income affects the
possibilities of obtaining microcredit in the Province of Hubei in China. They found a

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positive and significant connection among credit accessibility and income by rural
households in China. The study shows that the rate of acceptance of application for
microcredit was greater for higher income households.
3.1.8 Assets

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Assets also influence the ability of access to microcredit. The borrowers with
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surplus funds or having less budget restrictions are less interested to participate in
microcredit programme. Li et al. (2011) conclude that assets are negatively but
significantly related to the possibility of being a microfinance borrower in China.
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3.1.9 Clean Drinking Water
Access to safe and clean drinking water is the basic component of wellbeing.
The reason for different diseases like Diarrhea is unsafe drinking water which causes
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deaths of children in Pakistan. Unsafe drinking water is the basic cause of different
infectious diseases like Hepatitis in Pakistan. According to MDGs, clean drinking
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water is included in goal 7 which is about environment sustainability.

3.1.10 Sanitation
Sanitation has an important role in housing, health and wellbeing of
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households. Sanitation is closely related with several public health aspects. According
to MDGs, provision of better sanitation is included in goal 7 which ensures
environment sustainability.
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3.1.11 Household Income/Expenditures

Income and expenditure are two approaches which are commonly used. Level
of income and sources are used to measure income approach while household
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expenditures are calculated in expenditure approach. Expenditure approach is more

practical, accurate and less time consuming (Meyer et al., 2000). According to

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 Mahjabeen (2008), MFIs played a positive role to increase income, assets and
consumption level to decrease income disparity and increase wellbeing.

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3.1.12 Self- Employment and Entrepreneurship

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Entrepreneurship is defined as to create new business or to update the present
business unit to have opportunities for new business taking risk. Creation or updation
of small business unit through small investments is termed as micro entrepreneurship.
Finance has the major role in economic development (Drioadisuryo & Cloud, 1999).

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Without provision of financial capital, poor people cannot start and develop business,
increase their income and productivity of labour (Woller & Woodworth, 2001).

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3.2 Sample Size & Reliability Analysis
A sample size of 384 respondents is selected for analysis. Before collecting
final data, Cronbach’s alpha test is applied on 40 selected respondents as pilot study

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to examine the reliability of questionnaire. The benchmark value of the test is 0.70
which show the reliability of questionnaire (Cronbach & Warrington 1951). The value
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of Cronbach’s alpha which is greater than 0.70 is considered reliable in social
sciences. Table 1 shows the rule of thumb for the Cronbach’s alpha reliability test
(George, 2011).
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Table 1: Reliability Levels
Cronbach's Alpha Internal Consistency
α < 0.50 Unacceptable
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0.60> α ≥ 0.50 Poor

0.70> α ≥ 0.60 Questionable
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0.80> α ≥ 0.70 Acceptable

0.90> α ≥ 0.80 Good
α ≥ 0.90 Excellent
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Source: George, (2011)

The reliability of questionnaire and internal consistency of variables is
checked using Cronbach’s alpha test. The overall value of Cronbach’s alpha is 0.739,
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which indicates the best internal consistency of the questionnaire. Reliability analysis
of individual item is shown in table 2.
Table 2: Reliability of Individual Items
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Type of Variables Variables Name Cronbach's Alpha if

Item Deleted

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 Increase in Access to Education 0.72
Dependent Variables Increase in Access to Health care 0.72

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Improvement in Living Standard 0.72

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Age 0.75
Education 0.74
Demographic Gender 0.73
Variables Marital Status 0.74

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Occupational Status 0.75
Family Size 0.73

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Monthly Income 0.72
Business Experience 0.75

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Money Received from MFB 0.72
Loan Purpose 0.76
Loan Duration 0.75
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Customer Duration 0.73
Monthly Expenditures 0.72
School Going Children 0.74
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Access to Healthcare 0.73

Household Assets 0.76
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Possession of Land 0.74

Livestock Possession 0.74
Home Appliances 0.73
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Agri Machinery 0.73

Independent
Residence status 0.75
Variables
Electricity 0.74
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Gas 0.73
Water pump 0.74
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Boundary wall 0.73

proper ventilation 0.73
proper sanitation 0.73
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Proper Cooking Fuel 0.73

Easy procedure 0.74

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 Reasonable Rate of Interest 0.72
Increase in Income 0.72

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Increase in Consumption 0.72

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Increase in Saving 0.72
Increase in Assets 0.72
Easy Repayment Schedule 0.72
Satisfactory Loan Terms 0.73

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Source of Earning 0.75
Note. Author’s Own Calculation

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3.3 Model Estimation of Microfinance and Poverty Alleviation
Ordinal logistic regression technique is employed in this study because the
dependent variables are ordinal or categorical. The selection of ordinal logistic

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regression technique for this study is based on previous studies conducted by Gichuki
et al. (2014) & Nouman et al. (2013). Marginal effects are computed as post
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estimation analysis. Ordinal logistic regression provides more valid and accurate
results due to its suitability and designing for natural order characteristic of the data.
Table 3: Summary of Variables in Ordinal Logistic Model
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Variables Name Variable Label

Increase in Access to Education IAE
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Increase in Access to Health Care IHC

Improvement in Living Standard ILS
Money received from MFB MR
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Increase in Saving IS
Increase in Consumption IC
Increase in Employment Opportunities IEO
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Possession of Land PL
Family Size FS
Source of Earning SE
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Livestock Possession LSP

Increase in Assets IA
Access to Healthcare AHC
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Note. Author’s Own Calculation

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 Three models are constructed taking into three core dimensions of poverty,
which are health, education and living standards (Alkire and Santos, 2010). The detail

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of variables of the three models is given in table 3.

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Model 1: Increase in Access to Education (IAE)
The first model is specified as under.
IAE = β1 + β2 MR + β3IEO + β4 IA + β5 IS + β6 PL + β7 LSP + ℇ (1)
Where;

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IAE= Increase in Access to Education
MR = Money Received From MFB

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IEO = Increase in Employment Opportunities
IA = Increase in Assets
IS = Increase in Saving
PL = Possession of Land
LSP = Livestock Possession
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Model 2: Increase in Access to Healthcare (IHC)
The second model is specified as under.
IHC = β1 + β2 MR + β3IEO + β4 IA + β5 SE + β6 FS + ℇ (2)
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Where;
IHC= Increase in Access to Healthcare
MR = Money Received From MFB
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IEO = Increase in Employment Opportunities

IA = Increase in Assets
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SE = Source of Earning
FS = Family Size
Model 3: Improvement in Living Standard (ILS)
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The third model is specified as under.

ILS = β1 + β2MR + β3IEO + β4 IA + β5 IC + β6AHC + ℇ (3)
Where;
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ILS = Improvement in Living Standard

MR = Money Received From MFB
IEO = Increase in Employment Opportunities
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IA = Increase in Assets
IC = Increase in Consumption
AHC = Access to Healthcare

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 4. Results and Discussion
The empirical results of three estimated models are explained in this section.

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Upon the satisfactions of basic assumptions, OLR technique is used to estimate the

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models and marginal effects are computed to interpret the results in marginal form as
well as in order log odds.
4.1 Model 1: Increase in Access to Education
This section explains the correlation analysis, ordinal logistic regression and

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marginal effects analysis in case of model 1.
4.1.1 Correlation Analysis

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A correlation matrix is constructed to show the correlation or bivariate
association among dependent and independent variables in table 4.
Table 4: Results of Correlation Matrix

IAE
IAE
1
MR IEO

rr IA IS PL LSP
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MR 0.25 1
IEO 0.38 0.28 1
IA 0.51 0.25 0.39 1
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IS 0.45 0.16 0.42 0.37 1

PL -0.01 0.13 -0.04 0.03 -0.01 1
LSP 0.14 0.15 0.09 0.04 0.06 0.24 1
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Note. Author’s Own Calculation

The results in table 4 explain no problem of collinearity in the data. The
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highest correlation coefficient is 0.42 between increase in employment opportunities

(IEO) and increase in saving (IS) of the households.
4.1.2 Ordinal Logistic Regression Analysis
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The results of Ordinal Logistic Regression (OLR) are presented in table 5.

Table 5: Results of Ordinal Logistic Regression
IAE Coef. Std. Err. Z P>z
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MR 0.22* 0.12 1.81 0.070

IEO 0.28** 0.14 1.98 0.048
IA 1.16*** 0.15 7.48 0.000
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IS 0.89*** 0.15 5.71 0.000

PL -0.37 0.32 -1.16 0.246

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 LSP 0.69** 0.30 2.24 0.025
CUT1 2.93 1.36 2.15

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CUT2 5.77 1.00 5.77

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CUT3 9.21 1.04 8.85
CUT4 11.86 1.12 10.59
LR chi2(6) 189.80 Prob. (0.000) Pseudo R2 0.2070

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Note. 0.01, 0.05 and 0.10 level of significance is shown by (***), (**) and (*)
The intercepts of the model are indicated by cut 1, cut 2, cut 3 and cut 4 while

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the independent variables are shown in first column. The coefficients of OLR are
shown in second column that are termed as ordered log odds. Hypothesis is tested and
significance of the results is analyzed using Prob > chi2 test. The probability value to

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analyze the individual significance of the estimates is described in fifth column (P>z).
The results of ordinal logistic regression (OLR) indicate that one unit increase
in money received from MFB is expected to increase 0.22 (p < 0.10) units in the
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ordered log odds to be in the higher category of increase in access to education
keeping other variables constant. Similarly one unit increase in employment
opportunities (IEO), increase in assets (IA), increase in saving (IS) and livestock
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possession (LSP) is expected to increase 0.28, 1.16, 0.89 and 0.69 (p < 0.05) units
respectively in the ordered log odds to be in the higher category of increase in access
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to education keeping other variables constant. On the other hand, possession of land
(PL) is statistically insignificant to increase in access to education (IAE).
4.1.2 Marginal Effects Analysis
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The results of marginal effects are presented in table 6.

Table 6: Results of Marginal Effects Analysis
Delta-method
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IAE dy/dx Std. Err. Z P>z

1 -0.001 0.001 -0.89 0.371
2 -0.006 0.004 -1.65 0.099
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MR 3 -0.027 0.015 -1.83 0.067

4 0.003 0.002 1.36 0.174
5 0.031 0.017 1.81 0.070
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1 -0.001 0.001 -0.92 0.359

2 -0.007 0.004 -1.79 0.073

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 IEO 3 -0.034 0.017 -2.01 0.045
4 0.004 0.002 1.46 0.144

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5 0.038 0.019 1.98 0.048

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1 -0.003 0.003 -1.03 0.305
2 -0.030 0.008 -3.65 0.000
IA 3 -0.142 0.018 -7.71 0.000
4 0.015 0.009 1.70 0.090

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5 0.160 0.019 8.53 0.000
1 -0.002 0.002 -1.02 0.310

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2 -0.023 0.007 -3.36 0.001
IS 3 -0.108 0.018 -6.03 0.000
4 0.011 0.007 1.74 0.082
5
1
rr
0.122
0.001
0.020
0.001
6.00
0.77
0.000
0.439
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2 0.009 0.008 1.12 0.262
PL 3 0.045 0.038 1.16 0.245
4 -0.005 0.005 -0.98 0.328
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5 -0.050 0.043 -1.16 0.245

1 -0.002 0.002 -0.94 0.348
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2 -0.018 0.009 -1.99 0.047

LSP 3 -0.084 0.037 -2.23 0.026
4 0.009 0.007 1.32 0.186
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5 0.094 0.041 2.28 0.023

Note. Author’s Own Calculation
Results explain that money received from MFB is statistically insignificant to
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increase in access to education (IAE) for initial two levels of preferences. It explains
no impact of MR on IAE in two levels of preferences. However, money received from
MFB is statistically significant to increase in access to education (IAE) for highest
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level of preferences. It shows that one unit increase in MR increases the probability of
IAE by 0.031 at 0.10 level of significance. While money received from MFB (MR) is
statistically significant to increase in access to education (IAE) for two levels of
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preferences (“slightly disagree” and “neutral”) with negative effect. The result depicts
that one unit increase in MR decreases the probability of IAE by 0.006 and 0.027

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 respectively at 0.10 level of significance. On the same pattern, other results can be
explained.

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4.2 Model 2: Increase in Access to Health Care

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This section explains correlation analysis between dependent and independent
variables, ordinal logistic regression analysis and marginal effects analysis of ordinal
logistic regression.
4.2.1 Correlation Analysis

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The correlation between dependent and independent variables is described in
table 7.

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Table 7: Results of Correlation Matrix
IHC MR IEO IA SE FS
IHC 1
MR
IEO
0.27
0.54
1
0.28
rr 1
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IA 0.45 0.25 0.39 1
SE 0.22 0.20 0.17 0.11 1
FS 0.06 0.25 0.21 0.20 0.08 1
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Note. Author’s Own Calculation

The results explain the correlation among independent variables and there is
no severe problem of collinearity with each other. The highest correlation coefficient
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is 0.39 between increase in employment opportunities (IEO) and increase in assets

(IA) of the households.
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4.2.2 Ordinal Logistic Regression Analysis

The results of Ordinal Logistic Regression (OLR) are presented in table 8.
Table 8: Results of Ordinal Logistic Regression
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IHC Coef. Std. Err. Z P>z

MR 0.25** 0.13 2.01 0.044
IEO 1.21*** 0.15 8.17 0.000
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IA 0.96*** 0.15 6.33 0.000

SE 0.19*** 0.07 2.82 0.005
FS -0.35*** 0.14 -2.44 0.014
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CUT1 2.50 0.96 2.60

CUT2 4.19 0.72 5.82

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 CUT3 7.88 0.74 10.65
CUT4 10.65 0.85 12.53

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LR chi2(5) 195.79 Prob. (0.000) Pseudo R2 0.2166

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Note. 0.01, 0.05 and 0.10 level of significance is shown by (***), (**) and (*)
The results of ordinal logistic regression (OLR) indicate that one unit increase
in money received from MFB is expected to increase 0.25 (p < 0.05) units in the

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ordered log odds to be in the higher category of increase in access to health care
(IHC) keeping other variables constant. Similarly one unit increase in increase in
employment opportunities (IEO), increase in assets (IA) and source of earning (SE) is

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expected to increase 1.21, 0.96 and 0.19 (p < 0.05) units respectively in the ordered
log odds to be in the higher category of increase in access to health care (IHC)
keeping other variables constant. But coefficient of family size (FS) shows negative

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sign which indicates negative relation between family size and increase in access to
health care (IHC). The result shows that one unit increase in family size (FS) is
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expected to decrease 0.35 (p < 0.05) units in the ordered log odds to be in the lower
category of increase in access to health care (IHC) keeping other variables constant.
4.2.3 Marginal Effects Analysis
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The results of marginal effects are presented in table 9.

Table 9: Results of Marginal Effects Analysis
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Delta-method
IHC dy/dx Std. Err. Z P>z
1 -0.001 0.001 -1.28 0.202
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2 -0.004 0.003 -1.67 0.096

MR 3 -0.032 0.016 -2.03 0.042
4 0.004 0.002 1.52 0.127
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5 0.034 0.017 2.02 0.044

1 -0.007 0.004 -1.61 0.107
2 -0.021 0.007 -2.85 0.004
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IEO 3 -0.152 0.016 -9.50 0.000

4 0.018 0.008 2.15 0.031
5 0.162 0.018 9.02 0.000
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1 -0.005 0.003 -1.59 0.111

2 -0.016 0.006 -2.77 0.006

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 IA 3 -0.120 0.018 -6.65 0.000
4 0.014 0.007 2.03 0.042

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5 0.128 0.019 6.82 0.000

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1 -0.001 0.001 -1.43 0.154
2 -0.003 0.002 -2.08 0.038
SE 3 -0.024 0.009 -2.80 0.005
4 0.003 0.002 1.57 0.117

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5 0.026 0.009 2.90 0.004
1 0.002 0.001 1.37 0.172

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2 0.006 0.003 1.91 0.057
FS 3 0.044 0.018 2.45 0.014
4 -0.005 0.003 -1.54 0.124
5
Note. Author’s Own Calculation
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-0.047 0.019 -2.49 0.013
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The results explain that money received from MFB is statistically insignificant
to increase in access to health care (IHC). It explains no impact of MR on IHC in
these two levels of preferences for two levels of preferences ie from strongly disagree
p

to slightly agree. However, money received from MFB is statistically significant to

increase in access to health care (IHC) for highest level of preferences (“strongly
agree)”. It shows that one unit increase in MR increases the probability of IHC by
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0.034 at 0.05 level of significance. While Money received from MFB is statistically
significant to increase in access to health care (IHC) for two levels of preferences
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(“slightly disagree” and “neutral”) with negative effect. The result depicts that one
unit increase in MR decreases the probability of IHC by 0.004 and 0.032 at 0.10 and
0.05 level of significance respectively.
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4.3 Model 3: Improvement in Living Standard

This section illustrates the correlation analysis between dependent and
independent variables, ordinal logistic regression analysis and marginal effects
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analysis of ordinal logistic regression.

4.3.1 Correlation Analysis
The correlation between dependent and independent variables is described in
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table 10.

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 Table 10: Results of Correlation Matrix
ILS MR IEO IA IC AHC

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ILS 1

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MR 0.28 1
IEO 0.57 0.28 1
IA 0.39 0.25 0.39 1
IC 0.25 0.21 0.13 0.29 1

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AHC -0.05 0.07 0.14 0.06 -0.09 1
Note. Author’s Own Calculation

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The results explain that highest correlation coefficient is 0.39 between
increase in employment opportunities (IEO) and increase in assets (IA) of the
households. So, there is no problem of multicollinearity in the data. However, access

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to health care (AHC) shows negative correlation with improvement in living standard
(ILS). The correlation between increase in consumption (IC) and access to health care
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(AHC) is also negative.
4.3.2 Ordinal Logistic Regression Analysis
The results of Ordinal Logistic Regression (OLR) are presented in table 11.
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Table 11: Results of Ordinal Logistic Regression

ILS Coef. Std. Err. Z P>z
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MR 0.26** 0.12 2.08 0.037

IEO 1.44*** 0.15 9.29 0.000
IA 0.48*** 0.15 3.21 0.001
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IC 0.30** 0.13 2.35 0.019

AHC -0.35*** 0.13 -2.76 0.006
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CUT1 0.96 1.26 0.76

CUT2 2.87 0.88 3.26
CUT3 6.62 0.81 8.17
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CUT4 9.47 0.90 10.52

LR chi2(5) 184.77 Prob. (0.000) Pseudo R2 0.2139
Note. 0.01, 0.05 and 0.10 level of significance is shown by (***), (**) and (*)
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The results of ordinal logistic regression (OLR) indicate that one unit increase
in money received from MFB is expected to increase 0.26 (p < 0.05) units in the
ordered log odds to be in the higher category of improvement in living standard (ILS)

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 keeping other variables constant. Similarly one unit increase in increase in
employment opportunities (IEO), increase in assets (IA) and increase in consumption

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(IC) is expected to increase 1.44, 0.48 and 0.30 (p < 0.05) units respectively in the

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ordered log odds to be in the higher category of improvement in living standard (ILS)
keeping other variables constant while the coefficient of access to health care (AHC)
shows negative sign. It indicates negative relationship between access to health care
(AHC) and improvement in living standard (ILS). One unit increase in access to

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health care (AHC) is expected to decrease 0.35 (p < 0.05) units in the ordered log
odds to be in the lower category of improvement in living standard (ILS).

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4.3.3 Marginal Effects Analysis
The results of marginal effects are presented in table 12.
Table 12: Results of Marginal Effects Analysis

ILS
rr
dy/dx
Delta-method
Std. Err. Z P>z
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1 -0.001 0.001 -0.96 0.335
2 -0.003 0.002 -1.50 0.133
MR
3 -0.031 0.015 -2.08 0.037
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4 -0.005 0.003 -1.74 0.082

5 0.039 0.019 2.11 0.035
1 -0.004 0.003 -1.09 0.277
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2 -0.015 0.007 -2.10 0.036

IEO 3 -0.169 0.015 -11.11 0.000
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4 -0.028 0.011 -2.64 0.008

5 0.217 0.019 11.43 0.000
1 -0.001 0.001 -1.05 0.295
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2 -0.005 0.003 -1.81 0.070

IA 3 -0.057 0.018 -3.20 0.001
4 -0.010 0.004 -2.24 0.025
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5 0.073 0.022 3.31 0.001

1 -0.001 0.001 -0.99 0.322
2 -0.003 0.002 -1.59 0.111
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IC 3 -0.035 0.015 -2.35 0.019

4 -0.006 0.003 -1.89 0.059

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 5 0.045 0.019 2.39 0.017
1 0.001 0.001 1.02 0.307

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2 0.004 0.002 1.71 0.088

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AHC 3 0.041 0.015 2.76 0.006
4 0.007 0.003 2.14 0.032
5 -0.053 0.019 -2.84 0.005
Note. Author’s Own Calculation

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Table 12 explains the results of marginal effects computed after ordinal
logistic regression. Money received from MFB is statistically insignificant to

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improvement in living standard (ILS) for first two levels of preferences (“strongly
disagree” and “slightly disagree”) but money received from MFB is statistically
significant to improvement in living standard (ILS) for highest level of preferences

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(“strongly agree”). It shows that one unit increase in MR increases the probability of
ILS by 0.039 at 0.05 level of significance. While money received from MFB (MR) is
ee
statistically significant to improvement in living standard (ILS) for third and fourth
level of preferences (“neutral” and” slightly agree”) with negative effect. The result
depicts that one unit increase in MR decreases the probability of ILS by 0.031 and
p

0.005 at 0.05 and 0.10 level of significance.

5. Conclusion and Policy Recommendations
The impact of microfinance on poverty alleviation is analyzed in this study in
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Pakistan. Pakistan is a developing country. The data of rural microfinance clients of

Khushhali bank is gathered. The impact of microfinance is checked on poverty
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alleviation on three key determinants of poverty which includes education, health and
living standards. Education, health and living standards are treated as dependent
variables in three models while money received from microfinance bank (MFB),
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increase in saving, increase in employment opportunities, increase in assets, access to

healthcare, livestock possession, family size, source of earning, possession of land
and increase in consumption are taken as independent variables. Three models are
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empirically estimated using ordinal logistic regression (OLR) technique and marginal
effects are also computed as post estimation.
The results explain the significant and positive impact of microfinance on
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education, health care and living standards. It is concluded that access to credit plays
an important role in poverty alleviation of rural poor through widening the

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 opportunities to increase their income. Policy maker still needs a lot of work to be
done in the field of microfinance to alleviate poverty in rural areas. Education and

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health play key role in alleviation of poverty through better participation in income

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generating activities. Therefore, government should focus on education and health in
rural areas to alleviate poverty and should provide free education and health facilities
to rural poor people.
Living standard is also the vital determinant of poverty alleviation. Living

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standard includes food, shelter, education, health, sanitation, proper boundary wall,
cooking fuel, electricity, gas, drinking water and proper ventilation. Hence,

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government policy makers should concentrate on development projects in rural areas
focusing on provision of education, health facilities, clean drinking water, sanitation,
electricity and gas to improve the living standard of poor people.

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Further research may be carried out on the topic in future to explore more
dimensions of microfinance to reduce poverty. For example, a comparison of rural
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and urban clients may be taken to check the impact of microfinance on poverty
alleviation in rural as well as urban areas. Secondly, a longitudinal study can be useful
to understand the impact of microfinance on poverty alleviation taking the data of
p
same clients in two different time periods. Thirdly, a research can be conducted on the
role of microfinance on women empowerment in backward districts although the
participation of women in microfinance programmes is limited. Fourthly, a
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comparison of two backward districts can be made to analyze the impact of

microfinance on different monetary and non-monetary aspects of poverty. Finally, a
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comparative study can be conducted on the contribution of MFI’s and MFB’s

operating in the district for the purpose of alleviation of poverty.
Acknowledgement: The authors extend their appreciation to the Arab Open
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University for funding this research through research fund No. (AOURG-2023-001).

References
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Appendix: Questionnaire

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Section 1
1. Name: _________________________________
2. What is your age?
i.
ii.
20-30
31-40
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iii. 41-50
iv. 51 and above
3. What is your education?
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i. Illiterate-Primary
ii. Middle- Matric
iii. Intermediate- Graduate
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iv. Master and above

4. Gender
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i. Male
ii. Female
5. Marital Status
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i. Married
ii. Unmarried
iii. Widow/Widower
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iv. Divorced/Separated
6. Occupational Status
i. Self employed
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ii. Government Servant

iii. Private Job
iv. Others ___________________

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 7. Family Size
i. 2-4

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ii. 5-7

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iii. 8-10
iv. 11 and above
Section 2
1. What is your average monthly income?

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i. Less than 10000
ii. 10001-20000

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iii. 20001-30000
iv. 30001-40000
v. Above 40000
2. What are your Sources of earnings?
i) Agriculture
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ee
ii) Own Business
iii) Private Employee
iv) Government Employee
p
v) others
3. Did you have any business experience before entering this program?
1). None 2).Less than 1 year 3).2-3 years 4). Above
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3 years
4. What amount of loan you have received from any of the MFIs
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1. 25000-50000 2. 50001- 75000 3. 75001- 100000

4. Above 100000
14. What is your purpose of taking loan from MFI
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1. Business purpose
2. Buying livestock and Dairy
3. Farm Inputs
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4. Social needs
5. Daily consumption
6. Emergency needs
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5. Loan Duration Categorical of Loan Duration taking the values:

1= 1 year
2= 2 years

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 3= 3 years
4= more than 3 years

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6. How long have you been a borrower of your microfinance institution?

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1. Less than 1 year
2. 1 to 2 years
3. 2 to 3 years
4. above 3 years

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7. What is your household average monthly expenditures
i. Less than 10000

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ii. 10001-15000
iii. 15001-20000
iv. 20001-25000
v.
Section 3
Above 25000

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ee
1. How many children go to school (6-11) age?
i) none ii) 1-3 iii) 4-6 iv) 7 & above
2. Access to healthcare facilities is:
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i) extremely difficult
ii) slightly difficult
iii) normal
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iv) slightly easy

v) extremely easy
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3. What are your household assets?

1=Farm lands / buildings
2=Livestock
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3= Agricultural machineries
4= Car / Motorcycles
5=Others
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4. Do you have any type of land possession (rural/urban, commercial/agricultural)?

i) Yes ii) No
5. Do you have any type of livestock possession (buffalo, cows, sheep, goat etc.)
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i) Yes ii) No
6. Do you have any home appliances (Refrigerator, TV, Washing Machine, sewing
machine, M/cycle)

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 i) Yes ii) No
7. Do you have any agricultural machinery (Tractor, Trolly, Cart, Thresher)

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i) Yes ii) No

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8. What is your status of residence ownership?
i) Owned ii) joint family
iii) Rented iv) others ___________
9. Do you have following necessary facilities in your house?

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Electricity i) Yes ii) No
Gas i) Yes ii) No

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Water Pump i) Yes ii) No
Permanent Boundary Wall i) Yes ii) No
Proper Ventilation i) Yes ii) No
Proper Sanitation System
Proper cooking fuel
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i) Yes
ii) No
ii) No
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Section 4
The numbers of following table indicates the degree of satisfaction or agreement level
(on a scale of 1-5*) of the household or a person after he or she has received loan
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from a microfinance institution. Please circle the number, which accurately reflects
your opinion.
Statement 1 2 3 4 5
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Strongly Slightly Neutral Slightly Strongly

disagree disagree agree agree
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The procedure of obtaining loans

from KBL is easier than
conventional banks.
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The rate of interest of micro credit

is reasonable.
My income has increased after
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getting microfinance loan.

My household consumption is
increased after getting
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microfinance loan.
My savings has increased after

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 getting microfinance loan.
The access to education is

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increased after getting

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microfinance loan.
My household assets are increased
after utilizing microfinance loan.
Access to healthcare is increased

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after getting microfinance loan.
Employment opportunities have

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increased due to Microfinance loan
Improvement in the living standard
of the family due to Microfinance
loan.
Repayment schedule can easily be
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ee
managed.
Terms of microfinance loan are
satisfactory.
p
ot
tn
rin
ep
Pr

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