Microcredit Utilization: Shifting from Production to Consumption?

This paper explores whether microcredit borrowers in Pakistan are utilizing loans for production or for consumption and whether their need for larger loans encourages multiple borrowing.

The average Pakistani has experienced a decline in real income in recent years. The real value of the average outstanding loan balance has also declined. The paper states that the microfinance sector’s failure to maintain its average loan balance has raised fears about microcredit’s ability to meet borrowers’ enterprise needs effectively. The inadequacy of average microcredit may spur clients to borrow from multiple microfinance providers (MFPs) and to divert loans to unplanned or non-enterprise related uses. The study uses a quantitative survey that is validated by focus group discussions. Findings include:

• Pakistan’s microfinance sector has not been able to maintain the purchasing power of credit disbursed;
• Many borrowers feel the need to take multiple loans to meet their increasing business and consumption expenditures;
• Borrowers predominantly use loans for business needs but are increasingly using credit for household consumption;
• Borrowers claim greater profitability on current loan use.

The paper concludes with recommendations for MFPs, regulators and policymakers, donors and social investors, and the Pakistan Microfinance Network.