Rural Finance for Growth and Poverty Alleviation

Abstract

"Pakistan's rural sector accounts for more than 70 percent of employment, and roughly two-thirds of rural employment is in agriculture. Less than a third of rural households get loans, only 10 percent of which are from institutional sources. Pakistan's credit institutions are not helping the country accelerate agricultural growth and reduce poverty. To improve performance in the rural economy and efficiency in financial institutions, rural credit markets must be liberalized. The government needs to initiate the following reforms: Produce and price controls must be replaced by prudent regulation and supervision, combined with policies to stabilize the economy. Commercial banks must operate in a competitive environment. They must be allowed to set interest rates for rural lending that cover their transaction costs. Credit must be made available to support productivity growth for agricultural smallholders and small producers of the rural nonfarm sector, where Pakistan's growth potential lies. Credit must be made available to women and to the rural poor for consumption-smoothing and for sustainable income-generating activities."