Non-Financial Services (NFS) in Microfinance: European Models and Adaptation Prospects for Pakistan

Loan repayment rates are more often than not, the main criterion used to assess the success of microfinance models. While repayment rates are a direct indicator of credit risk and provide valuable insight into the financial capability of the borrower, it does not capture the full range of outcomes and impacts that microfinance interventions can trigger. By exploring the world of microfinance and examining how European microfinance models that supplement financial assistance with Non-Financial Services (NFS) help borrowers go beyond simple loan repayment and achieve sustainable entrepreneurial success, this research aims to challenge the status quo. With the guidance of Amartya Sen’s Capability Approach framework, this research aims to shed light on how NFS can empower microentrepreneurs, not only in terms of loan repayment but also in ensuring their entrepreneurial success and long-term business prosperity. Additionally, the research explores the current landscape of Pakistani Microfinance Institutions (MFIs), where Islamic finance serves as the foundation of the MFI model, characterized by interest-free principles, to understand why NFS is not a key component within such models and if there are possibilities for adaption. Utilizing a mixed-methods approach, incorporating qualitative interviews from 47 borrowers across Karachi, Lahore, and Islamabad along with quantitative analysis, this research seeks to investigate the perspectives of microcredit borrowers in Pakistan. It seeks to ascertain their existing financial and non-financial needs, evaluate the efficacy of current MFI models in empowering microentrepreneurs, and identify gaps that borrowers themselves identity and advocate for a change in. Through understanding borrower needs and deficits, and juxtaposing these insights with successful MFI models that integrate NFS, this research seeks to inform the design and implementation of microfinance programs to go beyond mere financial assistance. These strategies acknowledge that true poverty alleviation achieved through microfinance extends beyond mere loan repayment, emphasizing the importance of ensuring that borrowers’ businesses are self-sustaining and growth-capable.