Introduction:

Income and expenses, in many ways, shape and define our lives. Those whose incomes are higher than their expenses have different options and choices compared to those whose incomes are lower than their expenses. But the relationship between income and expenses is not always constant, for most people, this is a cyclical relationship with one aspect often overshadowing the other. In economics, the practice of balancing out income and expenditure is known as consumption smoothing. This has two legs: the first is the more desirable one, where one’s income is above one’s expenses, and the aim is to invest or save this surplus. The second, and more undesirable leg, is the situation where expenses are higher than income, and one needs to have some level of consumption to survive or preserve a lifestyle. In such a situation, loans are an essential lifeline.

In this blog we use the data from KFIS 2024, to look at the impact of negative financial shocks and the availability of loans in their aftermath.

The need for loans

Pakistan has gone through many external shocks as well as major economic turmoil in the last five years. This includes the floods of 2022 that resulted in damages worth USD 14.9 billion [1], this was followed by extreme inflation that reached 38% in May 2023 [2]. This, among other reasons, resulted in a consumption mismatch that compelled 12% of Pakistani adults to borrow in the last 5 years. The figure below lists these various reasons which resulted in the need to borrow in Pakistan.

So how does the need to borrow in order to smooth consumption vary by financial inclusion status? Data from KFIS suggests that this need is more acute among those who are financially excluded compared to those who are financially included. Furthermore, the highest percentage of respondents indicated increased cost of living as a reason to borrow.

As the figure shows 15% of financially included and 28% of the financially excluded reported to needing loans “Very Often” or “Often”. This might suggest the financially included being relatively less vulnerable to the need for loans compared to the financially excluded.

Source of loans

In terms of the source of loans, Pakistanis overwhelmingly rely on “family and friends”. As the data shows, 85% of Pakistanis reported to relying on family and friends for loans during such times. Only 13% reported to relying on formal sources such as banks, another 8% relied on Informal money lenders.

Why not borrow from banks?

An interesting aspect of borrowing preferences came in the form of over reliance on informal loans from sources such as friends and family as well as informal money lenders. Even for the financially included, 21% borrowed only from informal sources, while 8% reported to have borrowed from a formal source. Intuitively speaking, when it comes to borrowing the financially included should have different reasons for not borrowing from banks, than the financially excluded. The ownership of an account should have some impact on the perceptions of the financially included with regards to approaching banks. However, as the figure below shows the main reasons for not borrowing from banks are similar for both the groups, as high interest rates, complication of paperwork as well as reliance on other means are the main reasons for not borrowing from banks for both the groups.

How is non availability of loans managed?

While the reliance on the formal sector for loans is similar for both the financially included and financially excluded, the groups do differ when it comes to the coping strategies for dealing with the non-availability of loans. As the figure shows a higher proportion of the financially included relies on savings compared to the financially excluded as shown in the figure below

The higher reliance on savings, for the financially included, might explain the lower reliance on other coping mechanisms, for instance 73% of the financially excluded reported to reducing household or personal expenses compared to 62% of the financially included. Similarly, 21% of the financially excluded resorted to selling assets, compared to 11% of the financially included.

Limits of loan availability

The availability of loans represents a crucial lifeline for the individuals, and for that matter its limits matter. The respondents were asked about how much they could raise in terms of loans when the need arise. As the figure shows, 29% of Pakistanis were convinced that they could not arrange a loan, similarly another 44% responded that they “don’t know” how much they can secure as a loan. This suggests a high level of uncertainty when faced with the prospects of an external financial shock, figure below shows the maximum limits.

As the figure shows the highest proportion was for a loan of less than PKR 50,000 from friends at family (26%), informal money lender (17%) and formal (13%). It is important to put this amount in perspective by comparison to the minimum wage, which for 2025 is at PKR 37,000.[3]

Returning loans

In terms of the experience of returning loans, the respondents reported different levels of difficulty. The loans from the formal sector as well as those from friends and family had a similar level of ease and difficulty. Returning loans to informal money lenders was reported as the most difficult experience, with 91% of borrowers rating the process as difficult or very difficult.

Conclusion

In conclusion, KFIS 2024 highlights key insights into how Pakistanis use loans to cope with financial shocks. The reliance on informal sources is widespread, even among the financially included, with friends and family being the most relied upon option. High interest rates as well as complications of paperwork seem to be deterring both the financially included and excluded from borrowing from formal sources. However, the financially included reported a higher reliance on saving in the absence of loans when compared to the financially excluded.

The limited uptake of formal loans by the financially included raises questions about whether access to credit a compelling enough reason is to open a formal financial account in Pakistan. This points to a key missing use case in the current narrative around financial inclusion and may partly explain the reluctance among many to open and actively use formal accounts.