Financial Fragility of Pakistani Household

We analyzed the financial fragility of Pakistani households using data from the Household Integrated Economic Survey (HIES) 2015-2016 through financial burden indicators, financial margin, and credit risk indicators. We contribute to the literature by applying a modified measure of loss given default based on household valuables besides traditional components of real estate and financial wealth. We also conducted stress tests of households aiming at the assessment of their sensitivity to different types of adverse shocks and observe large heterogeneity across various household characteristics in the impact of these shocks. Although financial burden indicators provided mixed results, our credit risk indicators identified financially vulnerable households as those with no formal education, headed by currently married males, without knowledge of information, communication, and telecommunication, and engaged in agriculture as the most financially vulnerable. These households held most of the debt at risk and posed serious threats to financial stability and hence should be given special attention from the viewpoint of stability of the financial system. In contrast, we found households with graduates and above the level of education, employers, having knowledge of information, communication, and telecommunication and employed in the government services to be most resilient. Finally, we analyzed the potential determinants of various measures of household financial vulnerability and found education, employment status, and industry of employment of head of the household as the main determinants of financial vulnerability in Pakistan. We propose a combination of credit risk and financial burden indicators for an assessment of the financial conditions of households instead of solely relying on financial burden indicators.