I- The Problem The claim that micro-finance is a working solution to global poverty is not universally accepted (Hytopoulos, 2011); however, the common perception is that it aims to make credit available to the lowest income groups in order to economically empower them. In developing countries like Pakistan, poverty is found to be high in rural areas and especially among women (Rauf 2009). The benefits of microfinance are emphasized so much that the common belief is that everyone needs and demands; due to which there exists a gap in literature as little research has gone into determining the precise impact of microfinance in Pakistan. Even the research on impact that has taken place disregards intra-household resource allocation, with the household being the primary unit of analysis (Pakistan Micro-Finance Network 2003). Furthermore, research seems to view microfinance more as additional income rather than investment and thus does not take into account the returns to this investment but attempts to establish direct linkages between microfinance lending and its effects. Thus, the main goal of this study is to measure the precise effect that microcredit lending as well as its returns have on education decisions. Given that microcredit schemes have been tailored to provide more economic power to women which extends their decision making power within households (Blumberg, 2005). And that women show a stronger preference for educating their children than men (Behrman and Rosenzweig, 2002). This paper will also assess whether greater economic independence among mothers (because of microfinance opportunities) reduces the gender gap in terms of education within the households in the Pakistani context. II- Motivation: National resources and donor financing in Pakistan are increasingly turning to micro-finance as an instrument of alleviating poverty and promoting gender equality (Pakistan Micro-Finance Network 2003). According to recent estimates of the World Bank, in 2011 over one billion people lived on less than $1.25 a day and over 2.2 billion lived on less than US $2 a day. In Pakistan, over 20% of the population is below the poverty line (UNDP). Even though these numbers are quoted as an ‘improvement’ compared to the situation in the late 20th Century, poverty is still a grave concern; and has been one of the most significant challenges for developing countries. To meet this challenge effectively, human capital development is essential (Schultz, 1961). One of the most effective methods of developing human capital and production capacity of a population is through education (Olaniyan, 2008). According to The Sustainable Development Policy Institute of Pakistan, the country is producing ‘more illiterates due to high population growth, low level of school enrolment and high level of drop outs’ which makes education a grave concern (2008). Some researchers point that there are supply side constraints to education in the developing world (such as lack of infrastructure: roads, schools, teachers and materials), however it is hard to ignore the demand side – represented by budget constraints