Microenterprise Development
USAID's Program Has Met Some Goals; Annual Reporting Has Limitations Gao ID: GAO-04-171 November 17, 2003Microenterprises--small businesses owned and operated by poor entrepreneurs--have potential to help the world's poorer populations. For this reason, the U.S. Agency for International Development (USAID) included microenterprise development in its programming. In 2001, the agency reported that its was conducting microenterprise projects in 52 countries and had obligated almost $2 billion since 1988 to support its program. The program supports micro loans, among other services, to assist poor entrepreneurs. Since 1996, USAID has annually reported the program's results. To help Congress oversee USAID's management of its microenterprise development program, GAO was asked to (1) determine the extent to which the agency's microfinance activities are meeting the program's key objectives, (2) assess the reliability of USAID's reporting on its overall microenterprise activities, and (3) examine the agency's role in identifying and disseminating microenterprise best practices.
USAID's microfinance activities have met some, but not all, of the agency's microenterprise program objectives. These objectives are to (1) reduce poverty among participants; (2) target the poor and very poor; (3) encourage women's participation; and (4) develop sustainable microfinance institutions (MFI). First, regarding reducing poverty--defined as alleviating its impacts or lifting and keeping a large number of people above the poverty line--GAO found that microfinance can help alleviate some impacts of poverty, incrementally improving borrowers' income levels and quality of life and offering an important coping mechanism to poor workers and their families. However, there is little evidence that it can lift and keep many over the poverty line. Second, microfinance generally has served the poor clustered around the poverty line but not the very poor. Third, USAID has successfully encouraged the participation of women, who have comprised about two-thirds of micro loan clients since 1997. Fourth, USAID has emphasized the importance of MFI sustainability. In fiscal 2001, of 294 USAID-supported MFIs that reported on sustainability, 38 percent reported achieving full sustainability--a percentage consistent since 1999. The basic data in USAID's Microenterprise Results Reporting (MRR) system are reliable, but certain methodological problems may affect the accuracy of some of the agency's reporting on key program objectives. Specifically, USAID may not be reporting accurately (1) the amounts it has obligated to microenterprise activities; (2) whether 50 percent of its resources went to the very poor, as required by Congress; and (3) the sustainability of USAID-supported institutions. Further, although the agency reports annually on the activities of institutions it supports, it does not show the percentage of those institutions' total funding that its contribution represents. USAID has identified and disseminated microenterprise best practices, providing information to its missions and implementing partners through policy guidance, training, and technical assistance. In addition, USAID has collaborated with microenterprise development provider networks and others to publish information about these practices.
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Report to the Chairman, Committee on International Relations, House of
Representatives:
United States General Accounting Office:
GAO:
November 2003:
Microenterprise Development:
USAID's Program Has Met Some Goals; Annual Reporting Has Limitations:
GAO-04-171:
GAO Highlights:
Highlights of GAO-04-171, a report to the Chairman, House Committee on
International Relations
Why GAO Did This Study:
Microenterprises”small businesses owned and operated by poor
entrepreneurs”have potential to help the world‘s poorer populations.
For this reason, the U.S. Agency for International Development (USAID)
included microenterprise development in its programming. In 2001, the
agency reported that its was conducting microenterprise projects in 52
countries and had obligated almost $2 billion since 1988 to support
its program. The program supports micro loans, among other services,
to assist poor entrepreneurs. Since 1996, USAID has annually reported
the program‘s results.
To help Congress oversee USAID‘s management of its microenterprise
development program, GAO was asked to (1) determine the extent to
which the agency‘s microfinance activities are meeting the program‘s
key objectives, (2) assess the reliability of USAID‘s reporting on its
overall microenterprise activities, and (3) examine the agency‘s role
in identifying and disseminating microenterprise best practices.
What GAO Found:
USAID‘s microfinance activities have met some, but not all, of the
agency‘s microenterprise program objectives. These objectives are to
(1) reduce poverty among participants; (2) target the poor and very
poor; (3) encourage women‘s participation; and (4) develop sustainable
microfinance institutions (MFI). First, regarding reducing poverty”
defined as alleviating its impacts or lifting and keeping a large
number of people above the poverty line”GAO found that microfinance
can help alleviate some impacts of poverty, incrementally improving
borrowers‘ income levels and quality of life and offering an important
coping mechanism to poor workers and their families. However, there is
little evidence that it can lift and keep many over the poverty line.
Second, microfinance generally has served the poor clustered around
the poverty line but not the very poor. Third, USAID has successfully
encouraged the participation of women, who have comprised about two-
thirds of micro loan clients since 1997. Fourth, USAID has emphasized
the importance of MFI sustainability. In fiscal 2001, of 294 USAID-
supported MFIs that reported on sustainability, 38 percent reported
achieving full sustainability”a percentage consistent since 1999.
The basic data in USAID‘s Microenterprise Results Reporting (MRR)
system are reliable, but certain methodological problems may affect
the accuracy of some of the agency‘s reporting on key program
objectives. Specifically, USAID may not be reporting accurately (1)
the amounts it has obligated to microenterprise activities; (2)
whether 50 percent of its resources went to the very poor, as required
by Congress; and (3) the sustainability of USAID-supported
institutions. Further, although the agency reports annually on the
activities of institutions it supports, it does not show the
percentage of those institutions‘ total funding that its contribution
represents.
USAID has identified and disseminated microenterprise best practices,
providing information to its missions and implementing partners
through policy guidance, training, and technical assistance. In
addition, USAID has collaborated with microenterprise development
provider networks and others to publish information about these
practices.
What GAO Recommends:
GAO recommends that the Administrator of USAID review the agency‘s MRR
system to ensure that (1) it measures the program‘s performance and
(2) all data are collected, analyzed, and reported USAID completely
and accurately. USAID concurred with our recommendation.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
USAID Has Met Some Program Objectives:
MRR Data Generally Reliable but May Not Accurately Reflect USAID's
Microenterprise Activities:
USAID Has Identified and Disseminated Best Practices:
Conclusion:
Recommendation to USAID:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Microenterprise Best Practices:
Appendix III: Review of Microenterprise Studies:
Appendix IV: USAID's Microenterprise Results Reporting:
Appendix V: Comments from the U.S. Agency for International
Development:
GAO Comments:
Appendix VI: GAO Contact and Staff Acknowledgements:
GAO Contact:
Staff Acknowledgements:
Tables:
Table 1: Findings and Recommendations from 22 Selected Studies on
Microfinance and Microenterprise Development:
Figures:
Figure 1: USAID's Microenterprise Development Program, Highlighting
Microfinance Activities:
Figure 2: Conceptual Diagram of Populations along the Poverty Scale:
Figure 3: Microentrepreneurs in Bulgaria:
Figure 4: Microentrepreneurs with Loans from Various USAID-funded MFIs:
Figure 5: Financial Sustainability of Institutions, by Average Loan
Size:
Figure 6: Clients in USAID-funded Micro Loan Projects, by Gender, 1997-
2001:
Figure 7: Women Entrepreneurs at USAID-funded MFIs in Peru:
Figure 8: Financial Sustainability of MFIs, by Average Number of
Borrowers:
Figure 9: Available USAID Obligations Data for Poverty Lending, Fiscal
Years 2000 and 2001:
Abbreviations:
ACCION: Americans for Community Cooperation in Other Nations:
AIMS: Assessing the Impact of Microenterprise Services:
BDS: Business Development Services:
CGAP: Consultative Group to Assist the Poor:
CRS: Catholic Relief Services:
GAO: U.S. General Accounting Office:
GEMINI: Growth and Equity through Microenterprise Investments and
Institutions:
MFI: microfinance institution:
MRR: Microenterprise Results Reporting:
NGO: nongovernmental organization:
SEEP: Small Enterprise Education and Promotion Network:
USAID: U.S. Agency for International Development:
United States General Accounting Office:
Washington, DC 20548:
November 17, 2003:
The Honorable Henry Hyde:
Chairman:
Committee on International Relations:
House of Representatives:
Dear Mr. Chairman:
Microenterprises--small businesses owned and operated by poor
entrepreneurs--have potential to help the least advantaged populations
in the developing world. Recognizing this potential, the U.S. Agency
for International Development (USAID) has included microenterprise
development in the agency's strategy for economic development and
poverty reduction. In 2001, the agency reported that it was conducting
microenterprise projects in 52 countries and had obligated almost $2
billion since 1988 to support its program. The Microenterprise for
Self-Reliance and International Anti-Corruption Act of 2000,[Footnote
1] enacted on October 17, 2000, expressed strong congressional support
for microenterprise projects, stated policy preferences for
implementing such projects, and authorized increased funding.
The key objectives of USAID's microenterprise development program are
to reduce poverty among microenterprise owners, workers, and
families;[Footnote 2] target the poor and the very poor;[Footnote 3]
encourage participation by women; and develop sustainable microfinance
institutions (MFI).[Footnote 4] The majority of USAID's microenterprise
funding supports microfinance services, particularly micro loans. Since
1996, USAID has annually surveyed missions and implementing
institutions regarding their microenterprise activities and issued a
report to Congress. To assist your committee in overseeing the agency's
management of its microenterprise development program, you asked that
we (1) determine the extent to which USAID's microfinance activities
are meeting the program's key objectives, (2) assess the reliability of
the agency's reporting on its overall microenterprise activities, and
(3) examine the agency's role in identifying and disseminating
microenterprise best practices.
To identify key program objectives, we reviewed USAID's policy guidance
and the Microenterprise for Self-Reliance and International Anti-
Corruption Act of 2000. To determine whether USAID is meeting these
objectives, we interviewed officials from USAID, USAID's implementing
partners, and experts; conducted fieldwork in Peru, Egypt, and
Bulgaria, three countries with established USAID microenterprise
programs; and reviewed academic and applied studies of microenterprise
projects and outcomes. Because most available USAID data and research
literature are focused on microfinance, particularly on micro loans, we
primarily analyzed this aspect of the agency's microenterprise program.
To assess USAID's microenterprise reporting, we evaluated the efforts
of the contractor responsible for the reporting, analyzed the
electronic files containing program data, and checked the reliability
of data in the contractor's system and in the countries we visited. To
determine USAID's role in identifying and disseminating information on
best practices, we reviewed a wide body of literature on the subject;
interviewed USAID officials, implementing partners, and a panel of
experts; and reviewed relevant documents in Washington, D.C., and the
countries where we conducted fieldwork. (See app. I for a discussion of
our methodology.):
Results in Brief:
USAID's microfinance activities have met some, but not all, of the
program's key objectives. First, regarding the reduction of poverty,
microfinance can help alleviate some impacts of poverty, incrementally
improving borrowers' income levels and quality of life and providing
poor individuals, workers, and their families with an important coping
mechanism. However, there is little evidence in the research literature
or consensus among experts that microfinance alone can lift and keep
large numbers of people above the poverty line. Second, although USAID-
funded studies and academic analyses have found that microfinance
activities generally serve the poor clustered around the poverty line,
few loans appear to be reaching the very poor. At the same time, some
research suggests that loans to the very poor may be ineffective,
creating unmanageable debt, unless combined with other services. Third,
the program has encouraged women's participation in microfinance
projects: Women have comprised two-thirds or more of the micro loan
clients in USAID-funded microfinance projects since 1997, according to
USAID data. Finally, the agency has emphasized the importance of
developing fully sustainable MFIs, and some of the MFIs it funds report
having made progress toward this goal.
Most of the program data in USAID's Microenterprise Results Reporting
(MRR) system were generally reliable, but certain methodological
problems may prevent the agency from accurately reporting its progress
in meeting key objectives. Because of the way the MRR obligations data
are collected, USAID cannot report microenterprise funding levels with
certainty. In addition, its method of estimating the percentage of
loans to the very poor prevents the agency from stating with certainty
that it has met the requirement that 50 percent of its microenterprise
resources go to the very poor. Finally, because differing definitions
are used to calculate sustainability, the sustainability data that
USAID-supported MFIs provide may not be reliable. Moreover, although
the agency's annual reports describe the overall activities of
institutions that receive USAID support, the reports do not provide
sufficient data on USAID's contribution to MFIs and other service
providers.
USAID has identified and disseminated best practices for
microenterprise development. The agency has funded initiatives to
identify best practices and has provided information on these practices
to its missions and implementing partners through policy guidance,
training, and technical assistance. USAID also has collaborated with
networks of microenterprise implementing partners and other
organizations to publish information on best practices. (App. II
contains a list of key best practices.):
We are recommending that the Administrator of USAID review the agency's
MRR system with the goal of ensuring that its annual reporting is
complete and accurate. Specifically, the Administrator should review
and reconsider the methodologies used for the collection, analysis, and
reporting of data on annual spending targets, outreach to the very
poor, MFI sustainability, and the contribution of USAID's funding to
the institutions it supports.
USAID provided written comments on a draft of this report (see app. V
for the agency's comments and our detailed response). USAID concurred
with our recommendation that it make improvements in its
microenterprise reporting, but it took issue with three points: (1)
USAID stated that its microfinance efforts have reached the very poor,
as statutorily defined, based on the number of micro loans made by
institutions that it supports. This report recognizes that loan size is
considered by USAID and the microenterprise industry as an inadequate
indicator of whether micro loans are reaching the very poor, and
Congress has directed the agency to develop more precise poverty
measurement tools. Our report reflects current research and consensus
on the extent to which the very poor are being served by the program;
(2) USAID also stated that it uses a single definition of
sustainability and that the sustainability data reported in the MRR are
reliable. However, we documented differing definitions and
interpretations that affect the reliability of reported sustainability
data; and (3) USAID stated that it would be difficult to allocate the
microenterprise accomplishments reported in the MRR between USAID and
other donors, but it agreed to make other improvements to the MRR,
including providing more explicit instructions on activities to include
in reporting and taking other steps to improve data accuracy. If USAID
implements these improvements, which we believe are responsive to our
recommendation, it could help improve the reliability of the
information in the MRR.
Background:
Microenterprise development and its primary component, microfinance,
emerged in the 1980s. Microfinance--the supply of micro loans,[Footnote
5] savings, and other financial services to the poor--has operated on
the premise that the poor will invest loans in microenterprises,
repaying the loans out of profits, and the enterprises will grow,
potentially lifting large numbers of people out of poverty.
Microfinance practitioners have demonstrated that the poor will repay
loans on time and that, despite high transaction costs, micro loans can
support financially viable lending institutions. Through the 1990s, a
wide variety of institutions operating in many countries have used this
model, adapting it to local conditions.
By USAID's definition, a microenterprise consists of a poor owner-
operator and nine or fewer workers. Microentrepreneurs--typically small
shopkeepers, craftspeople, and vendors--face a range of impediments to
improving their standard of living. Most rarely have sufficient
collateral to meet loan requirements at traditional banks; according to
one report, only 2.5 percent of potential microenterprise operators
have access to financial services other than moneylenders.[Footnote 6]
USAID's microenterprise development program focuses on three key areas:
* helping establish and fund MFIs to provide loans and other financial
services to the poor and very poor,
* funding business development services (BDS) to help improve the
business skills of microentrepreneurs and develop markets for
microenterprises, and:
* advocating for host government policy reforms to enhance
microenterprise development.
USAID has been the leading bilateral donor of funds and technical
assistance to microenterprise development projects since 1988, when it
began formally tracking funding. USAID provides funding through
nongovernmental organizations, contractors, and, occasionally,
government organizations that implement the client-level activities.
USAID reported that it committed $158.7 million to microenterprise
development activities in fiscal year 2001, compared with $164.3
million in fiscal year 2000. Almost two-thirds of USAID's
microenterprise development obligations in fiscal year 2001 were
directed to providing financial services, principally for creating and
strengthening existing credit and savings institutions; the other third
went to BDS and policy activities. Figure 1 shows an overview of
USAID's microenterprise program, highlighting its microfinance
component. In fiscal year 2001, USAID-assisted institutions served more
than 2.8 million loan clients and more than 3.5 million savings
clients. USAID-assisted institutions also provided BDS to more than
800,000 microenterprise clients, including market research, new product
development and testing, technology development, business counseling,
and marketing assistance.
Figure 1: USAID's Microenterprise Development Program, Highlighting
Microfinance Activities:
[See PDF for image]
[End of figure]
USAID's microenterprise development program, which is highly
decentralized, funded projects in 52 countries in 2001. USAID's
missions design, implement, and monitor the microenterprise projects,
obligating about 80 percent of the program's funding. In Washington,
D.C., the Microenterprise Development Division provides policy guidance
and manages a number of grants and, along with other USAID offices,
provides about 20 percent of the agency's microenterprise funding. The
division also provides technical support for the missions and conducts
research on microenterprise issues.
USAID takes a collaborative approach in its microenterprise development
program. For example, USAID policy is to identify, support, and
strengthen existing MFIs with established performance records to help
meet its microenterprise objectives. It also funds studies of the MFIs
it has supported, to assess impacts and to identify best practices for
both USAID and the entire microenterprise industry. One major USAID
research project, Assessing the Impact of Microenterprise Services
(AIMS), was initiated in 1995. Most of the AIMS studies focused on a
single country or activity. However, two recent AIMS studies examined
USAID-and non-USAID-funded microenterprise activities in seven
countries[Footnote 7] and synthesized key findings from a number of
other studies,[Footnote 8] respectively.
USAID's microenterprise development program has targeted the poor and
the very poor (see fig. 2). The poor are those whose annual income is
at or below the poverty line as defined by the host country. The very
poor are those with an annual income 50 percent or more below the
poverty line as established by the government of the country. In
addition, the vulnerable nonpoor, who also receive microenterprise
assistance, are those whose annual income is just above the poverty
line.
Figure 2: Conceptual Diagram of Populations along the Poverty Scale:
[See PDF for image]
Note: This diagram is for illustrative purposes only and is not drawn
to scale. The national poverty line is defined by each country.
[End of figure]
Since 1994, USAID's policy has been to devote half of its
microenterprise development resources to activities targeting the very
poor. In 2000, this policy was established as law by the
Microenterprise for Self-Reliance and International Anti-Corruption
Act of 2000, which required that 50 percent of all microenterprise
resources be targeted to very poor entrepreneurs. From 1994 until the
implementation of the 2000 legislation, USAID defined loans to the very
poor, or "poverty loans," as those with an average balance of $300 or
less per borrower (in 1994 dollars). The 2000 legislation established
the loan level at $1,000 or less for Europe and Eurasia, $400 or less
for Latin America, and $300 or less in the rest of the world.
USAID annually collects data on its microenterprise program through the
MRR. (See app. IV for a discussion of the MRR methodology.) Data are
collected through surveys of USAID staff in headquarters, overseas
missions, and institutions that receive USAID funding. USAID staff
provide the data on funding obligations, and implementing institutions
provide programmatic data on number and gender of clients, number of
loans, amount of lending to the very poor, MFI sustainability self-
assessments, BDS services provided, and policy initiatives.
In addition to the USAID-supported studies, a large body of published
and unpublished work has been generated by what is commonly referred to
as the microfinance industry. This research includes empirical studies,
a broad array of theoretical analyses, and materials on best practices.
However, because the industry is relatively new, large gaps exist in
important research areas. For example, experts generally agree that
reliable and valid impact assessments are lacking or limited in scope.
(See app. III for a review of 22 microenterprise studies.):
USAID Has Met Some Program Objectives:
USAID's microfinance activities have achieved some of the agency's key
program objectives but made limited progress toward others. First,
microfinance can help to alleviate the effects of poverty among
participants. However, there is less evidence that microfinance has
lifted or kept large numbers above the poverty line as established by
host countries. Second, USAID's program has generally reached the poor
but not the very poor. Third, the program appears to have succeeded in
encouraging the participation of women through micro loans. Finally,
USAID has emphasized the importance of developing sustainable MFIs and
has made some progress toward this goal.
Microfinance Can Help Alleviate Some of Poverty's Impacts:
Our fieldwork and review of USAID-funded studies and research
literature showed that microfinance can alleviate some of the impacts
of poverty among recipients.[Footnote 9] USAID officials, implementing
partners, and borrowers also concurred that it can help to mitigate
some effects of poverty. Most borrowers said that the microfinance
institutions were their only formal source of credit or savings and
stated that the program helped improve their lives, incomes,
businesses, and sense of self-worth. (See fig. 3.) The broader academic
studies of microfinance we reviewed, as well as the experts we
consulted, generally agreed that micro loans can help poor individuals,
workers, and their families cope with personal and economic shocks,
such as illness or death of family members, and manage risks associated
with living in poverty. In addition, USAID officials noted that
microfinance projects are demand driven, put money directly into the
hands of the borrowers, and generally have loan repayment rates close
to 100 percent. The experts with whom we spoke agreed that microfinance
programs can have other benefits, such as helping to build a nation's
financial sector.
Figure 3: Microentrepreneurs in Bulgaria:
[See PDF for image]
[End of figure]
The studies we reviewed and experts we consulted also posited that
microfinance can help increase microentrepreneurs' working capital,
thereby enhancing their household income. However, positive impacts of
specific microfinance projects have been limited in scope and have
varied according to economic, social, and market conditions as well as
the design and aims underlying particular programs.
USAID-funded impact studies in two countries we visited, Peru and
Egypt, found some positive effects from microfinance. For example, the
study in Peru found that the program helped increase assets at the
microenterprise level; it also noted some positive effects at the
household and individual levels. According to the study, economic
recession in Peru during 1997 and 1999 may have limited the effects of
the small loans.[Footnote 10] A study in Egypt found that a
microfinance program offering group lending to poor women helped its
clients establish and expand their businesses.[Footnote 11] The loans
also enabled them to improve their standard of living by contributing
to the household budget, renovate their homes, and provide their
children with a better education through private tutors. (See fig. 4.):
Figure 4: Microentrepreneurs with Loans from Various USAID-funded MFIs:
[See PDF for image]
[End of figure]
Although microfinance can help alleviate some of the impacts of
poverty, the research literature does not show conclusively that it has
lifted large numbers of people above the poverty line. In our review,
we identified two studies on this issue. The 2002 AIMS study--examining
microfinance projects in three countries, two of which were USAID
supported--found that "there was no dramatic movement of client
households out of poverty over the two-year span of the
study."[Footnote 12] The second study analyzed the three major
microfinance programs in Bangladesh--two of which received USAID
funding in fiscal year 1998--and found that about 5 percent of program
participants per year rose above the poverty line during the period
covered by the study.[Footnote 13]
The experts we consulted generally agreed that although microfinance
can help to alleviate some of poverty's impacts, too few long-term
studies have been conducted to determine whether microfinance can lift,
and keep, significant numbers of clients above the poverty line. These
experts also emphasized that because the poverty line is a problematic
and somewhat artificial measure, most impact studies have not focused
on estimating the number of borrowers who cross and remain above it.
The experts and practitioners we interviewed and whose work we reviewed
now generally conclude that microfinance alone is not sufficient to
lift large numbers of people out of poverty. The challenges the poor
face--limited education, few opportunities, legal and cultural
barriers--are difficult to overcome with micro loans. Moving out of
poverty usually requires a combination of strategies by different
household members, and, according to a USAID program official,
"backsliding is possible and even frequent.":
Most USAID Funding Has Reached the Poor but Not the Very Poor:
Although the agency's microfinance activities serve the poor, they
generally appear not to reach the very poor, according to our review of
USAID studies and the research literature. In addition, as mandated by
the Microenterprise for Self-Reliance and International Anti-
Corruption Act of 2000, the agency uses small loan size as an indicator
of loans to the very poor; however, this is now generally considered an
inadequate measure of success in reaching that population. Moreover,
some evidence suggests that micro loans can have unintended negative
consequences among very poor borrowers. Finally, meeting the
requirement of targeting 50 percent of microenterprise resources to the
very poor could hamper MFI sustainability.
USAID's Microfinance Activities Generally Have Not Reached the Very
Poor:
USAID studies and other research literature on microfinance show that
microfinance activities serve those clustered just above and below the
poverty line but generally do not reach the very poor. According to the
2002 USAID-funded AIMS study, based on work in three countries, both
the vulnerable nonpoor and the poor participate in the program, with
the very poor making limited use of USAID-supported microfinance
services. The 2000 AIMS study[Footnote 14] reported that in the
projects studied in four countries, the majority of clients were poor,
followed by the vulnerable nonpoor. This study also found that
approximately 40 percent of USAID microfinance clients in Bangladesh
were very poor but that in Bolivia, the Philippines, and Uganda, the
number of very poor ranged from "almost none" to "some," although it
did not quantify the precise numbers. In addition, the 2000 AIMS study
noted that 20 other microfinance impact studies had found limited
participation by the very poor.
The broader literature on microfinance confirms that the microfinance
industry has reached the poor and vulnerable nonpoor but relatively few
of the very poor. For example, one widely cited study[Footnote 15]
found that microfinance lenders in Bolivia tended to serve those near
the poverty line, not the very poor. During our fieldwork,
representatives from USAID and their implementing partners told us,
based on their experience with the program, that few loans went to the
very poor--a finding generally consistent with academic studies of
projects in other countries. USAID officials in the countries we
visited said that the very poor rarely take out loans because they may
lack the economic opportunities to repay the loans and are reluctant to
increase their debt levels. According to the 2000 AIMS study, not
enough information is available to determine whether (1) the very poor
choose not to borrow to avoid additional debt; (2) MFI staff disqualify
the very poor because of concern over their ability to repay the loans;
or (3) other types of loans and services, such as savings or insurance,
would better meet the needs of the very poor.
Small Loan Size an Inadequate Measure of Whether Loans Reach the Very
Poor:
Although most MFIs use small loan size as an indicator of loans to the
very poor (as mandated in the 2000 act), in practice this is an
inadequate method. It is based on the assumption that small loans
appeal only to the very poor, and it is widely used in part because it
is easy to administer. However, many practitioners, including USAID,
now generally consider loan size an inadequate indicator of clients'
level of poverty.
In June 2003, legislation was enacted amending the Microenterprise for
Self-Reliance and International Anti-Corruption Act of 2000 to ensure
the development of more precise poverty measurement tools.[Footnote 16]
The amendments required USAID to develop, test, and certify at least
two low-cost methods for determining recipients' poverty level by
October 1, 2004, and begin using one of the methods by October 1, 2005.
The amendments also expanded the definition of the very poor to
specifically include those living on less than $1 per day.
Loans to Very Poor May Be Ineffective Unless Combined with Other
Services:
Although some evidence suggests that micro loans may help alleviate the
impacts of poverty, evidence also suggests that in some cases these
loans may affect very poor borrowers more negatively than positively
and may be more effective in combination with complementary services.
Within the microfinance industry, little consensus exists about the
effectiveness of micro loans to the very poor. USAID officials in the
countries we visited stated that economic and social impediments in
those countries often make loan repayment difficult for the very poor.
In Peru, a representative of a large U.S.-based implementing partner
told us that her organization typically does not lend to the very poor,
considering social services, not loans, more appropriate for that
population. In Egypt, one of the largest USAID-supported MFIs said that
it has started a separate grant program to reach the very poor. USAID
officials in Bulgaria we visited said that the poor were more able than
the very poor to expand their enterprises and, as a result, to hire the
very poor. In addition, a USAID program official stated that
microfinance might not always be an appropriate intervention for the
very poor, since they often cannot use the loans productively.
Some research also indicates that micro loans alone may not be an
appropriate assistance mechanism for people below a certain level of
poverty because they may increase their debt to unmanageable levels.
Other research has attempted to show that with a strong commitment to
reaching the very poor, and with a well-targeted program attuned to the
needs of very poor clients, microfinance can have positive
impacts.[Footnote 17]
At the same time, recent studies suggest that to reach the very poor,
the microfinance industry needs to move beyond loans and offer the very
poor other services, such as savings and insurance. [Footnote 18] For
example, a 2002 strategic evaluation of the Consultative Group to
Assist the Poorest (CGAP)[Footnote 19] stated that savings may be the
most important financial service for the very poor, since it provides a
way to accumulate money without risking debilitating indebtedness. In
addition, the 2002 AIMS report and other research indicated that,
because of difficulties in reaching the very poor with micro loans and
the potential for indebtedness, there is a need to expand the type of
products or assistance targeted to this group. These products can
include savings, insurance, and money transfer services; nonfinancial
business development services; and reforms of key policies, programs,
institutions, and regulations that can affect the very poor. Last, a
2003 CGAP publication states that donor funding for microfinance should
complement, not substitute, for investments in core services, like
health, education, and infrastructure,[Footnote 20] a view that also
reflects USAID's policy, according to agency officials.
Poverty Lending Requirement May Hamper MFI Sustainability:
USAID officials stated that implementing the requirement that 50
percent of funds be targeted to the very poor, based on the loan sizes
set by the 2000 act, could make individual MFI sustainability more
difficult to achieve. Officials at the missions we visited said that
their primary objective was to develop sustainable MFIs. In Bulgaria,
officials with USAID and its implementing partners, Catholic Relief
Services (CRS) and Opportunity International, said that imposing this
requirement on individual MFIs could create unsustainable institutions,
because managing a high percentage of small loans would increase costs
associated with servicing these loans. The mission in Egypt, which
began its microfinance program in 1988, did not offer poverty lending
until 1999, when it judged that the institutions it supported were
financially viable and stable enough to begin making such
loans.[Footnote 21]
The research literature we reviewed also indicates that MFIs that are
considered financially sustainable generally do not reach the very poor
in large numbers. Our analysis of data in the MicroBanking Bulletin, a
publication in which MFIs report financial and programmatic
information, indicate a direct correlation between larger average loan
size and increased financial sustainability (see fig. 5). Further,
according to a CGAP assessment, donor confidence during the mid-to-late
1990s that most MFIs could both reach the very poor and become
sustainable has since declined.
Figure 5: Financial Sustainability of Institutions, by Average Loan
Size:
[See PDF for image]
Note: MFIs are considered financially sustainable when they can cover
100 percent of their costs, as well as the cost of borrowing funds at
commercial rates.
[End of figure]
A USAID program official said that the poverty lending requirement can
work against the goal of developing sustainable MFIs, since it directs
the agency to target half of its resources to those may be least able
to repay the loans. The official added that by focusing its resources
on the poor and the vulnerable nonpoor, who can use loans more
productively, the agency could increase the likelihood of developing
sustainable institutions.
USAID's Microfinance Activities Have Reached Many Women:
USAID data indicate that the agency succeeded in reaching large numbers
of women clients through its microcredit activities in fiscal years
1997 to 2001 (see fig. 6).[Footnote 22]
Figure 6: Clients in USAID-funded Micro Loan Projects, by Gender, 1997-
2001:
[See PDF for image]
[End of figure]
The broader research literature we reviewed shows that micro credit
activities have successfully targeted women. Generally, the literature
suggests that female clients have had better loan repayment rates and
lower default rates than male clients. Microcredit services are of
considerable importance to poorer women, who tend to have more limited
access to other financial services than men. Research also shows that
micro loans have generally improved female clients' participation in
decision making at the household and business levels.[Footnote 23]
Our fieldwork indicated that USAID-supported MFIs' focus on women
varied by country and project type. In fiscal year 2001, more than two-
thirds of the USAID-funded MFI micro loan clients in Peru were women,
and in Egypt and Bulgaria, just under half of those clients were women.
Within these countries, we found that project design affected women's
participation rates. Projects employing group lending[Footnote 24] or
offering nonfinancial incentives, such as health care, tended to have a
higher percentage of female clients. For example, as a result of group
lending projects that began in 1999 for women from poor communities,
the overall percentage of women clients across USAID-funded
microfinance activities in Egypt increased from 17 percent in fiscal
year 2000 to about 45 percent in fiscal year 2001. In Peru, MFIs such
as ProMujer, whose clients are nearly all women, offer borrowers group
loans, day care, health education, and medical referral services. (See
fig. 7.):
Figure 7: Women Entrepreneurs at USAID-funded MFIs in Peru:
[See PDF for image]
[End of figure]
Some Progress Made toward MFI Sustainability:
USAID has emphasized developing sustainable MFIs, and available data
suggest that some progress has been made toward this goal. In fiscal
year 2001, of the 294 USAID-funded MFIs that reported sustainability
levels, 112 stated that they had achieved full sustainability. USAID
does not collect sustainability data from MFIs that no longer receive
funding. As a result, it lacks the long-term data needed to determine
whether MFIs it has supported have continued to provide services in a
sustainable manner and if so, for how long. The research literature we
reviewed indicates that achieving full sustainability has been
difficult for the broader microfinance industry. Further, the
literature indicates that fully sustainable MFIs tend to reach larger
numbers of borrowers. Finally, MFI sustainability can be transient,
subject to factors such as mismanagement and economic shocks.
USAID Has Emphasized MFI Sustainability:
Within the microfinance industry, USAID is a leader in promoting MFI
sustainability. Before receiving USAID funding, an MFI must provide a
plan outlining the major steps it will take to achieve sustainability.
USAID expects MFIs to attain full sustainability within 7 years of
receiving USAID assistance. USAID and other donors consider
sustainability to be an important goal because it requires that MFIs
manage operations efficiently and meet clients' needs consistently.
Further, achieving sustainability allows institutions to continue
providing services after donor funding ceases. According to one CGAP
official, "Aiming for sustainability is paramount.":
USAID determines an MFI's progress in achieving full sustainability by
using an interim measure it calls operational sustainability. An MFI is
considered operationally sustainable if revenues from interest and fees
cover all of its operational expenses, including salaries and other
administrative expenses. To be considered fully sustainable, the
organization must cover both its operational and financial costs, such
as the cost of borrowing funds at commercial interest rates, while
taking into account inflation and any subsidies.
USAID-Funded MFIs Report Some Progress toward Full Sustainability:
Available data suggest that USAID-supported MFIs have made some
progress toward achieving full sustainability. In fiscal year 2001, 294
USAID-supported MFIs reported sustainability levels;[Footnote 25] of
these, 112, or 38 percent, said that they were fully sustainable, a
percentage that had remained consistent since 1999.[Footnote 26]
Because USAID does not monitor MFI sustainability once its funding
stops, it lacks long-term data to determine whether the MFIs it has
supported continue to be sustainable, and if so, for how long.
To assess trends in MFI sustainability, we analyzed MRR data from 1995
to 2001; 45 MFIs reported sustainability data for both 1995 and 2001.
Of these, 15 (33 percent) reported reaching full sustainability at the
time of the 2001 survey. These percentages are similar to the
percentage reported for a 2002 MicroBanking Bulletin survey of
established MFIs[Footnote 27] but higher than those reported for the
overall microfinance industry. According to officials from CGAP, the
Foundation for International Community Assistance, and Americans for
Community Cooperation in Other Nations (ACCION), of the approximately
10,000 MFIs currently operating, the number that are sustainable or are
expected to survive in the long term ranges from an estimated "few
dozen"[Footnote 28] to 250. However, those MFIs that are currently
reported as sustainable serve about 80 percent of the total
microfinance clients worldwide, according to these officials. The
experts we interviewed agreed that the majority of microfinance clients
are served by a few large, sustainable MFIs.
In some cases, USAID has continued to fund MFIs that reported achieving
full sustainability and MFIs that did not achieve sustainability within
7 years of receiving USAID funding. USAID officials said that the
primary reason for continuing to fund these MFIs is to expand
microfinance services to new areas. For example, in Egypt, one of the
institutions listed as financially sustainable has received USAID
funding for 14 years to support expansion, according to mission
officials. In Bulgaria, an institution that had not attained
operational sustainability received USAID funding for fiscal years 1995
to 2003 and is expected to continue receiving support until fiscal year
2006, when USAID is expected to end its microenterprise activities in
that country. USAID officials in Bulgaria said that the country's
macroeconomic and financial instability, along with regulatory and
legal hurdles, has adversely affected MFIs.
The research literature we reviewed indicates that a large majority of
existing MFIs are not, and are not expected to become, fully
sustainable. The literature further indicates that MFIs with a large
number of clients have higher levels of financial self-sufficiency and
profitability than smaller MFIs. For example, Bank Rakyat Indonesia's
Micro Division had about 2.8 million borrowers and 27 million savings
depositors in fiscal year 2001 and has reported full financial
sustainability since the early 1990s. In addition, data reported in the
MicroBanking Bulletin, based on financial and portfolio data of leading
microfinance institutions worldwide, indicate that institutions with a
large loan portfolio and number of clients have higher levels of
financial sustainability than smaller institutions (see fig. 8).
Figure 8: Financial Sustainability of MFIs, by Average Number of
Borrowers:
[See PDF for image]
Note: MicroBanking Bulletin defines MFI size by the average number of
borrowers.
[End of figure]
MFIs are considered financially sustainable when they can cover 100
percent of their operating costs, as well as the cost of borrowing
funds at commercial rates.
MFI Sustainability Can Be Transient:
In analyzing the status of 81 USAID-funded MFIs that reported on
financial sustainability over a 5-to 7-year period, we found that over
one-fifth (18) reported achieving full sustainability but later
reported that they were no longer fully sustainable. MFI sustainability
can change rapidly because of various factors, as the following
examples from Peru illustrate.
* PRISMA, one of the largest USAID-funded MFIs, became unsustainable
because of mismanagement and the theft of $2 million by employees.
(USAID officials said that steps had been taken to recover the funds
and that PRISMA will remain ineligible for future support until this
situation is resolved.):
* CARITAS, an MFI affiliated with Catholic Relief Services, experienced
declines in full sustainability at five[Footnote 29] of its eight
branches during a 19-month period. Over the next 4 months, the
sustainability of two branches improved, but during the subsequent 23-
month period, lenient loan repayment practices at three branches
resulted in a significant decline in sustainability and a consequent
decline in portfolio quality at those branches.
External factors such as hyperinflation, host country policy, and
regulatory environment can also significantly affect MFI
sustainability. For example, a 2002 USAID-funded study concluded that
in Bulgaria, the effective ability of the three USAID-supported MFIs
"to continue probably expires with the ending of their donor program
unless their full [legal] . . . and regulatory status is
resolved."[Footnote 30] The study noted that for the most promising of
the three MFIs, Bulgaria's restriction on attracting savings from
borrowers or others was a major barrier to sustainability. In addition,
a USAID official stated that the devaluation of the U.S. dollar, among
other factors, contributed to a 14 percent drop in operational
sustainability at this MFI between fiscal year 2001 and fiscal year
2002, because loans were disbursed in dollars but collected in the
local currency.
MRR Data Generally Reliable but May Not Accurately Reflect USAID's
Microenterprise Activities:
Although the basic data collected for USAID's MRR are generally
reliable, certain methodological problems may impede accurate reporting
on the agency's progress in meeting key goals. Specifically, it may not
be reporting accurately (1) the actual amounts obligated to
microenterprise activities, (2) whether 50 percent of USAID's resources
went to the very poor, and (3) the sustainability of USAID-supported
MFIs. Moreover, although the annual MRR reports on the overall
activities of MFIs that receive any USAID monies, it does not provide
sufficient data on USAID's contribution to MFIs and other service
providers.
Basic MRR Data Are Generally Reliable:
We assessed the reliability of basic MRR data in terms of accuracy,
completeness, and consistency and found that they generally met these
criteria (see app. I for our methodology and app. IV for a discussion
of the MRR). These data include the number of clients, the percentage
of women clients, and the dollar amounts of the institutions'
portfolios. USAID collects most of the data via surveys filled out by
the institutions receiving USAID assistance. According to the
contractor responsible for collecting and analyzing the MRR data, the
survey questions for institutions were pretested and should be
understood by respondents. (The survey is available in English,
Spanish, and French.):
The contractor and USAID officials stated that they review the data for
completeness, accuracy, and consistency. MRR staff reported that they
compared current and past year survey responses to identify
inconsistent responses and investigated these responses as warranted.
Although two of the three USAID missions we visited did not perform the
checks recommended by USAID's policy guidance, most of the data we
examined were generally accurate.
Reliability of Obligations Data Is Uncertain:
We observed several problems with the reporting of USAID's obligations
that may affect the reliability of the data in the MRR. First, the 2001
MRR publication includes obligations for many clients and institutions
that do not meet the MRR's definition of a microenterprise as
"compris[ing] 10 or fewer employees, including unpaid family workers,
in which the owner/operator of the enterprise . . . is considered
poor."[Footnote 31] For example, of the roughly 120 institutions that
reported BDS and policy development programs in the 2001 MRR
publication, more than half reported serving some clients whose incomes
were above the national poverty line or who owned businesses that were
not microenterprises. In addition, at least one-third of all BDS
clients included in the MRR in 2001 had estimated incomes above the
poverty line. Furthermore, in Peru, an institution that had received an
obligation of $1.2 million in 2001 reported all its clients to the MRR,
even though only about one-third of its clients were
microentrepreneurs. Finally, almost a quarter (12 of 42) of the USAID-
supported MFIs in Eastern Europe reported to the MRR loans exceeding
$10,000, despite the regional loan size limit of $10,000.
Second, underreporting of microenterprise obligations in the MRR may
occur. According to the USAID contractor, some of the missions that
report may not list all obligations for microenterprise activities. For
example, in 2000, the contractor who collects the MRR data found $7
million of underreported microenterprise obligations, which was
subsequently included in the obligations totals.
In addition, the MRR does not track expenditures for its
microenterprise programs, and obligations reported to the MRR may not
accurately reflect actual program expenditures. During our fieldwork,
we found situations where obligations differed significantly from
actual expenditures. For example, for fiscal years 1991 to 2000, the
MRR reported obligations of about $160 million to microenterprise
programs at the USAID mission in Egypt. However, mission officials told
us that the program actually spent about 50 percent of this obligation.
Estimate of Obligated Funds Going to the Very Poor May Be Inaccurate:
USAID reported that 53 percent of its obligated microenterprise funds
went to the very poor in fiscal years 2000 and 2001. However, our
analysis indicates that the MRR may not accurately estimate the
percentage of microenterprise development funding that is targeted to
the very poor. We found the following limitations:
* The MRR lacks information on poverty lending for a significant
portion of total microenterprise obligations. In fiscal year 2000, it
had data for only 32 percent of obligations, and for fiscal year 2001,
it had data for only 41 percent of obligations (see fig. 9).
Figure 9: Available USAID Obligations Data for Poverty Lending, Fiscal
Years 2000 and 2001:
[See PDF for image]
Note: In fiscal year 2000, an estimated $28.5 million in loans went to
the very poor, and in fiscal year 2001, an estimated $34.2 million in
loans went to the very poor.
[End of figure]
* USAID's method for calculating overall poverty lending extrapolates
from the available data and assumes that institutions that did not
respond to the MFI survey provided the same amounts of poverty lending
as those that did respond. However, unlike the respondents, many of the
nonrespondents did not make loans or performed activities that were not
directly involved with poverty lending. Nonrespondent activities, which
totaled $94 million--roughly 60 percent of the total fiscal year 2001
obligations--included a range of services. For example, in 2001, USAID
obligated about $5 million to support its microenterprise staff and
about $2 million for research and other support activities.
* Many BDS programs that report on outreach to the very poor are likely
to provide inaccurate data. While MFIs report the dollar value of
poverty loans they have made, many BDS providers must estimate and
report the number of their clients who have received poverty loans from
any source--data that, according to a USAID program official, the BDS
providers often lack.
According to a USAID program official, the agency went to considerable
effort to collect data from institutions that make poverty loans. USAID
officials acknowledged that it is difficult to estimate future poverty
lending for institutions that have not yet begun to make poverty loans
and those that provide services rather than loans to clients. However,
USAID's annual MRR report does not inform the reader of the extent or
impact of these limitations.
MFI Sustainability Data May Not Be Reliable:
Because USAID-supported MFIs use different definitions to calculate
sustainability, the sustainability data reported in the MRR may not be
reliable. USAID supplies differing definitions of sustainability, one
for the MRR and one for its Implementation Grant Program awards. In
addition, not all MFIs reporting to the MRR use the definition
suggested there; for example, one MFI with affiliates in more than 20
countries requires its affiliates to report sustainability to the MRR
using a more stringent definition. Further, MFIs can and do interpret
the underlying MRR definition of sustainability differently; for
example, some basic terms such as "financial costs" are not defined and
are subject to various interpretations. As a result, the contractor
responsible for collecting and analyzing these data stated that they
should not be considered reliable.
MRR Does Not Provide Sufficient Data on USAID's Contributions:
The MRR does not provide information on USAID's level of contributions
to MFIs and other service providers it supports, making it difficult to
determine the scope of the agency's microenterprise development
funding. The MRR reports an MFI's total number of clients and loans,
regardless of the level of USAID's contribution to that MFI. For
example, in 2000, USAID obligated $400,000 to an MFI in Ecuador that
reported loans of $80 million and $477,000 to an MFI in Senegal that
reported loans of $336,000. As a result, the annual report lists a
large number of clients, loans, and other activities that were not
funded by USAID and in many cases were funded by other donors,
foundations, and private individuals.
In addition, USAID requires institutions that provide technical
assistance to MFIs to complete the MFI survey. Because these technical
assistance providers make no loans, reporting the number of loans and
clients served by the MFIs they assist may provide an inaccurate
impression of USAID's micro lending activities. For example, we found
that the institution listed as in the MRR as the largest lender in Peru
in 2001 did not make any loans or serve any clients directly. Instead,
it provided technical assistance to more than 20 MFIs. However, the MRR
reported that this institution had a $37 million loan portfolio and
20,000 clients. According to the contractor responsible for the MRR,
USAID is relying increasingly on technical assistance providers that
serve lending institutions.
USAID Has Identified and Disseminated Best Practices:
USAID has funded several studies and projects, such as the
Microenterprise Best Practices project, to publish emerging best
practices. In addition, the agency has provided information on best
practices to missions and implementing partners through policy
guidance, training, and technical assistance. USAID has also
collaborated with implementing organizations, microenterprise
networks, and donors in disseminating information on best practices.
Several organizations have published such information, including USAID;
the Committee of Donor Agencies for Small Enterprise Development, whose
secretariat is hosted and staffed by the World Bank; the Donor's
Working Group on Financial Sector Development; Catholic Relief Services
(CRS); and ACCION. (See app. II for a list of some key best
practices.):
USAID Has Made Efforts to Identify and Disseminate Best Practices:
According to officials from the World Bank and other organizations,
USAID has recognized the importance of identifying and disseminating
successful and unsuccessful attempts to design and implement
microenterprise activities. USAID's efforts include the following.
* Growth and Equity through Microenterprise Investments and
Institutions (GEMINI). Through its GEMINI project, which ended in 1995,
USAID supported more than 120 studies on microenterprise development to
publicize the experiences of leading microenterprise practitioners and
experts in analyzing and managing microenterprise activities. These
studies focused on the growth and dynamics of microenterprise in
general and new approaches to delivering financial and nonfinancial
assistance. The studies included data collection strategies for
surveys; strategies for MFIs in Indonesia to more profitably provide
financial services to the poor, strategies for MFIs to help
microenterprises grow into small enterprises, recommended options to
improve support for microenterprise development in Ecuador, and
analyses of the importance of providing needed equipment to MFIs.
* Microenterprise Best Practices project. USAID funded the
Microenterprise Best Practices project, a research-oriented effort to
develop and disseminate best practices. The project, completed in 2001,
resulted in more than 100 reports, including concept papers, case
studies, and technical tools and manuals providing guidance for
designing and managing microenterprise activities. These reports
included a model for Internet-based information for microenterprises in
the Philippines, a description of Opportunity International's
experience in Bulgaria and Russia in managing a microfinance program
during a period of high inflation, a guide for reporting financial
performance, and case studies of the difficulties encountered in
converting nongovernmental institutions to commercial banks in Bolivia
and Panama.
* Guidance. USAID policy guidance for microenterprise development
encourages missions to develop broad outreach activities to as many of
the poor as possible, requires that MFIs charge unsubsidized interest
rates to borrowers to cover the cost of operations, advises that
missions consider and address host government policy constraints, and
emphasizes the need for steady movement toward sustainability to
achieve significant impact and institutional viability. Further, USAID
policy states that missions providing assistance for microenterprise
development should monitor and report on their outreach to the poor,
including the distribution of its loan portfolio by loan amount.
* Training. USAID supports training courses for its own and
implementing organizations' staff in designing and executing
microenterprise activities. In addition, USAID provides funding to the
Microenterprise Development Institute at Southern New Hampshire
University and to Business Development Services Training Program at the
Springfield Centre in Durham, United Kingdom, to support their
microenterprise development training programs. USAID's Accelerated
Microenterprise Advancement Project provides scholarships to USAID
staff for microenterprise development training and exchange programs.
USAID also provides funding to the Small Enterprise Education and
Promotion Network (SEEP), a network of nongovernmental organizations
that implement microenterprise activities, for scholarships to enable
USAID employees and practitioners to attend SEEP's training courses.
During our fieldwork, we found that several USAID officials working on
microenterprise development had received training at these locations.
* Technical assistance. USAID's Prime Grant project provides direct
technical assistance to missions in planning microenterprise
activities. The project provides information on advances in
microenterprise development and lessons learned from the missions'
counterparts throughout the agency. USAID's Accelerated
Microenterprise Advancement Project provides missions technical
assistance from microenterprise experts and information on ongoing
research and learning in microenterprise development. Missions may also
receive technical assistance in developing scopes of work, including
sample scopes, and ongoing support throughout the procurement process.
USAID Has Collaborated with Other Organizations in Identifying and
Promoting Best Practices:
USAID has collaborated with implementing partners, networks of
implementing organizations, and the World Bank in identifying and
promoting best practices. These organizations have published handbooks,
bulletins, and other documents on best practices; maintained Internet
sites devoted to best practices; and sponsored seminars and workshops.
For example:
* CRS and ACCION International, two USAID-supported nongovernmental
organizations, have published handbooks to assist in designing and
implementing microenterprise activities. CRS also established the
Microfinance Alliance for Global Impact project to help its
implementing institutions strengthen their activities. The Foundation
for International Community Assistance produced an evaluation of
current practices used by microfinance institutions in assessing client
poverty levels. Implementing partners such as ACCION International and
Opportunity International also sponsor regional conferences,
workshops, and seminars on best practices.
* USAID has provided funding to SEEP to support its efforts to promote
best practices. According to SEEP's Executive Director, USAID has been
one of its leading supporters, providing funding and technical
assistance and participating in the network's conferences and
workshops. SEEP has published two studies on microenterprise best
practices.[Footnote 32] The network also sponsors conferences and
workshops on improving microenterprise activities.
* USAID is a member of the World Bank's Committee of Donor Agencies for
Small Enterprise Development and Donor's Working Group on Financial
Sector Development, which have published guiding principles for
designing and implementing microenterprise activities in 1995 and in
2001. The World Bank has also published reports to support the design
and implementation of microenterprise activities, such as a handbook,
to assist in operational planning and internal audits of
activities.[Footnote 33] The group also provides information through
MicroBanking Bulletin and the Microfinance Information Exchange.
Conclusion:
We found that microenterprise projects--including those funded by
USAID--can help alleviate some of the impacts of poverty on
individuals, households, and families. However, evidence suggests that
microfinance alone has not lifted large numbers of the poor over the
poverty line. In addition, despite USAID's use of micro loans to target
the very poor, as mandated, few loans appear to be reaching this group,
in part because loan size is an inadequate targeting method. Other
evidence suggests that loans to the very poor can place some borrowers
at risk of unmanageable debt and may be more beneficial when offered
with other financial services such as savings and insurance and with
development assistance such as grants, health services, education, and
housing. Efforts to reach the very poor that do not recognize and
address these key concerns may not be fully effective.
Despite the general reliability of its data, certain methodological
weaknesses in USAID's MRR system may prevent the agency from reporting
with precision its program expenditures, the percentage of its funds
going to the very poor, the percentage of MFIs that are sustainable,
and the extent of USAID's contributions to the institutions it
supports.
Recommendation to USAID:
We recommend that the Administrator of USAID review the agency's MRR
system with the goal of ensuring that its annual reporting is complete
and accurate. Specifically, the Administrator should review and
reconsider the methodologies used for collection, analysis, and
reporting of data on annual spending targets, outreach to the very
poor, MFI sustainability, and the contribution of USAID funding to the
institutions it supports.
Agency Comments and Our Evaluation:
USAID provided written comments on a draft of this report (see app. V).
USAID concurred with the report's recommendation that it make
improvements in its MRR. The agency cited three points with which it
took issue, related to reaching the very poor, the sustainability of
MFIs it supports, and its reporting of contributions to institutions.
USAID stated that the number of small loans it had issued indicated
that it was reaching the very poor. As discussed in our report and
acknowledged in USAID's comments, loan size is now recognized as an
inaccurate indicator of the extent to which this program is reaching
the very poor. Given this limitation, we reviewed detailed impact
studies that collected information on borrowers' economic status (see
app. III for a summary of key studies on this topic); further verified
this information through detailed discussions with international
experts, USAID officials, and their implementing partners working with
USAID-funded programs; and conducted detailed program reviews in three
countries . The general consensus across the studies, experts, and
program implementers is that microfinance projects serve those
clustered around the poverty line but generally do not reach the very
poor.
USAID also stated that, contrary to our report, the agency uses a
single definition of sustainability, and it inferred that the
sustainability data reported in the MRR was accurate. We disagree with
USAID on these points: We documented several definitions and
interpretations that affect the reliability of the reported data, and
we have added information to the report to clarify our concern
regarding the agency's method for measuring microfinance institutions'
sustainability. As noted in the report, 38 percent of MFIs that
received USAID funding in fiscal year 2001 reported that they had
achieved financial sustainability. The higher figure cited in USAID's
response combined data on operational and financial sustainability,
despite the fact that operational sustainability is, by USAID's
definition, an interim measure toward the goal of achieving full
financial sustainability.
USAID stated that it would be difficult to allocate the microenterprise
accomplishments reported in the MRR between USAID and other donors.
However, it said that it plans to include more explicit language in the
MRR to indicate that results are generally reported for entire
institutions and that the resources of other donors and supporters
contributed to the results. In its comments, USAID also agreed to (1)
provide more explicit instructions on what activities to include in the
MRR; (2) revise the formula for estimating the extent of funding that
benefits the very poor and include in its annual report additional
language concerning the formula; (3) improve the accuracy of data on
obligations and poverty lending; and (4) adopt a new standardized
definition of sustainability if one is adopted by the field. We believe
that these improvements would be responsive to our recommendation and,
if made, could improve the accuracy and balance of the MRR.
We will send copies of this report to interested congressional
committees as well as the USAID Administrator. We will also make copies
available to others upon request. In addition, this report will be
available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please
contact me at (202) 512-3149 or at gootnickd@gao.gov. Other contacts
and staff acknowledgments are listed in appendix VI.
Sincerely yours,
David B. Gootnick:
Director, International Affairs and Trade:
Signed by David B. Gootnick:
[End of section]
Appendix I: Scope and Methodology:
To determine whether the U.S. Agency for International Development's
(USAID) microenterprise development program is meeting its key
objectives, we first identified those objectives by reviewing the
agency's policy guidance and the pertinent legislation. We also held
discussions with USAID officials in Washington, DC. To determine the
results of the agency's microenterprise assistance, we met with
officials and reviewed documents from USAID and their implementing
partners in Washington, Peru, Egypt, and Bulgaria, and we met with
program beneficiaries in these three countries. We selected Peru and
Egypt because they have mature programs that have existed since the
late 1980s and received high levels of USAID obligations over the past
10 years. These countries also represent culturally different areas
(e.g., the program in Peru serves a large indigenous population, and
the primarily business-led program in Egypt serves a combination of
urban and rural areas). We selected Bulgaria because the program was
relatively new; per capita income and the gross domestic product were
high; and participants were reported by USAID to have higher
educational levels and to be operating different types of businesses
than in Africa, Asia, or Latin America. In addition, we reviewed a
broad range of program and academic studies on the issues and conducted
interviews and round-table discussions with academics and practitioners
who have expertise regarding the ability of microenterprise activities
to meet USAID's objectives. We also reviewed USAID studies that
pertained to countries we visited, as well as studies that assessed
project impact related to key program objectives. Because most
available USAID data and most of the research literature focuses on
microfinance, particularly micro loans, we concentrated our review
primarily on this aspect of microenterprise development.
To assess the reliability of the Microenterprise Results Reporting
(MRR) data, we reviewed the survey questionnaires that are used to
collect the data, noting strengths and weaknesses in the survey design.
We also conducted a variety of analyses of the MRR database. Our
analyses focused on the data on obligations supplied by the USAID
missions and the data on microenterprise activities supplied by
microfinance institutions (MFI), business development service (BDS)
providers, and policy service providers from 1995 through 2002. We
conducted interviews focused on data reliability with the contractor
that manages the data collection and analysis and drafts the MRR
reports. In these interviews, we asked how the survey data are
collected, what quality checks are performed, and what other internal
controls are in place. On our field trips to Peru, Egypt, and Bulgaria,
we conducted data reliability interviews with officials at all three
USAID missions and at six institutions that had received USAID funding.
During our meetings with USAID missions and the institutions, we
conducted spot checks of key MRR data to assess their reliability. We
found that the reliability of the lending and BDS institutions' data on
the percentage of women clients sufficed for our analysis, provided we
noted that some BDS providers could not directly estimate these
percentages. The data on lending institutions' sustainability were of
uncertain reliability because of inconsistencies in the way respondents
interpreted the MRR survey question; however, these data were
consistent with the testimonial and documentary evidence that we
gathered.
To examine USAID's role in identifying and disseminating best
practices, we reviewed (1) USAID policy guidance, (2) USAID country
strategies and annual reports for the three countries we visited, and
(3) other relevant USAID documents. We also reviewed a wide body of
literature on the subject, including World Bank publications and the
MicroBanking Bulletin; analyses of best practices produced by donor
groups; handbooks, analyses, and other documents produced by USAID
implementing organizations such as Catholic Relief Services and
Opportunity International; and studies and analyses by recognized
microenterprise experts. We interviewed USAID officials in the
Microenterprise Development Division, the regional bureaus that oversee
mission activities, and the countries we visited, including officers
responsible for economic growth and microenterprise activities. We also
interviewed officials of the World Bank and from implementing
organizations in Washington, D.C; Baltimore, Maryland; and the
countries we visited. Finally, we attended a roundtable on best
practices whose members included recognized experts on microenterprise
development from the World Bank, implementing organizations, and
academia. The World Bank also provided informal comments on a draft of
this report.
We conducted our review from December 2002 through September 2003 in
accordance with generally accepted government auditing standards.
[End of section]
Appendix II: Microenterprise Best Practices:
Best practices are processes, practices, and systems that have been
used by organizations and widely recognized as improving performance in
achieving program goals. Although the research literature and our
fieldwork indicate that no standard manual of best practices exists for
microenterprise development, a core of preferable strategies (best
practices) has emerged within the microenterprise industry comprising
USAID, other donors, and their implementing partners.
Design-Related Best Practices:
* Perform due diligence reviews. USAID officials require their
implementing partners to carefully review all candidates and to pay
particular attention to choosing institutions with strong management
skills. Officials from Catholic Relief Services (CRS), a
nongovernmental organization that manages a microenterprise activity in
Bulgaria, chose their implementing partner based on the partner's
strong management experience.
* Develop broad outreach. At USAID missions in Peru, Bulgaria, and
Egypt, microenterprise activities included provisions for small loans
to poor microentrepreneurs with no other affordable credit
alternatives. A USAID-supported MFI in Egypt recently initiated a
lending program that specifically provides small loans to the poor and
is instituting a grant program to help the very poor become eligible
for micro loans. In Peru, to target the poor and very poor, USAID chose
to implement microenterprise activities in several of the country's
poorest regions. USAID-supported institutions in Bulgaria and Egypt
offered financial incentives to loan officers, based in part on the
number of loans in their loan portfolio, to encourage them to attract
clients.
* Increase access to services. At implementing organizations in Peru,
Bulgaria, and Egypt, loan officers assist poor and very poor clients in
filling out the loan applications and attempt to review and approve
loan requests within a few days. In addition, because the poor usually
lack the collateral needed to qualify for loans, USAID supports
collateral substitution activities to attract the poor and very poor
who would have no other access to credit. USAID missions in Bulgaria,
Egypt, and Peru conduct microenterprise activities that used group
lending as a collateral substitute. For individual loans, an
implementing organization in Bulgaria require that clients obtain
written loan guarantees from acquaintances as a collateral substitute.
* Adopt an appropriate lending model. Some models, such as group
lending or village banking,[Footnote 34] may be more appropriate than
individual lending programs for certain activities or institutions. CRS
adopted a group lending model to serve the needs of the poor in
Bulgaria. (This model also supports the CRS goal of advancing social
and economic justice by serving the poorest.) A study of group lending
activities in Africa, Asia, and Latin America indicated that more
successful group lending models vary according to the local culture.
For example, in South Africa, the South African Get Ahead Foundation
adapted the traditional African rotating savings program to create
similar group lending activities.
* Offer an array of services. In addition to credit, services such as
savings options and insurance are valuable to clients and, by providing
other revenue sources, can assist MFIs in reaching sustainability. In
Indonesia, a CRS MFI established a savings program in a village bank
for its microenterprise clients. ACCION International, using a group
lending model, has each member contribute a minimum amount to a common
pool of savings.
* Establish appropriate pricing policies for services. USAID requires
financial institutions that receive microenterprise funding, even those
that emphasize lending to the very poor, to charge unsubsidized
interest rates. For example, CRS specifies in its microenterprise
handbook that the MFIs it manages should charge unsubsidized interest
rates. In Bulgaria, Egypt, and Peru, the annual interest rates can be
as high as 40 percent annually, although the repayment period is often
less than 1 year.
* Control loan delinquency rates. Loan delinquency rates greater than
10 percent have been found to seriously undermine MFI sustainability.
Several MFIs offer financial incentives to their loan officers
partially based on the repayment rates of their loan portfolio. MFIs in
Peru, Bulgaria, and Egypt use different methods to determine financial
incentives to reward their loan officers, but all base the amount of
financial incentive on the loan repayment rate of the officer's
portfolio. At one implementing organization in Egypt, loan officers
must maintain at least a 97 percent repayment rate on their loan
portfolios to be eligible for financial incentives. An MFI in Bulgaria
that provides individual loans requires that five people provide
guarantees for each loan. The MFI also employs a loan collection
officer and an attorney to file in court to collect on delinquent
loans. MFIs in Egypt and Bulgaria that focus on poverty lending use a
group lending model to provide for prompt loan repayment.
* Address potential policy constraints. USAID guidance advises missions
to consider the local economic environment when designing and
implementing microenterprise activities. For example, the guidance
advises missions not to provide assistance to MFIs during periods of
high inflation. USAID officials told us the agency suspended a
microenterprise activity because the Government of Egypt tax policies
were too restrictive. Grant agreements may also include a component
focused on policy and regulatory reforms to facilitate microenterprise
activity. Such reforms may include permitting financial institutions to
offer savings to clients, streamlining business registration procedures
and assisting microentrepreneurs in registering and obtaining title to
their businesses' assets. A USAID grant agreement in Bulgaria required
the implementing organization to coordinate efforts in legislation on
policy reform within 3 years.
Implementation-Related Best Practices:
* Require transparency and accountability in operations. USAID requires
implementing partners and MFIs to report annually on financial and
operational performance. In Peru, a USAID-funded technical assistance
provider conducts audits of more than 40 MFIs to assess their
implementation-related practices.
* Provide adequate resources to successfully manage a microenterprise
activity. Effective management information systems and other assets are
necessary for implementing organizations and financial institutions to
make decisions, motivate performance, and provide accountability over
funds. USAID provides resources to help implementing partners and MFIs
improve their management capacity. For example, most USAID grant
agreements provide funding to rent office space, to purchase management
information systems, including the computers needed to track
outstanding loan balances and due dates, and to purchase other
equipment such as office furniture.
* Provide necessary training. Training for implementing organizations
and clients in areas such as financial management and computers is
often needed to ensure that MFIs manage operations effectively. USAID
grant agreements may provide funding for training of implementing
organizations' staff. Implementing organizations, such as an
Opportunity International-funded MFI in Colombia, includes weekly
training of clients in areas such as marketing and product
presentation. A USAID-funded study of five nongovernmental
organizations implementing microenterprise activities concluded that
heavy investment in training was a factor in the success of village
banks.
* Provide incentives to loan officers. USAID-supported MFIs in Bulgaria
and Egypt provide loan officers incentive-based salaries. Criteria for
the incentives included the number of clients recruited and the
clients' loan repayment rates. Incentives can double loan officers'
monthly earnings.
* Require a manageable loan portfolio for loan officers. Implementing
organizations in Bulgaria and Egypt, such as CRS and Opportunity
International, limit the number of clients one loan officer can manage.
The number can vary depending on the ability of the officer, but few
manage more than 300 clients. Also, because incentives are based
primarily on loan default rates, officers are motivated to limit their
pool of clients to a size they can manage effectively.
* Monitor and evaluate performance. Donors and implementing
organizations should monitor the performance of the MFIs they support
to ensure they are meeting program goals. These goals can include a
focus on the poor and women, as well as financial indicators, such as
repayment rates and progress toward sustainability. They should also
perform audits on a regular basis to ensure the accuracy of information
reported. USAID typically performs midterm and final evaluations of its
grant agreements. A cross-country study of village banks in seven
countries concluded that oversight of the banks' operations was a
critical factor in their success. Further, USAID requires annual
financial reports of implementing organizations.
* Promote MFI sustainability. This goal supports (1) sound financial
practices, (2) expanding and maintaining outreach, and (3) reducing
dependency on donor support. USAID and other implementing organizations
encourage MFIs to charge unsubsidized interest rates to cover the cost
of operations. A USAID-funded study of successful microenterprise
activities in Indonesia and Bangladesh concluded that MFIs must have a
commitment to, and a plan for, reaching sustainability.[Footnote 35]
[End of section]
Appendix III: Review of Microenterprise Studies:
We collected, reviewed, and analyzed a set of 22 studies, 20 of which
provide an overview of existing research and practice in
microenterprise or its components. The purpose of our review was to
obtain general information on the primary findings, issues, and debates
in microfinance and microenterprise and to complement other USAID-
specific components of our data collection efforts.
We selected these studies on the basis of three criteria: (1) each
study was published in 1998 or later, (2) each was peer reviewed or
published by journals or publishers respected in the field, and (3)
each was recommended by 2 or more of 15 microfinance experts we
consulted. We also included two case studies (published and peer
reviewed), because 5 or more of the experts we consulted recommended
them. We ensured that the studies selected covered a range of
microenterprise subtopics and scientific journals relevant to economic
and social development issues. A primary reviewer summarized each study
using a data collection instrument developed specifically for the
purposes of this review. A secondary reviewer then verified each study
summary.
We reviewed each of the 22 articles and summarized the findings and
relevant suggestions or recommendations, paying particular attention to
information on poverty impacts, outreach, women's empowerment,
sustainability, and best practices (see table 1). (Note: The
recommendations in the third column of the table are those of the
studies' authors and do not represent the viewpoint of GAO.):
Table 1: Findings and Recommendations from 22 Selected Studies on
Microfinance and Microenterprise Development:
1; Author title source: Bhatt, Nitin; Tang, Shui-Yan; Delivering
Microfinance in Developing Countries: Controversies and Policy
Perspectives; 2001. Policy Studies Journal 29 (2): 319-333; Primary
findings: * Attempts to replicate best-practice models of microfinance
based on successful programs (Grameen, BRI, BancoSol) have largely been
disappointing; * Few programs have lived up to their original
objective of "including the excluded."; * In most cases, subsidies have
ended up funding inefficient and lax management practices that have
resulted in limited outreach, high loan default rates, and
unsustainable operations; Author recommendations: * The best solution
for the microfinance industry is to have a diverse array of
institutions that are both non-and for-profit, subsidized and
unsubsidized, and bare-bones and integrated; * There is a need for
better, more accurate financial reporting and cost-benefit analysis in
microfinance.
2; Author title source: Cohen, Monique; Making Microfinance More
Client-Led; 2002. Journal of International Development 14 (3): 335-
50; Primary findings: * The microfinance industry has been largely a
single product industry; this product has worked well for people around
the poverty line but is less effective at reaching the very poor; *
Although most MFIs serve a wide range of clients, the majority of
clients are clustered just above and just below the poverty line; *
Many poor people are highly indebted and microfinance loans are only
one component of the debt burden of many households; * High drop-out
rates in some places have arisen as competition between MFIs has
increased; * Poverty-targeted programs tend to reach a higher
percentage of lower income clients; even here, poorer populations often
exclude themselves from microfinance programs; * Many poor people
"patch" together funds from a variety of sources, including MFIs, in
order to meet their consumption and investment needs; * Most MFI
management information systems lack adequate client information that
can be used as a tool in decision making and product development;
Author recommendations: * To achieve outreach to underserved market
segments and to the very poor, the microfinance industry must focus on
clients' specific financial needs and design appropriate financial
services accordingly.
3; Author title source: Steven Haggblade; Mead, Donald C; Meyer,
Richard; An Overview of Policies and Programs for Promoting Growth of
the Rural Nonfarm Economy; Forthcoming. In Developing the Rural
Nonfarm Economy, edited by Steve Haggblade, Peter Hazel, and Thomas
Reardon; Primary findings: * In analyses of the impacts of micro loan
programs on rural nonfarm economies, outreach has proven impressive,
financial sustainability has proven elusive, and income increases have
been generally documented at the household and firm levels,
particularly for the better-off poor and in Asia; * Micro loans have
not advanced our understanding of the challenge of lending to
enterprises in rural areas where population densities are lower and
where the seasonality in cash flows and lending costs is higher; *
Business development services involving the delivery of nonfinancial
services to rural nonfarm enterprises are more heterogeneous, more
problematic, and have produced decidedly fewer results than the
delivery of financial services to rural nonfarm enterprises; Author
recommendations: * In the future, improvements in rural welfare will
need to go beyond financial markets and services to develop new engines
of economic growth, new technologies, and new ways of doing business;
* A focus on subsectors, supply chains, and clusters can lead to
tailored systemic interventions that unleash growth potential for large
numbers of rural firms.
4; Author title source: Hulme, David; Impact Assessment Methodologies
for Microfinance: Theory, Experience, and Better Practice; 2000. World
Development 28 (1): 79-98; Primary findings: * Microfinance impact
assessments vary greatly in their range, rigor, and practicality; there
have been relatively few quasi-experimental, control-treatment
studies, and practitioners have found such studies to be expensive and
difficult to use; * There is increasing movement toward mixed studies
incorporating quantitative and qualitative elements and toward
designing impact assessment activities into microfinance programs;
Author recommendations: * Impact assessments must be tailored to the
resources, needs, and time frames defined by the program's context.
5; Author title source: Khandker, Shahidur R; Fighting Poverty with
Microcredit: Experience in Bangladesh; 1998. New York: Oxford
University Press; Primary findings: * Globally, micro loan programs
have been able to reach the poor and enhance both their productive and
human capital by generating self-employment; * The long-run cost-
effectiveness of micro loans depends on the overall growth of the
economy; * Bangladesh is one of the few countries in which micro loan
programs have been successfully replicated; * Microfinance in the
Bangladesh programs reduced poverty by increasing per capita
consumption among program participants and their families; poverty
reduction estimates based on consumption impacts show that about 5
percent of program participants can lift their families out of poverty
each year through microfinance; * One percent of rural households in
Bangladesh can free themselves from poverty each year through micro
loans; * Participation in micro loan programs enhanced women's
productive means by increasing their access to cash income from market-
oriented activities and by increasing their ownership of nonland
assets; * Subsidies in the Bangladesh programs studied were necessary
to defray an array of high costs associated with providing microloans
to the poor; Author recommendations: * In replicating microfinance
programs, it is necessary to design a socially conscious and
transparent system of accountability that works for both program
officials and borrowers; * The poor and women need special banking, so
the commercialization of micro loans should not divert attention from
meeting this special need.
6; Author title source: Matin, Imran; Hulme, David; Rutherford,
Stuart; Finance for the Poor: from Microcredit to Microfinancial
Services; 2002. Journal of International Development 14 (2): 273-94;
Primary findings: * Poor people must and do save in order to finance
the large lump sum payments needed to deal with an array of life-and
environment-based needs and crises; * The poor are a heterogeneous
group of vulnerable households with complex livelihoods and varied
needs; * The success of the group lending model globally is mixed; *
Weekly frequency of repayment and repayment incentives (typically
larger repeat loans) correlate strongly with success, defined in terms
of arrears rate and subsidy repayment index; Author recommendations: *
A shift away from credit for business development toward financial
services of all types for the poor will help them to effectively manage
the many risks and crises that emerge in their lives.
7; Author title source: Mayoux, Linda; From Access to Empowerment:
Widening the Debate on Gender and Sustainable Micro-Finance; 2000.
Journal fur Entwicklungspolitik 16 (3): 247-273; Primary findings: *
Some policies introduced for financial sustainability result in adverse
impacts on empowerment; * Beneficial impacts of microfinance per se on
women cannot be assumed; impacts vary substantially across cases and
programs; * Microfinance services have enabled some, but not all,
women to increase their incomes and negotiate improvements in their
family and community position; microfinance alone is the most limited
for the poorest and most disadvantaged women; * Women's decisions
about loan use involve assessments of benefits, costs, and risks in the
context of the gender norms of household resource allocation and
decision-making; * Women's choices about activity and ability to
increase income are constrained by gender inequality; market, resource,
and skill constraints; and microfinance delivery; Author
recommendations: * An empowering gender policy should include
increasing women's incomes from their own activities; control of income
from loans and activities; negotiated improvements in household well-
being, and access to support networks; * A gender policy that supports
financial sustainability and empowerment should consider improving the
conditions of service delivery, reducing costs of complementary
services (e.g., training, gender awareness/support), and mainstreaming
gender policy.
8; Author title source: Mead, Donald C; Liedholm, Carl; The Dynamics
of Micro and Small Enterprises in Developing Countries; 1998. World
Development 26 (1): 61-74; Primary findings: * House-to-house baseline
surveys make clear that the number of micro and small enterprises (MSE)
is far larger than that reported in most official statistics; * In
most countries, the majority of MSEs operate in rural areas, are
engaged in the trade and manufacturing sectors, are owned and operated
by women, and are more likely to be operated from the home; * Younger,
smaller, male-headed manufacturing and services MSEs in urban areas are
more likely to grow than are older, larger, female-headed trade MSEs in
rural areas; * When the economy is more buoyant, new jobs come from
the expansion of existing firms; in times of stagnation, existing MSEs
cut back on employment and a larger percentage of new jobs comes from
start-ups; Author recommendations: * Policies and projects for
supporting MSE development must be aware of the diversity of MSEs and
focus on the types of enterprises and on the stages in the enterprise's
life cycle where interventions can do the most good.
9; Author title source: Morduch, Jonathan; The Microfinance Promise;
1999. Journal of Economic Literature (37) 4: 1569-1614; Primary
findings: * There are few reliable studies of the net poverty impacts
of microfinance programs; those which do exist suggest some limited
positive impacts, as well as other mixed results; * Sustainable
microfinance programs have by and large not been able to reach the very
poor in large proportions or numbers; * Microcredit supplements
clients' income and does not produce fundamental shifts in clients'
employment patterns; microcredit rarely generate new jobs for others;
* The features of microfinance program designs vary to a high degree
globally; * Incentives and specific program design elements such as
group lending, weekly repayments, graduated repayment schedules, and
forced savings, have been important in the successes that microfinance
programs have achieved to date; * Microcredit has had very limited
success in regions with low population densities and with seasonal
income patterns; Author recommendations: * Savings programs will
strongly complement the credit-driven approach that has dominated
microfinance to date; * To alleviate poverty, new approaches to
management structures and product/program design are necessary.
10; Author title source: Morduch, Jonathan; The Microfinance Schism;
2000, World Development 28 (4): 617-629; Primary findings: * There is
a strong consensus among prominent policy making organizations that
microfinance institutions (MFI) that focus on profitability (through
high interest rates) will have the strongest effects on poverty; *
This consensus on best practices is at odds with actual practice, where
the large majority of MFIs are not focused on profitability, have not
given up subsidies, and are not sustainable; * Moderate subsidies have
been necessary in some programs to attain social objectives not present
in for-profit MFIs; * Efficient operations and clear incentive
structures for clients and loan staff are more important factors in
achieving success in microfinance than a focus on profitability;
nonprofit, subsidized programs have been able to operate efficiently,
provided they adhere to clear budgeting and performance criteria; *
Governments have played critical indirect roles in cases such as
Indonesia's BRI and Thailand's BAAC, which are state-owned commercial
banks; Author recommendations: * A diverse array of socially oriented,
subsidized, and profit-oriented, sustainable microfinance institutions
is best for the microfinance industry and for wide-scale poverty
alleviation; * If subsidized programs are to continue at current
funding levels, they will likely need to rely increasingly on their own
governments.
11; Author title source: Navajas, Sergio; Schreiner, Mark; Meyer,
Richard; Gonzalez-Vega, Claudio; Rodriquez-Meza, Jorge; Microcredit
and the Poorest of the Poor: Theory and Evidence from Bolivia; 2000.
World Development 28 (2): 333-346; Primary findings: * In a study in
La Paz, Bolivia microfinance lenders tended to serve those near the
poverty line, not the "poorest of the poor."; * Rural and group lenders
tended to serve larger numbers of poorer clients than urban and
individual lenders; * In addition to depth, defined as the degree to
which an MFI reaches the very poor, factors such as worth, cost,
breadth, length, and scope are important in evaluating outreach to and
the social welfare of the poor; * Length of outreach (time frame in
which an organization produces loans) is the key aspect of outreach
because it prompts improvements in the five other aspects; Author
recommendations: * Policy-makers and MFIs should consider all aspects
of outreach in making judgments about the focus and social benefits of
microfinance.
12; Author title source: Rankin, Katherine N; Social Capital,
Microfinance, and the Politics of Development; 2002. Feminist
Economics 8 (1): 1-24; Primary findings: * There is substantial
evidence that microfinance and micro loan programs have served to
strengthen existing patterns of male and class-based power relations,
rather than empowering women; Author recommendations: * Development
agencies and policy should place greater emphasis on finding ways to
empower the poor and disadvantaged so that they can overtly challenge
dominant social power relations.
13; Author title source: Rhyne, Elisabeth; Microfinance Institutions
in Competitive Conditions; 2002. In The Commercialization of
Microfinance: Balancing Business and Development, edited by Elisabeth
Rhyne and Deborah Drake. Kumarian Press; Primary findings: * The
microfinance industry has to date primarily been a one-product
industry, based on short-term (3 to l2 months) group-based lending,
with frequent repayments, and small loan sizes; * Microfinance
institutions have traditionally taken an inward-looking approach to
their development, focusing primarily on streamlining operations to
achieve greater outreach; * In some countries, there has been a
substantial increase in competition among MFIs for clients, e.g.,
Bolivia, Bangladesh, Nicaragua, and Uganda, which has increased the
need for MFIs to be more oriented toward their 1) competition and 2)
clients; * Overlending is a key problem that arises in competitive
markets; Author recommendations: * Maintaining sustainability, while
becoming more attuned to the needs of clients, is critical; MFIs must
adapt to the changing needs of clients to survive and develop in the
newly competitive microfinance environment; * MFIs must be attuned to
the problem of overlending.
14; Author title source: Robinson, Marguerite S; The Microfinance
Revolution: Sustainable Finance for the Poor (Chapters 1 and 2); 2001.
Washington, D.C.: The World Bank; Primary findings: * Sustainable
microfinance only occurs in systems providing commercial financial
intermediation; other models (e.g., subsidized credit) are not
sustainable in the long term and are not affordable on a global scale;
* Only institutional commercial microfinance can provide sustainable
financial services to the working poor by providing low-cost credit and
wide outreach; * The lowest levels of the poor need food, employment,
and/or government or donor assistance and grants; Author
recommendations: * The shift away from donor-assisted credit delivery
to sustainable financial institutions that provide commercial
microfinance is essential to meet the global demands for microfinance;
* Governments must support commercial microfinance through regulation,
supervision, and public education to ensure success.
15; Author title source: Rutherford, Stuart; The Poor and Their
Money; 2000. New Delhi, India: Oxford University Press; Primary
findings: * The poor can save, do save, and want to save money; the
poor have to save to make the large lump sum payments that come up
frequently in their lives; * The argument about whether the poor need
savings or loans is false; they need both; * Financial services for
the poor help them trade their savings for lump sums of cash; good
financial services for the poor are those that perform this trade
well; Author recommendations: * The key to microfinance is to find
creative ways to collect small sums (savings, repayments, insurance
premiums) and turn them into large sums (loans, withdrawals from
savings, or insurance pay-outs).
16; Author title source: Schreiner, Mark; Aspects of Outreach: A
Framework for Discussion of the Social Benefits of Microfinance; 2002.
Journal of International Development 14 (5): 591-603; Primary
findings: * There are six interacting dimensions of outreach: worth to
clients, cost to clients, depth, breadth, scope, and length; *
Tradeoffs exist in achieving outreach: programs focusing on
sustainability achieve breadth, length, and scope at the expense of
depth; programs focused on poverty alleviation achieve depth at the
expense of breadth, length, and scope; Author recommendations: *
Microfinance institutions should focus on sustainability because the
longer an MFI is in operation the greater the number of clients and the
greater the overall impact on poverty.
17; Author title source: Sebstad, Jennefer; Cohen, Monique;
Microfinance, Risk Management, and Poverty; 2000. AIMS. U.S. Agency
for International Development; Primary findings: * Microfinance
programs have been more successful in reaching clients from moderately
poor and vulnerable non-poor households than from extremely poor
households; * Clients use loans for a wide range of purposes beyond
enterprise development; * Micro loans are more useful for clients in
protecting against risks ahead of time than in smoothing consumption
following a shock; * Investment in productive assets is more prevalent
among clients having larger loan sizes, higher numbers of loans, and
more time in the program; * Microloans have positive impacts on
reducing vulnerability measured as diversified income sources,
increased numbers and types of assets, and women's empowerment; Author
recommendations: * Future programs should link services to clients'
needs and demands, should become more flexible, and should diversify
services offered; * Linking financial services with other supportive
services could improve clients' ability to deal with risks.
18; Author title source: Snodgrass, Donald R; Sebstad, Jennefer;
Clients in Context: The Impacts of Microfinance in Three Countries.
Synthesis Report; 2002. AIMS. U.S. Agency for International
Development; Primary findings: * Overall, microfinance makes a
difference to people's lives; however, microfinance does not have the
unequivocally large, positive impact on microenterprise development and
poverty reduction that has been claimed for it by some; * Microfinance
impact is a function of product characteristics, the macroeconomic
situation, and the length of time the client has been in the program;
* The microfinance programs reviewed had significant impact on a
variety of individual-, household-, and enterprise-level income and
well-being indicators, although the nature and magnitude of these
impacts vary across countries and programs; * Microfinance provided
recipients with resources for dealing with risks typically not
available to nonrecipients; * Receiving a micro-loan resulted in
greater household and enterprise decision-making authority for women in
the study; Author recommendations: * Expanding and diversifying
services to include savings, insurance, and emergency loans will
increase impact and enhance clients' ability to cope with shocks.
19; Author title source: Snow, Douglas R; Buss, Terry F; Development
and the Role of Microcredit; 2001. Policy Studies Journal 29 (2): 296-
307; Primary findings: * We have very scant knowledge of the
relationships between program designs and outcomes; * There have been
very few strong microfinance program outcomes studies; as a
consequence, "there is good reason to fear reliance on program design
as a surrogate for outcomes."; * If forced to stand alone, few micro
loan programs, if any, would survive; * The twin concepts of
sustainability and outreach are inherently contradictory; Author
recommendations: * Governments, if not all donors, ought to have
specific goals for micro loan programs and these should be grounded in
strong research and knowledge of impacts.
20; Author title source: Von Pischke, J.D; Current Foundations of
Microfinance Best Practices in Non-Industrialized Countries; 2001. In
Replicating Microfinance in the United States, edited by Jim Carr and
Zhong Yi Tong. Washington, D.C.: Fannie Mae Foundation; Primary
findings: * Major players in both sustainability-and poverty-oriented
MFIs have developed a consensus about preferred microfinance
strategies; * They have generally agreed upon 12 best practices:; *
Create sustainable institutions; * Charge interest rates that will
enable the lender to cover costs; * Control arrears; * Use subsidies
for institution building, i.e., technical assistance and
capitalization; * Behave competitively from the outset; * Maintain
uncompromising commitment to the target group; * Select "owners" who
will provide effective governance; * Manage risk, explore failure; *
Develop good management information systems; * Be transparent; *
Focus on incentives; * Exchange information on defaulters; Author
recommendations: [Empty].
21; Author title source: Woller, Gary M; Dunford, Christopher;
Woodworth, Warner; Where to Microfinance?; 1999. International Journal
of Economic Development 1 (1): 29-64; Primary findings: * There is
general agreement in microfinance that poverty reduction and the
achievement of financial self-sufficiency are the basic goals for the
industry; * The industry disagrees on how to achieve these goals: the
institutionists emphasize financial self-sufficiency over a focus on
the very poor; the welfarists emphasize assisting the very poor over
the need for financial self-sufficiency; * The institutionist
perspective has become more prominent in the microfinance industry, but
its assertions that subsidized institutions cannot survive for long
periods and cannot have strong, large-scale impacts on the very poor
are not fully supported by existing evidence and are based on an array
of questionable or inconsistent assumptions; * Most microfinance
institutions lie somewhere along a continuum ranging from traditional
business and traditional social service orientation; Author
recommendations: * There is no need for a once-and-for-all choice
between competing approaches; the microfinance industry should be
characterized by a diversity of microfinance institutions that cater to
various segments of low-income communities.
22; Author title source: Wright, Graham; Replication. Regressive
Reproduction or Progressive Evolution?; 2000. Journal of Microfinance 2
(2): 61-81; Primary findings: * Replication of a best practices model
for microfinance program design has been difficult, because the
contexts in which such a model would be implemented vary so greatly; *
Institutions attempting to replicate the same general microfinance
model are characterized by a high level of diversity in implementation
methodologies; * The poor often participate in a variety of formal and
informal financial institutions; Author recommendations: * To be
successful, microfinance programs must be adapted and tailored to the
cultural, economic, social, and political features of the contexts in
which they are implemented; * Implementation and replication of
programs must include a period of research, experimentation, and
adaptation.
[End of table]
[End of section]
Appendix IV: USAID's Microenterprise Results Reporting:
To monitor and evaluate its microenterprise portfolios, USAID developed
a data collection process and information management system known as
the Microenterprise Results Reporting (MRR). The term also refers to an
annual report that presents the agency's financial data--primarily
amounts it obligates for microenterprise development--and programmatic
information.
The MRR data are collected through annual surveys of USAID staff in
headquarters and at overseas missions and the institutions that receive
USAID funding. A USAID contractor is responsible for data collection
and the management information system. Beginning early in each fiscal
year, the contractor requests obligations data for microenterprise
projects from USAID headquarters and missions. The mission staff report
current year obligations and identify the recipient institutions,
categorizing them as microfinance, business development services (BDS),
or policy services providers. In addition, the mission staff identify
institutions that received obligations in previous years for ongoing
projects.
Separate surveys have been designed for the microfinance institutions
(MFI), BDS providers, and policy service providers. The survey for MFIs
asks about outstanding loan balances, the number of loans to women,
maximum loan sizes, loan loss, loans below the poverty lending
threshold percentage, the number of rural clients, savings, and the
financial sustainability of the institutions. The survey for BDS
providers asks about the types of services provided, the number of
clients overall, the number of women clients, the number of rural
clients, the number of clients with "poverty loans," data sources for
clients, the clients' industrial sector, the institutions' competitors,
the demand for BDS, and exit strategies. The policy service providers
survey asks about the types of institutions and for descriptions of
policy issues covered.
The number of respondents to the annual surveys during 1998 to 2001 has
remained fairly constant, ranging from 361 to 411. Most MRR respondents
complete the MFI survey. In 2000, for example, 512 surveys were sent
out; 282 of the 361 respondents completed the MFI survey, 99 completed
the BDS survey, and 18 completed the policy survey. The reported
response rates rose in recent years, from 56 percent (411 surveys) in
1998 to 84 percent (492 surveys) in 2001.
USAID contractor staff analyze the data and, in some cases, apply
methodologies the agency has developed to assess whether it has met
particular program goals, such as its poverty-lending target. This
methodology is designed to weight the individual institutions'
obligations by the amounts of loans that are considered poverty loans.
The data and the analyses are presented in the annual reports, which
also provide examples of USAID-funded microenterprise projects. In
addition to publishing the data in the MRR reports, the contractor also
publishes selected data on a Web site accessible to the agency's
missions, institutions that receive USAID-funding, and interested
others.
[End of section]
Appendix V: Comments from the U.S. Agency for International Development:
Note: GAO comments supplementing those in the report text appear at the
end of this appendix.
USAID:
U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT:
NOV 6 2003:
Mr. David Gootnick:
Director, International Affairs:
U.S. General Accounting Office:
441 G Street, N.W.:
Washington, DC 20548:
Dear Mr. Gootnick:
I am pleased to provide the U.S. Agency for International Development's
(USAID's) formal response on the draft GAO report entitled
"MICROENTERPRISE DEVELOPMENT: USAID's Program has Met Some Goals;
Annual Reporting Has Limitations" (November 2003).
We appreciate that the GAO has taken USAID's management of this
important work seriously. The draft report's finding that we have met
some key goals confirms the value of our
comprehensive microenterprise strategy and the dedication of our staff
around the world to this important program. The findings that our
microenterprise development programs alleviate poverty and benefit poor
entrepreneurs and their households are consistent with our experience
of over two decades. The recognition of the strong and effective
priority USAID places on serving women - who comprise two-thirds of all
clients of USAID-supported microfinance institutions - is also welcome.
As the draft report notes, USAID has focused consistently on the
importance of building sustainable institutions, and this has paid off
in an unusually high complement of sustainable partners. We are pleased
with the findings concerning our contributions to promoting donor
collaboration and generating and disseminating knowledge and best
practices.
We continue to find, however, that the report's primary focus on
microcredit, and to some extent microfinance, is inconsistent with the
draft report's title and does not address the full range and scope of
USAID's microenterprise strategy and programs. In addition, we note
three specific points made by the draft report which we consider to
present errors of fact and interpretation and to result in inaccurate
evaluation of USAID's performance
1. Reaching the Very Poor: The report's assertions that "USAID's
Microfinance Activities Generally Have Not Reached the Very Poor" and
"Small Loan Size Does Not Accurately Target the Very Poor" are
contradicted by the only available data of which we are aware.
Congress, USAID and the practitioner community have long used loan size
as a proxy for service to the very poor; passage of the Microenterprise
for Self-Reliance Act in 2000 made use of this proxy a statutory
requirement. While recognizing that the loan size proxy was imperfect,
USAID has applied it through its Microenterprise Results Reporting (MRR
system) to analyze and report on service to the very poor. Using this
measure, MRR reported that in FY 2001 (the most recent year for which
completed data are available), USAID-supported MFIs made 2 million
poverty loans out of 3 million total loans. Thus, two-thirds of all
loans met the statutory standard of service to the very poor. While the
use of smaller loans is one way to increase the likelihood of the very
poor benefiting, USAID has long supported a wide variety of methods to
target services to the very poor, including the use of collateral
substitutes, service features that overcome cultural barriers to
access, and safe and convenient savings services.
2. Sustainability Performance and Measurement: The report's finding
that "Data on MFI Sustainability Are Not Standardized" is not correct.
For more than five years, MRR has used a
single, clear definition of Sustainability (distinguishing between
operational and financial sustainability) in the questionnaires
distributed to fund recipients. There is currently no single alternate
definition of Sustainability that has been adopted as an industry
standard. USAID's microfinance partners have demonstrated impressive
sustainability; at both levels in FY 2001, over half were sustainable
and, more important, 73% of clients were served by sustainable
institutions.
3. Joint Funding of Microenterprise Programs: The report voices concern
that USAID's annual MRR reports do not isolate the Agency's
contributions to the MED institutions it supports, making it difficult
to determine the impact of the agency's funding. The reports do not
attempt to disaggregate USAID's impact from that of other donors,
investors, lenders, or the institution's earnings and assets, for two
important reasons. First, it would be impractical and methodologically
questionable to allocate impact between USAID and other supporters,
since we typically fund institution-building rather than discrete,
separable projects. Second, Agency
policy and philosophy is oriented toward engaging others in support of
our implementing partners in all fields, including microenterprise
development. Such efforts would be seriously hindered by actions on our
part that appeared to take credit for results that are the product of
joint support.
GAO Recommendation: Corrections of these points would, we feel, add to
the credibility of the report. Consequently, we find the recommendation
to be reasonable.
It should be noted that 2003 amendments to the Microenterprise for
Self-Reliance Act also require substantial changes to the MRR and
reporting by awardees on the extent of their service to very poor
clients. The Microenterprise Development Team of the Office of Poverty
Reduction, plans to address the areas of concern within the next month,
with a view to presenting the Administrator the proposed MRR changes by
mid-November. The Administrator's decisions on these matters will be
communicated to you as soon as possible.
It should be noted that the MRR has already incorporated a suggestion
that came from the GAO team prior to receipt of the draft report, i.e.,
that USAID missions receive more explicit instructions on how to pro-
rate reporting of activities that serve purposes and target groups
beyond microenterprise development and poor microentrepreneurs.
By the date of publication of the GAO report, the Microenterprise
Development team will have revised the formula used for estimating the
extent of funding that benefits very poor clients in order to improve
the accuracy of data on obligations and poverty lending; and will have
drafted additional language for inclusion in the annual report
concerning the estimating methodology.
We do not believe there are significant weaknesses in the definitions
or techniques MRR employs to measure sustainability of USAID-supported
microfinance institutions, but we will review this with colleagues in
other organizations. Further, if the microfinance field adopts a new
standardized definition of sustainability, we will incorporate it into
MRR. Similarly, because USAID has focused on institution-building, and
has strongly encouraged partners to leverage other funding and support,
in most instances we do not consider it practical or appropriate to
analyze and report the impact of USAID funds in isolation from those of
other donors, investors, or creditors. However, we will include more
explicit language in the MRR
annual report indicating that results reported generally cover the
entire institution and that the resources of other donors and
supporters contribute to those results. No data system is 100%
accurate, of course, and any system can be improved. We believe that
these changes provide a reasonable and cost-effective response to the
draft report's recommendation that will not significantly increase the
burden on MRR reporters.
Enclosed is Annex 1, which provides more detailed commentary on the
substance of the draft report and USAID's response to the
recommendation.
Thank you for the opportunity to respond to the GAO draft report and
for the courtesies extended by your staff in the conduct of this
review.
Sincerely,
John Marshall:
Assistant Administrator:
Bureau for Management:
Signed by John Marshall:
Enclosure:; a/s;
Annex 1:
USAID Substantive Comments on Draft Report:
We are delighted that the GAO has taken USAID's management of its
microenterprise development work so seriously. The draft report's
finding that we have met some key goals confirms the value of our
comprehensive microenterprise strategy and the dedication of our staff
around the world to this important program. The findings that our
microenterprise development programs alleviate poverty and benefit poor
entrepreneurs and their households are consistent with our experience
of over two decades. The recognition of the strong and effective
priority USAID places on serving women - which comprise two-thirds of
all clients of USAID-supported microfinance institutions - is also
welcome. As the draft report notes, USAID has focused consistently on
the importance of building sustainable institutions, and this has paid
off in an unusually high complement of sustainable partners. We are
gratified with the findings concerning our contributions to promoting
donor collaboration and generating and disseminating knowledge and best
practices.
We offer the following comments on the draft report. They are intended
to address errors of fact or interpretation, and to explain USAID
policy and practices relevant to the specific findings.
USAID Programs do not Reach the Very Poor/Small Loan Size Does Not
Accurately Target the Very poor:
The draft report concludes that "microfinance generally has served the
poor clustered around the poverty line but not the very poor" (page 1)
and that "few loans appear to be reaching the very poor" (page 4). This
conclusion is repeated at numerous points throughout the draft report.
USAID does not believe that the evidence presented in the draft report
supports this finding.
* For well over a decade, Congress, USAID, and MED implementing
partners have agreed to use loan size as a proxy for service to the
very poor.
* When the Microenterprise for Self-Reliance Act of 2000 came into
effect, it created the statutory requirement that the Agency use this
measure to analyze and report on the extent of service to very poor
people (defined by the law as those at or below half of national
poverty lines).
* Using this measure, MRR reported that in FY 2001, USAID-supported
MFIs made 2 million[NOTE 1] poverty loans out of 3 million total
loans. In other words, two-thirds of all loans met the statutory
standard of service to the very poor.
USAID has long recognized the many challenges of ensuring that the very
poor benefit from microenterprise assistance programs and has long
supported a variety of methods to help ensure that the very poor are
served with MED services. While the use of smaller loans is one way to
increase the likelihood of the very poor benefiting, even in its 1995
policy paper, USAID suggested a number of other techniques such as use
of collateral substitutes, unsubsidized interest rates, service
features that overcome cultural barriers to access, safe and convenient
savings services, etc. (USAID policy paper pages 14-15). As required by
law, USAID has used the delivery of small loans as the proxy for
measuring the extent of service to very poor clients, not as the means
for targeting them.
Loans to Very Poor May Be Ineffective and Can Have Negative
Consequences:
The draft report states that loans may affect poor borrowers more
negatively than positively. USAID is well aware of the dangers of over-
indebtedness for poorer clients and believes that the available
empirical evidence does not support the draft report's suggestion that
this is a significant or widespread problem.
* The weight of empirical evidence and program experience suggests that
very poor people typically benefit from access to well-tailored credit
and other microfinance services.
We do agree with the statement in the draft report that it is important
to provide the poor, including the very poor, with an expanded range of
financial products.
* USAID is actively supporting research, pilot programs and expansion
of successful efforts related to a range of products such as savings,
insurance, and money transfer services.
Some Progress Made Toward MFI Sustainability:
The draft report concludes that USAID has emphasized the importance of
the microfinance institutions (MFIs) it supports achieving
sustainability. The sustainability track record of USAID-supported MFIs
is very strong. Although the draft report cites the estimate that of
roughly 10,000 MFIs worldwide, only 75-250 are estimated to be
sustainable,
* More than 50% of USAID-funded MFIs have achieved operational
sustainability (where the MFI is covering all operating costs,
including loan losses, from operating revenues) or the higher standard
of full financial sustainability (where the MFI is also covering
inflation, commercial costs of borrowing to finance expansion, and the
imputed costs of granted capital).
* In FY 2001, 53% of MFIs reporting to MRR were either operationally or
financially sustainable. We consider this a remarkable achievement.
In the sections covering MRR's methodology and reliability, the draft
report asserts that MRR has not used a standardized definition of
sustainability. This is not correct. For more than five years, MRR has
used a single, clear definition of sustainability (distinguishing
between operational and full financial sustainability), in part so as
to be able to present comparable data from year to year. The two-part
definition is included in the standardized questionnaire that goes to
each recipient of microfinance funding, and the MRR contractors perform
data quality checks to ensure consistent reporting.
Poverty Lending Requirement May Hamper MFI Sustainability:
The draft report suggests that sustainability might not be consistent
with serving very poor clients. In particular, it suggests that poverty
lending requirements may hinder MFI sustainability. While it would
appear that sustainability is more difficult to achieve for MFIs
reaching very deep with their services (primarily due to the smaller
loan size and perception that the clientele is riskier),
* USAID and others have found that even MFIs serving a relatively large
share of very poor clients can achieve sustainability.
* It is USAID's policy that even institutions that target the very poor
should commit to achieving sustainability, although we recognize that
this might require a longer time-frame.
Basic MRR Data are Generally Reliable:
The draft report found that the basic program data in USAID's
Microenterprise Results Reporting system (MRR) are generally reliable.
It found that the MRR data generally met the criteria of accuracy,
completeness, and consistency. We agree and are proud that MRR is
widely recognized as by far the most comprehensive and accurate donor
reporting system and data base among microfinance and microenterprise
donors.
It is important to note that MRR is tasked with collecting, analyzing,
and reporting data on USAID microenterprise obligations and the
activities and results of its implementing partners. It is not intended
to track microenterprise expenditures nor is it intended to perform
internal audits on financial and programmatic performance.
This is the responsibility of missions and other USAID operating units,
which carry out these functions as part of their Performance Monitoring
Plans and related data quality assessments.
* A recent GAO audit of the Egypt mission's microfinance portfolio and
operations, for example, found strong compliance with USAID policy
guidance, strong monitoring systems and a high level of accuracy of
performance data reported.
Reliability of Obligations Data is Uncertain:
The draft report raised questions about the reliability of obligations
data reported by MRR. The main concern described by the GAO team
focused on funding obligations that did not appear to solely serve
microentrepreneurs or provide micro loans. We believe these concerns
might derive from a misunderstanding of USAID policy and practice, as
well as mission procedures in reporting obligations data to MRR. By
policy, USAID does not require that MED awardees solely serve micro-
scale entrepreneurs. For example, the microenterprise policy paper
states: "USAID's concern is that organizations receiving its support
maintain an effective commitment to include the poor in their service
delivery, not that they exclude other groups" (page 16).
* Serving a mix of clients (for example, small and medium firms as well
as microenterprises, or households that include the very poor, moderate
poor, and vulnerable non-poor) may result in stronger impacts on the
target populations or firms, as well as improved prospects for
sustainability.
* By offering diverse credit and savings services to both very poor and
less poor clients, for example, many credit unions reach far more very
poor households than smaller MFIs that solely serve very poor
households.
* In "mixed" programs, the key concern is not that service be
restricted to micro-scale firms; rather the funding reported to MRR
must report only that portion that serves microenterprises.
USAID missions are accustomed to pro-rating their obligations (e.g., in
reporting obligations against various earmarks and directives), and
staff and the MRR contractors showed evidence to the GAO team that such
pro-rating of obligations occurs for MED activities. To respond to the
concern articulated by the GAO team, however, MRR has recently included
more explicit pro-rating instructions in its website guidance to
missions and will also include additional language in its annual
request for MED obligations.
MRR Does Not Link USAID Funding to Services Provided:
The draft report voiced concern that the agency's annual reports do not
isolate USAID's contributions to the MED institutions it supports,
making it difficult to determine the impact of the agency's funding .
There are two important reasons that USAID does not attempt to
disaggregate the impact of its funding from that of other donors,
investors, and lenders. First, it would be impractical and very
difficult to devise a reasonable methodology for doing so, since USAID
is typically providing funding to build MED institutions, rather than
for discrete projects with separable budgets, activities, and impacts.
* There is a strong consensus in the microfinance donor community that
it is not meaningful or cost-effective to try to impute impact among
different donors and investors.
The second reason that USAID does not isolate its contributions from
others is more a matter of policy and philosophy. The agency is
committed to a very active effort to engage others in support of our:
implementing partners in all fields, including microenterprise
development. The Global Development Alliance provides one visible
example of this commitment to leveraging other resources, which we
believe is inconsistent with highlighting the USAID contributions. In
response to the concerns raised in the draft report, however, we will
in the future include language in the annual report indicating that
many awardees receive support from other sources as well and that those
sources deserve a share of the credit for the awardees' impacts.
It should also be noted that the draft report found that USAID has
identified and disseminated best practices and cites numerous examples
of programs and activities, encompassing research, pilot activities,
policy guidance, training, and technical assistance. It further found
that USAID has collaborated with other organizations in this best
practices work, including implementing partners, networks of
practitioners, and other donors. USAID appreciates the GAO recognition
of the considerable investment it has made in identifying and
disseminating best practices, which we hope have helped to advance the
field.
Concluding Remarks:
Given the many barriers confronting poor and very poor households
around the world who seek to use MED as a means to improve their
economic opportunities and living conditions, USAID has long favored
comprehensive support to the microenterprise sector. The major elements
of USAID MED programs include efforts to:
* expand the availability of financial services to the poor and their
enterprises (commonly referred to as "microfinance" and encompassing a
range of financial services including but not limited to microcredit);
* expand the availability of non-financial enterprise support services
such as market access and technical training (commonly referred to as
"business development services"); and:
improve the policy, legal, regulatory, and administrative environment
in which low-income entrepreneurs operate their businesses (commonly
referred to as "enabling environment activities").
While support to microcredit is a critical intervention and receives
the largest share of the Agency's microenterprise development funding,
it is not by itself typically sufficient to help poor and very poor
households start and expand enterprises that will move them out of
poverty.
* The GAO draft report focuses the greatest share of its analysis and
observations on microcredit. We would have welcomed a more in-depth
review of our entire microenterprise development portfolio, a
comparable level of attention to savings, business services and policy
activities, and suggestions on strengthening these non-credit programs.
We also believe that the effectiveness of USAID's MED efforts should be
assessed from the perspective of this broader view of poverty
alleviation and reduction. Over the past decade, the development
community has come to understand poverty in a more nuanced and
comprehensive way, looking beyond a narrow focus on income poverty to
understand and intervene on other aspects such as risk, vulnerability,
voice and participation. It has also focused attention on the
importance of helping the poor build and protect a wide variety of
assets (business assets, savings and other financial assets, human
capital such as education and health, social capital, etc.).
The GAO report focused on a narrow definition: MED programs would meet
the test of reducing poverty to the extent that by themselves, they
succeeded in moving large numbers of poor and very poor people
permanently above the poverty line. This definition applied by the GAO
team overlooks or downplays significant impacts that are likely to
contribute to poverty reduction, such as reduced risk and vulnerability
or empowerment of women and other disadvantaged groups.
* MED programs around the world have often contributed measurably to
building and protecting assets of poor and very poor among
microfinance activities that offered the risk and vulnerability of
poor households addition to enterprise credit, this has products (such
as emergency loans or school savings, remittances, and micro-insurance.
* Some USAID missions have supported MED as a means of strengthening
civil society and citizens' voice and stake in the economy.
* Other missions have supported MED as a successful intervention to
shift from humanitarian to development assistance following conflicts
and natural disasters, helping affected populations rebuild assets.
While the GAO report mentioned these kinds of activities in passing as
evidence of poverty alleviation, it did not indicate their relevance to
poverty reduction over time.
The draft report concludes that microenterprise development has
alleviated poverty but also notes that the evidence is inconclusive on
MED's track record on poverty reduction --as measured by large-scale
movement of poor people permanently above the poverty line, solely as
result of microenterprise assistance. Helping any single household
climb out of poverty is a complex process; recent research has
demonstrated that progress tends to be uneven and to take a long time.
Escaping from poverty usually requires a combination of income asset
strategies, and backsliding is possible and perhaps even frequent.
USAID does not assert that MED interventions, by themselves, can raise
large numbers of very poor people above the poverty line on a permanent
basis.
* We have always viewed MED as contributing to both poverty alleviation
and poverty reduction, by helping poor and very poor households
increase their incomes, build up diverse assets,
reduce their vulnerability and risk from external shocks, invest in
health and education, etc.
* Microenterprise assistance can contribute to each of these, by
ensuring that services are appropriate, that they reach the intended
beneficiaries, and that they are available over time.
* Evidence suggests that more powerful poverty impacts come with access
to MED services over time; USAID strategies reflect this lesson through
a consistent focus on sustainability of service provision, so services
can continue beyond the period of donor funding.
In sum, while we would agree that empirical evidence (few large-scale
longitudinal impact studies with the most rigorous methodologies have
been conducted)[NOTE 2] is inconclusive on whether microfinance has
reduced poverty, we would not support its summary finding that "there
is little evidence that it can lift and keep many over the poverty
line" (page 1, emphasis added).her loan fee loans),
NOTES:
[1] Poverty loans constituted 1.99 million out of a total of 2.9
million loans (p. 32 of the 2001 MRR annual report).
[2] One (Khandker, World Bank) analyzed the poverty impact of three
large-scale microfinance institutions (MFIs) in Bangladesh. It
concluded that on average, 5% of clients per year moved out of poverty
as a result of the assistance. Given that these MFls serve millions of
clients, one could reasonably argue poverty reduction impact.
The following are GAO's comments on USAID's letter dated November 6,
2003.
GAO Comments:
1. USAID stated that our report does not address the full range and
scope of its microenterprise strategy and program. Our report focuses
primarily on microfinance, since this component of USAID's
microenterprise program has received, and continues to receive, the
bulk of the agency's funding. Microfinance has also been the principal
focus of long-term studies funded by USAID and others. We found no
long-term studies or evaluations that assessed the impact of USAID's
support for Business Development Services (BDS) or its policy work in
the area of microenterprise development. Our discussions with USAID
employees in Peru, Egypt, and Bulgaria regarding BDS and policy
initiatives yielded some information on these efforts, but we found
that no data on these efforts had been collected systematically.
2. USAID said that it has long used loan size as a proxy for services
to the very poor, recognizing that it is imperfect but a statutory
requirement. Because of the limitation of loan size as a proxy, we
analyzed impact studies and evaluations funded by USAID and others that
collected information on borrowers' economic status to determine the
extent to which microfinance has reached the very poor. These studies,
based on in-depth research across multiple countries and settings,
found that the very poor are rarely reached with micro loans, for
reasons outlined in this report (see app. III for a summary of key
studies on this topic). To complement information contained in these
studies, we discussed this issue at two roundtable meetings with
international experts; we also interviewed USAID officials and
nongovernmental organization officials working with USAID-funded
programs in the countries where we conducted fieldwork. The consensus
across the literature and among the experts is that microfinance
projects often have difficulty reaching the very poor.
3. USAID said that the MRR has used a single, clear definition of
sustainability in questionnaires to implementing partners. We disagree
with USAID on this point, and we have added information to this section
to clarify our concern regarding the agency's lack of a standardized
method for measuring microfinance institutions' (MFI) sustainability.
As noted in the report, 38 percent of MFIs that received USAID funding
in fiscal year 2001 reported that they had achieved financial
sustainability. In addition, the figures cited in USAID's response
combine data on operational and financial sustainability, despite the
fact that operational sustainability is defined in USAID's policy
guidance as an interim measure toward the goal of achieving full
financial sustainability.
4. USAID stated that allocating the impact between USAID and other
donors would be impractical and methodologically questionable. However,
it also says that it plans to include language in its annual report
indicating that many of USAID's awardees receive support from other
sources as well, and that these sources deserve a share of the credit
for the awardees' impacts.
5. See comment 2. USAID states that it made about 2 million loans in
fiscal year 2001 that met the statutory standard for service to the
very poor. The agency said that it also utilized other methods of
reaching this group. As noted in the report, Congress recognized the
limitations of loan size as an indicator for targeting and reaching the
very poor and directed USAID to develop more accurate methods to ensure
that this group is reached in the future.
6. USAID said that the report suggests that loans to the very poor can
have negative consequences and may be a significant or widespread
problem. As noted in the report, the very poor can benefit from credit,
but some evidence suggests that microcredit should compliment, not
substitute, for investments in core services, such as health and
education.
7. USAID states that their record of supporting MFIs and achieving
sustainability is strong. With regard to the issue of MFIs' achieving
full financial or operational sustainability, we note in the report
that USAID's policy establishes full financial sustainability as its
goal; that is, to develop fully financially sustainable MFIs, capable
of providing services indefinitely without USAID or other donor
support. We did not report data on operational sustainability because
this measure is defined in USAID's policy manual as a "useful interim
standard of financial performance." Accordingly, we focused on full
sustainability, a standard that, if widely attained, could ensure that
these institutions would be available to provide these services in the
future. Also, see comment 3.
8. USAID said the report suggests that sustainability might not be
consistent with serving very poor clients. Our report does not state or
suggest that sustainability might not be consistent with serving very
poor clients. We agree with USAID that attaining full financial
sustainability may be more difficult for MFIs serving greater numbers
of very poor borrowers.
9. USAID incorrectly attributed to us an audit conducted in Egypt; this
audit was conducted by the USAID Inspector General.
10. USAID stated that its policy allows microenterprise funds to be
obligated for activities that do not meet the definition of
microenterprise development found in the MRR and that microenterprise
awardees do not have to solely serve micro-scale enterprises. However,
our report addresses the reporting of such activities, not the policy.
According to the 2001 MRR, "Microenterprises are small, often
informally organized businesses that are owned and operated by poor and
very poor entrepreneurs. USAID defines a microenterprise as one that
comprises 10 or fewer employees, including unpaid family workers, in
which the owner/operator of the enterprise—is considered poor. By
limiting its definition of microenterprises to those whose owners/
operators are poor, USAID ensures that the focus of its efforts remains
on the most vulnerable households in higher-risk environments." Despite
this definition, the annual MRR reports present data on a wide variety
of activities that do not meet this definition. This includes its
policy work, much of its BDS work, its obligations to small and medium
businesses, and loans to those that are not poor. As a result, it is
uncertain how much of USAID's funding is going to poor
microenterpreneurs. We believe that USAID should be more transparent in
reporting these results.
In addition, despite USAID's statement that the MFIs and missions
report only activities that meet the definitions of microenterprise as
defined in the MRR, we found no evidence of this in our work in three
countries or our analysis of MRR data. As noted in this report, we
found numerous examples of the missions' and implementing partners'
reporting activities to the MRR that did not meet the MRR definition.
Based on USAID's comments, we have modified this section of the report
to further clarify our position and the basis for these observations.
USAID also said it will include more explicit guidance on its website
to address the issue. This could potentially improve this aspect of
USAID's reporting.
11. USAID stated that the report focused on a narrow definition of
program impacts. This report does not take a narrow view of the impacts
of USAID's microenterprise program. In addition to our assessment of
its impact on poverty alleviation and poverty reduction, there are
sections focused on reaching the poor and very poor and other services
these groups may need; outreach to women; the sustainability of MFIs;
the reliability of the MRR; best practices identified by the
microenterprise development industry; USAID's efforts to identify and
promote best practices; whether USAID incorporates best practices in
their projects; and a synopsis of 22 key studies. In both the body of
the report and appendix III, we include considerable discussion of the
extent to which microfinance can help alleviate poverty by reducing
risk and vulnerability.
12. USAID states that microenterprise development can be a successful
intervention to shift from humanitarian to development assistance
following conflicts and natural disasters. The USAID policy manual
(section II.H.4.), titled "Avoiding Poor Prospects for Microfinance
Development," states that microfinance should not be viewed as a
response to alleviate the large-scale human suffering created by wars
and civil conflict. It notes that such assistance will inevitably
conflict with the basic requirements of building sound financial
institutions. Despite this guidance, we found that USAID/Bulgaria used
emergency funds provided for the Danube River Initiative to respond to
the economic hardship resulting from the Kosovo crisis, providing
funding to MFIs that committed to work in this region. Officials of the
implementing partner told us that this humanitarian initiative, while
important from a social perspective, proved to be financially
unsustainable in light of the many challenges refugees faced.
Accordingly, the implementing partner terminated its programs in these
regions, according to USAID officials in Bulgaria.
[End of section]
Appendix VI: GAO Contact and Staff Acknowledgments:
GAO Contact:
Phillip Herr (202) 512-8509:
Staff Acknowledgments:
In addition to the person listed above, Edward George, Jim Strus,
Martin De Alteriis, Mona Sehgal, David Dornisch, Yesook Merrill,
Valerie Caracelli, and Reid Lowe made key contributions to this report.
FOOTNOTES
[1] Title I of P.L. 106-309. In legislation enacted on June 17, 2003,
Congress amended the act to increase assistance for the poor and
provide changes in how assistance is targeted to the very poor (P.L.
108-31).
[2] USAID has not defined "poverty reduction." For this report, we
applied the definitions found in a 2002 USAID-funded report on
microenterprise that defined poverty reduction in two ways: (1)
alleviating the impacts of poverty (which can include raising income to
permit increased expenditures on necessities such as food, education,
and housing); and (2) lifting and keeping a large number of people
above a nation's poverty line.
[3] The act defines the very poor as "those living in the bottom 50
percent below the poverty line as established by the national
government of the country." The act requires that 50 percent of all
microenterprise resources be targeted to the very poor.
[4] MFIs supply micro loans, savings, and other financial services. To
be considered fully sustainable, the MFI must generate sufficient
revenues to cover both its operational costs (e.g., salaries) and its
financial costs (e.g., the cost of borrowing funds from commercial
sources).
[5] Micro loans--small loans with frequent repayment schedules and
commercial interest rates--are administered by a range of institutions,
including nongovernmental organizations and private financial
institutions.
[6] World Bank, CGAP Report 2000, Consultative Group to Assist the
Poorest (Washington, D.C.: 2000).
[7] Donald Snodgrass and Jennifer Sebstad, Clients in Context: The
Impact of The Microfinance in Three Countries--Synthesis Report
(Washington, D.C.: Management Systems International, 2002).
[8] Jennifer Sebstad and Monique Cohen, Microfinance, Risk Management,
and Poverty (Washington, D.C.: Management Systems International, 2000).
[9] USAID generally supports and invests in MFIs and ongoing projects
started by NGOs or other groups. The research literature on
microfinance and USAID's own studies do not distinguish between USAID-
funded projects and projects funded by the World Bank, private
foundations, or other donors.
[10] Elizabeth Dunn and J. Gordon Arbuckle, Jr., The Impacts of
Microcredit: A Case Study from Peru, (Washington, D.C.: USAID/AIMS,
2001).
[11] Bashayer El Kheir: An Impact Tracking Study (Final Report)
(Washington, D.C.: USAID, 2003). Another USAID study in Egypt was
unable to draw firm conclusions about the impact on poverty
alleviation, because, although it noted some positive findings, the
study lacked baseline data as well as a control group (see USAID,
Technical Assistance to Small and Emerging Business Development
Organizations: Study on Old Clients [Washington, D.C.: 2001]).
[12] Donald Snodgrass and Jennifer Sebstad, Clients in Context: The
Impact of The Microfinance in Three Countries--Synthesis Report
(Washington, D.C.: Management Systems International, 2002), p. 65.
[13] Shahidur Khandker, Fighting Poverty with Microcredit: Experience
in Bangladesh. (New York: Oxford University Press, Inc., 1998).
[14] Sebstad and Cohen, Microfinance, Risk Management, and Poverty.
[15] Sergio Navajas et al., "Microcredit and the Poorest of the Poor:
Theory and Evidence from Bolivia," World Development 28, no. 2 (2000):
333-346.
[16] PL 108-31, enacted June 17, 2003.
[17] Research that attempts to find a middle ground between
sustainability-and poverty-orientations is reflected in Morduch
(2000), Woller, Dunford, and Woodworth (2000), and Cohen (2002). (See
app. III.)
[18] Evaluation and Strategic Review of the Consultative Group to
Assist the Poor (Washington, D.C.: The World Bank, 2002), p. 16. (See
also Rutherford, 2000; Matin, Hulme, and Rutherford, 2002; Cohen, 2002,
in app. III.)
[19] CGAP, a consortium funded by 29 bilateral and multilateral donor
agencies that support microfinance, is affiliated with the World Bank.
[20] Donor Brief, No. 13, July 2003, CGAP.
[21] USAID applies the poverty lending requirement on an agency wide
basis. However, it does not ask that individual missions or MFIs meet
this requirement.
[22] USAID also reaches a large number of savers through its
microfinance program. According to USAID data for 2001, the program
reached 3.5 million savers, compared with 2.9 million borrowers.
However, the proportion of women reached through micro savings services
cannot be determined, because USAID does not collect savings data
disaggregated by gender.
[23] Several studies indicate that in some cases, micro loans have not
empowered women but instead have strengthened traditional gender and
class power relations. However, this conclusion does not represent the
general agreement among experts we consulted that, on the whole, micro
loans have had a positive effect on women.
[24] Under the group lending model, 5 to 30 members receive a loan and
future loans to individual members are contingent on the entire group's
repayment record.
[25] USAID provided funding to 492 organizations in fiscal 2001. The
agency does not disaggregate these data by MFIs, BDS providers, or
policy advocacy organizations.
[26] To the extent that financially stable institutions are more likely
to report sustainability data, this percentage may be biased upward.
[27] In the 2002 survey of 147 MFIs, 42 percent reported full
sustainability. The MFIs participated in the survey voluntarily. (See
"Bulletin Tables" [data annex], MicroBanking Bulletin 8 (2002).
[28] James W. Fox, Mark Havers, and Klaus Maurer, Evaluation and
Strategic Review of The Consultative Group to Assist the Poorest
(Washington, D.C., The World Bank: 2002), p.iv.
[29] Two branches that had been fully sustainable experienced
significant declines in sustainability (49 percent and 14 percent,
respectively), but managed to remain sustainable, albeit at a lower
level.
[30] Bulgaria Microfinance Assessment (Arlington, VA: The Peoples'
Group, Ltd., 2002), p. 8.
[31] USAID, Microenterprise Results Reporting for 2001 (Washington, DC:
2003) p.4.
[32] Candace Nelson, Barbara McNelly, Kathleen Stack and Lawrence
Yanovitch, Village Banking: The State of the Practice (New York, NY:
SEEP Network and the United Nations Development Fund for Women, 1996);
Craig Churchill, Madeline Hirschland, and Judith Painter, New
Directions in Poverty Finance: Village Banking Revisited (Washington,
D.C.: SEEP Network, 2002).
[33] Joann Ledgerwood, Microfinance Handbook: An Institutional and
Financial Perspective (Washington, D.C.: World Bank, 1998).
[34] In group lending and village banking, group members, rather than
an individual, accept joint responsibility for repaying the loan.
[35] Mohini Malhotra, Poverty Lending and Microenterprise Development:
A Clarification of the Issues, GEMINI Working Paper No. 30 (Washington,
D.C.: U.S. Agency for International Development, 1992).
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