Microenterprise and U.S. Foreign Assistance

CRS Report for Congress
Microenterprise and U.S. Foreign Assistance
April 12, 2001
Curt Tarnoff
Specialist in Foreign Affairs
Foreign Affairs, Defense, and Trade Division

Congressional Research Service The Library of Congress

Microenterprise and U.S. Foreign Assistance
Summary
Microenterprises – businesses operated by the poorest of entrepreneurs – have
been targets of U.S. foreign assistance for many years. Microentrepreneurs face a
number of obstacles to improving their productivity and standard of living, including
a lack of accounting and managerial skills and an inability to obtain financial services
– savings and credit. While more research is needed, existing studies have found
positive impacts on business and household income, education, and employment,
especially among women, when assistance is provided to give better access to savings
and credit. In FY1999, roughly $154 million was used by the Agency for
International Development (USAID) to assist microentrepreneurs in U.S. aid recipient
countries.
Foreign aid has played a major role in the development of microfinance
institutions that have emerged in large numbers since the late 1970s. Many of these
institutions seek to operate on business principles, charging a rate of interest that
might cover costs. Because the poor cannot provide collateral, these institutions
often require entrepreneurs to form solidarity groups to take on each other’s
obligations. Their repayment rate is often above 97%.
Although many other bilateral and multilateral donors have contributed to the
development of microfinance institutions, USAID has been the leader in financing and
developing programs supporting microenterprise. Congress has strongly endorsed
this effort in appropriation bills, by directing a specific level of funding in the FY1988-
1992 period and recommending support in report language thereafter. Some
Members collaborated with USAID in the development of a Microenterprise Initiative
announced in 1994. In October 2000, the 106^t^h Congress approved the
Microenterprise for Self-Reliance Act of 2000, authorizing microenterprise support
programs (P.L. 106-309).
In FY1999 more than two thirds of USAID funding for microenterprise went
toward technical assistance and capital for microfinance institutions. Fifty-eight
percent of such funds supported poor people who received poverty loans – mostly
loans in amounts of $300 or less, and 69% of clients were women.
Congress has authorized a $155 million funding level for FY2001 and 2002, but
achieving that goal depends in part on the overall foreign aid account as well as
amounts made available for economic growth objectives versus other priorities
sharing the same pot of funds. Some argue that funds should be dedicated to
“poverty lending,” i.e., aimed at the very poorest of the poor microentrepreneurs by
keeping loan levels low. Others argue that the most positive benefits from
microfinance accrue to those near the poverty line, not well below it. A number of
challenges face microenterprise implementors, including making programs sustainable
while broadening their outreach to the poorest, commercialization of microfinance,
use of new technologies, and the impact of crises and HIV/AIDS.

Contents
Introduction ................................................... 1
Microenterprise: Background......................................1
What are Microenterprises?....................................1
Obstacles and Solutions to the Growth of Microenterprise ............2
Lack of Skills and Access..................................2
Legal Barriers..........................................2
Absence of Financial Services...............................2
Impact of Microenterprise Support..............................3
Donor Support..............................................4
Public Support for Microenterprise..............................5
U.S. Assistance to Microenterprise..................................5
Congress and Microenterprise..................................5
Microenterprise for Self-Reliance Act of 2000..................6
The USAID Program.........................................7
USAID Centrally Funded Grant Programs.....................8
USAID Mission Activity..................................9
Micro And Small Enterprise Development Program (MSED)......10
Issues for Congress.............................................11
Funding Levels............................................11
Assistance Strategies and Priorities.............................12
Poverty Lending........................................12
Loan Programs vs. Other Assistance........................13
Central vs. Mission Programs..............................13
New Challenges for Microenterprise Support Programs..............14
Reaching the Poor......................................14
Making Programs Sustainable.............................14
Commercialization ...................................... 16
Geographic Challenge...................................16
New Technologies......................................16
Impact of Crises and HIV/AIDS............................16
List of Tables
Table 1. USAID Assistance to Microenterprise.........................8

Microenterprise and U.S. Foreign Assistance
Introduction
Microenterprises – businesses operated by the poorest of entrepreneurs – have
long been an object of U.S. foreign assistance policy and a subject of continuing
public and congressional interest. Efforts to assist people to overcome poverty
through participation in the private sector appear to have widespread appeal to
Americans on all points on the political spectrum. Anecdotal accounts of successful
microenterprise assistance programs in the developing countries appear regularly in
the media, and efforts have been made — some benefitting from the experience of the
U.S. Agency for International Development (USAID) — to replicate these programs
in the United States. In close collaboration with Members of Congress of both
parties, the Clinton Administration launched a Microenterprise Initiative in mid-1994
to make microenterprise “a prominent part” of USAID’s economic growth strategy.
Since 1987, Congress has periodically approved legislation supporting
microenterprise, and, in October 2000, it enacted a formal authorization of such
programs in the “Microenterprise for Self Reliance Act of 2000.”
This report looks at the features that characterize microenterprises and at the
U.S. foreign assistance programs that support microenterprise development. It
examines three issues of potential congressional concern: funding of microenterprise
programs, conflicting policy priorities, and the challenges now faced by program
implementors.
Microenterprise: Background
What are Microenterprises?
Microenterprises are the very smallest of non-farm businesses, owned and
operated by only one person or family, and staffed, in the most generally accepted
definition, by ten or fewer employees. Microentrepreneurs are the flower sellers, the
carpenters, shopkeepers, bakers, and craftspeople who occupy what economists call
the informal sector of the economy — the part of the economy that is not easily
captured by economists seeking measurements of production output and tax flows.
Microenterprises may be part-time or seasonal income-generating activities, and many
are based in the home. Microenterprises are the economy of the poorest working
segment of society. Estimates of the numbers of such enterprises vary widely — from
one-third to one-half of the world’s businesses, perhaps several hundred million.

Obstacles and Solutions to the Growth of Microenterprise
Microentrepreneurs face several impediments to improving their productivity and
standard of living – a lack of skills and market access, legal barriers, and an absence
of financial services, especially capital. A range of efforts, often assisted by
international donors, have been made to overcome these obstacles.
Lack of Skills and Access. Entrepreneurs at the micro level often lack
accounting, managerial, marketing, and technical skills that might help them
successfully manage and expand their businesses and boost productivity. They may
also be unconnected to markets outside their cities or country, and to other business
people in the same field. Local organizations and donors have responded to these
concerns with an array of training and other “business development services”
programs (BDS). Associations of similar businesses have been established to provide
training, offer advice, and promote regulatory reform. Networks between businesses,
exporters, and importers have helped to expand markets.
Legal Barriers. Microentrepreneurs and the institutions that serve them often
encounter laws and regulations that discourage growth and consequent entry into the
“formal” sector of the economy. Business license requirements, for example, can take
months and multiple forms and visits to government offices. Government restrictions
on interest rates have hindered bank lending to microbusiness. Donors have
supported research and analysis on government policies affecting microenterprise
development, provided policy advisers to governments, and encouraged the advocacy
activities of local associations of business people.
Absence of Financial Services. The greatest focus of public attention and
donor programs during the past two decades has been the inability of
microentrepreneurs to obtain financial services — credit and savings — with which
to develop their businesses, by funding larger retail inventory or necessary equipment.
Microentrepreneurs rarely possess sufficient collateral to satisfy traditional banks, and
they require too small a loan to make the transaction seem profitable to lending
institutions. One report suggests that only 2.5% of the world’s potential microclients¹
have access to financial services other than money lenders.
In the late 1970s, a number of institutions emerged in different parts of the world
whose purpose was to offer the credit that banks would not provide. Today, there²
are thousands of such institutions serving millions of people. The BRAC Rural

¹ “Estimates suggest that microfinance institutions reach about 12.5 million poor people
worldwide. Microfinance practitioners say that the global microfinance market exceeds 500
million people.” CGAP Report 2000, p. 10, Consultative Group to Assist the Poorest, World
Bank.
² A 1999 survey of 1,065 reporting institutions (of 1,600 approached) found 23.6 million
clients. Countdown 2005. Microcredit Summit Campaign, Vol. 3, Issue 2-3. July/August
2000. In 1996, a World Bank report estimated outstanding loans at 33 million in a survey of
209 institutions out of its inventory of 900 that have over 1,000 clients and three years of
experience. A Worldwide Inventory of Microfinance Institutions, Sustainable Banking with
(continued...)

Development Program in Bangladesh, for example, claims 2 million borrowers, and
the Bank Rakyat Indonesia (BRI) has 2.5 million borrowers and 25 million with
savings accounts.
The most well-known of these institutions and still a model for microenterprise
credit support operations throughout the world is the Grameen Bank in Bangladesh.
It has lent roughly $3 billion to date through 1,128 branch offices. It currently serves

2.4 million active borrowers. As developed during the late 1970s by its founder,

Mohammed Yunus, the Grameen Bank possesses several features in common with
many, but not all, microenterprise credit institutions. It seeks to operate on business
principles, charging an interest rate for its loans as high or higher than commercial³
banks, in an effort to cover costs. In lieu of collateral, Grameen requires that
entrepreneurs form “solidarity groups” of five fellow loan seekers, all of whom take
on each others’ loans as a collective obligation. The effect is to eliminate frivolous
loans and to encourage timely repayment: many microcredit institutions boast⁴
repayment rates above 97%, matching major banks in the formal sector.
There are numerous variations of the microfinance concept. For instance, in
place of solidarity groups, many institutions establish a “village banking” system in
which perhaps 30 or more people set up their own financial institution, which in turn
obtains capital from another source. Credit unions have, for many decades, provided
credit as well as savings facilities. Some institutions include business training or a
health dimension in their programs. Some serve particular types of entrepreneurs.
Many non-governmental organizations (NGOs), which have made up the vast
majority of microfinance institutions, are beginning to diversify and operate in a
commercial fashion, providing loans on an individual basis, offering savings accounts,
and even expanding to more complex financial services such as insurance. Some are
even transforming themselves into licensed, for-profit, financial institutions.
Established commercial banks, looking for new markets and impressed by the example
of successful microfinance NGOs, are increasingly entering the micro sector.
Impact of Microenterprise Support
Dozens of studies have been undertaken or are underway examining the
economic and social impact of microenterprise support programs, the bulk on
microfinance. The variability of programs, borrowers, and business and social

² (...continued)
the Poor, May 1996.
³ Some object that donor-assisted programs should charge the poor an unsubsidized interest
rate, but the rate is often much lower than other options available to the poor. Local loan
sharks often charge more than ten times the bank rate. In addition to helping make the
lending institution financially self-sustaining in the long run, a realistic rate of interest gives
microentrepreneurs a better sense of what is required of them as businesspeople in terms of
determining prices, earning a profit, and keeping records.
⁴ For more on the Grameen Bank, see David Bornstein, The Price of a Dream, New York,
1996, Alex Counts, Give Us Credit, New York, 1996, and Helen Todd, Women at the
Center: Grameen Bank Borrowers After One Decade, Boulder, 1996.

environments has led to an array of study conclusions that describe varying impacts.
For many in the international community, the key impact question is whether (and
how) these programs can reduce poverty. The consensus at the moment appears to
be that such programs are not a “magic bullet” in the war against poverty, but can be
highly useful in combating it.
Most studies suggest that provision of credit to people previously unable to
obtain it on reasonable terms and the opportunity to establish savings accounts can
have positive ramifications for the poor, especially women.⁵ Microfinance often raises
borrower income. It may help stimulate growth of the borrower’s enterprise, and it
may generate new employment, raising the income of others. Increased income may
be used to directly benefit the families of entrepreneurs. Studies generally support the
view that credit programs promote higher household income and increased family
welfare, including improved nutrition and education among children. These social
impacts are possibly connected to the fact that the largest proportion of microcredit
borrowers are women. Many microfinance institutions target women, and some, like
Grameen Bank, now lend exclusively to women due to the positive social impact of
such lending practices.
Many microfinance institutions seek to promote social welfare directly, in
addition to trying to boost incomes. One approach is to offer savings services, as the
Indonesian BRI and others have done with great success.⁶ The solidarity groups
formed by borrowers offer an opportunity to educate borrowers. Some socially
oriented microcredit institutions introduce discussions on family planning or
sanitation; the Grameen Bank provides vaccinations through its groups. Groups have
been motivated to organize day care centers and clinics in response to problem-
solving discussions.
Donor Support
From the beginning, many microenterprise support institutions have been in large
part dependent on outside donors for financial and technical assistance. Funds from
bilateral and multilateral donors as well as from private foundations have provided the
initial capital for loans, funds to cover operating losses, equipment such as computers
to track loans, technical experts to advise on methodology and train staff in banking
practices, and instructors to provide training to the microentrepreneurs themselves in
basic business accounting, marketing and other skills.
In recent years, there has been a growing commitment to microenterprise by the
international donor community. One rough estimate puts donor spending in the

⁵ General conclusions noted in this section are mostly based on studies carried out under the
auspices of USAID’s AIMS (Assessing the Impact of Microcredit Services) Project. See
AIMS publications in [http://www.mip.org].
⁶ Access to savings services allows the poor to cover food and other needs during low income
periods, prepare for retirement or disability, invest in children’s education and housing
construction, have an alternative to credit, and get a return on their deposit.

period from 1990 to 2000 at $2.6 billion.⁷ In June 1995, the World Bank, USAID,
the International Fund for Agricultural Development (IFAD), the Asian Development
Bank, the African Development Bank, the U.N. Development Program (UNDP), the
U.N. Capital Development Fund (UNCDF), and the aid agencies of Canada,
Netherlands, and France formed a Consultative Group to Assist the Poorest (CGAP).⁸
It promotes microfinance by marshaling resources, setting common criteria, improving
research on what works, and fostering donor coordination. Through FY2000, CGAP
had received $59 million in funds and commitments for its activities, $44 million of
it in grants from the World Bank. It expects to continue operations for the next
several years on roughly $10 million each year.⁹
Public Support for Microenterprise
Official government and institution support for microcredit activities, both in the
United States and abroad, has been stimulated by apparent widespread support within
the development and relief community of NGOs. In February 1997, an international
Microcredit Summit, attended by nearly 3,000 people from 1,500 institutions and 137
countries, initiated a campaign to insure that microcredit reaches 100 million of the
poorest people by the year 2005. The summit was organized by RESULTS, a
hunger-focused lobbying group that has had substantial impact on the congressional
microenterprise debate for more than a decade. The on-going campaign that emerged
from the Summit has sought to educate U.S. and foreign publics and to exchange
information on issues of mutual concern among microenterprise practitioners. The
campaign is encouraging microcredit programs to reach the poorest people, to reach
women, and to become financially self-sufficient, and have measurable, positive
impacts on the lives of its clients.¹⁰
U.S. Assistance to Microenterprise
Congress and Microenterprise
Since the mid 1970s, the United States has been a leading donor in financing and
developing programs supporting microenterprise. Nevertheless, in 1987 a bipartisan
group of Members of Congress, backed largely by charitable private voluntary
organizations (PVOs) and RESULTS, began advocating a greatly strengthened
microcredit effort. Specifically, they wanted an increase in the amount of funding for
the program and an increase in funds used for actual loans rather than training or
technical assistance. To insure that funds would benefit the very poorest members of

⁷ CGAP Annual Report 1999, page 18.
⁸ Australia, Belgium, Denmark, Finland, Germany, Italy, Japan, Luxembourg, Norway,
Sweden, Switzerland, the United Kingdom, the European Commission, the Inter-American
Development Bank, the International Labour Office (ILO), and the U.N. Conference on Trade
and Development (UNCTAD) have since joined.
⁹ CGAP Annual Report 1999 and CGAP Annual Report 2000.
¹⁰ See Microcredit Summit website at [http://www.microcreditsummit.org].

the population — an approach known as “poverty lending” — they called for an
increase in numbers of loans under $300 and a redefinition of microenterprise to mean
those with 4 or fewer employees (later modified to 10).
Authorizing legislation to accomplish these ends was introduced and adopted by
the House in 1987, and, in subsequent years, was adopted in various forms either in
the House or Senate without, however, ever becoming law. Congress recommended
several of these features in appropriations legislation, at first through a legislative
earmark for microenterprise (beginning in FY1988 for $50 million and increased to
$75 million from FY1989 to FY1992) and later through program guidelines in both
bill and committee report language, a practice which continues to this day.¹¹
Renewed congressional and executive branch interest in microenterprise was
reflected in the development of a USAID Microenterprise Initiative, formulated with
the close cooperation and support of House and Senate members of both parties as
well as consultation with the Microenterprise Coalition, a U.S. PVO community
advocacy group. With then-USAID Administrator Brian Atwood, these
congressional Members signed a Charter outlining goals, principles, and commitments
on June 22, 1994. Under the Initiative, USAID committed itself to strengthen
USAID’s capabilities in microenterprise, to maintain and increase funding, to facilitate
work with U.S. PVOs, and to increase its emphasis on reaching women and the very
poorest. The Initiative was formally “renewed” in July 1997.
Microenterprise for Self-Reliance Act of 2000. Until the adoption of the
Microenterprise for Self Reliance Act of 2000, signed into law as P.L. 106-309 on
October 17, 2000, microenterprise development activities had been carried out under
USAID’s broad enabling legislation, the Foreign Assistance Act of 1961. Through
this new specific authorization language, the 106^th Congress expressed both its strong
support for microenterprise programs as well as its policy preferences with regard to
the implementation of those programs.
The legislation adds a new section (sec. 131) to the Foreign Assistance Act
authorizing the use of grant assistance for credit, business service, and policy reform
activities. It requires that half of all assistance target the very poorest – those living
in the bottom fifty percent below the poverty level – in programs that provide
financial services with loans (in 1995 dollars) of $1,000 or less in Europe and Eurasia,
$400 or less in Latin America, and $300 or less in the rest of the world, and can cover
their costs in a “reasonable” time period. “Poverty assistance” may also be used for
“demand-driven” business development programs for clients holding poverty loans.
The legislation recommends the continued use of USAID central bureaus, among

¹¹ In their versions of the FY2001 Foreign Operations Appropriations, both House (H.R.
4811) and Senate (S. 2522) bills required that at least half of funds for microenterprise be
used for “poverty lending” purposes, defined by the House as loans under $1,000 in Europe,
$400 in Latin America, and $300 elsewhere, and by the Senate as loans under $300. The
House committee report (H.Rept. 106-720) recommended that microenterprise funding be the
same as in FY2000 and a best effort should be made to reach $152 million. The Senate made
no funding recommendation. The conference report on H.R. 4811 did not make reference to
microenterprise funding.

other things, to provide technical assistance for field missions, and grant assistance to
strengthen the development of intermediary institutions. It requires the establishment
of a monitoring system to measure goals, such as the extent to which the agency is
successful in reaching the poor. It authorizes $155 million for each of FY2001 and
FY2002.¹²
The Microenterprise Act also adds a new section 108 that authorizes the
provision of loans, guarantees, and training under the Micro and Small Enterprise
Development Credit Program at a level of $1.5 million for each of FY2001 and 2002.
It amends language (section 111) authorizing assistance to cooperatives to make
provision of credit to low-income people and microentrepreneurs a priority. The
Foreign Assistance Act is further amended (sec. 132) to authorize up to $5 million for
the establishment of a new “United States Microfinance Loan Facility”, which would
provide loans or guarantees to help microfinance institutions prevent bankruptcy due
to the affects of natural disasters, wars, or national financial crises.¹³
The USAID Program
USAID conducts its microenterprise program through multiple grant program
spigots — some centrally funded and the others mission-funded — and through two
credit programs. In FY1999, $153.5 million was used for microenterprise activities.
Currently, USAID has microenterprise programs in more than 55 countries. In
FY1999, 67% of funds went to microenterprise loans and institutional development
of microfinance organizations, 28% went to business development services (BDS) for
microentrepreneurs, and 5% for policy reform on behalf of both microenterprise
development institutions and entrepreneurs. USAID assistance in FY1999 benefitted
microfinance institutions serving roughly 4.5 million loan clients, and provided BDS
to over 400,000 clients.
Proportions of funding going for poverty lending, to women, and to specific
geographic regions have fluctuated from year to year.¹⁴ In FY1999, 58% of USAID
assistance to financial institutions went to support people who received “poverty
loans” – mostly in amounts of $300 or less ($1,000 or less in Central Europe and the

¹² While authorizing legislation establishes programs and policy and may recommend specific
funding levels, appropriations legislation allocates resources taking spending constraints into
account and may set funding levels at less than those authorized.
¹³ In addition to these amendments to the Foreign Assistance Act, the legislation contains
freestanding sections including requirement of a report on the most effective methods for
increasing access for the poor to microenterprise assistance, a sense of Congress encouraging
improved U.S. coordination among the G-7 in support of microenterprise and calling for
strengthened UN and MDB micro programs, and a sense of Congress supporting increased
microcredit assistance to Mexico.
¹⁴ With regard to poverty lending and gender statistics, the results reflect the variability and
imprecision of a reporting system whose universe is tens of thousands of loans provided by
hundreds of institutions that received USAID support in that particular year. The figures
should be viewed as suggestive.

former Soviet Union, $400 in Latin America). In FY1998, 63% met this description;
in FY1994, 52%. Women accounted for 69% of all loans in FY1999; 84% the year
before, and 61% in FY1994. Of total FY1999 microenterprise funding, Africa
accounted for 27% (27% in FY1998), Asia/Near East represented 23% (30%),
Europe 17% (14%), and Latin America 28% (23%).
Table 1. USAID Assistance to Microenterprise
(appropriations and local currency in $ millions)*
FY1988 $57.80
FY1989 $78.90
FY1990 $75.50
FY1991$113.60
FY1992$126.30
FY1993 $96.00
FY1994$137.40
FY1995$133.50
FY1996$111.40
FY1997$165.10
FY1998$138.40
FY1999$153.50
* Microenterprise funding is derived from appropriations to multiple accounts – development
assistance, economic support funds, central Europe (SEED), and former Soviet Union
(Freedom Support Act) – and from local currencies obtained from the sale of PL480 food aid
and from balance-of-payments support.
Note: FY1990 to FY1992 figures do not include microenterprise activities in East Europe. The
totals for those years would be slightly higher if those programs were taken into account. Most
figures are estimates made by USAID mission personnel – prior to issue of detailed policy guidance
in 1994, judgment was more subjective.
Source: USAID
USAID Centrally Funded Grant Programs. Centrally allocated funds —
including from USAID’s Office of Microenterprise Development and its Office of
Private and Voluntary Cooperation in Washington — accounted for 20% of total
microenterprise funding in FY1999.
Office of Microenterprise Development. Since the mid-1970s, an office
responsible for microenterprise has funded research, disseminated information on best
practices, and provided technical assistance for missions directly undertaking
microenterprise support projects. Under the Microenterprise Initiative, the Office of
Microenterprise Development stepped up these activities and began to provide its
own grants. One grant pool – the Implementation Grant Program – is directed
toward groups working with developing country microenterprise finance
organizations to enable those organizations to reach higher levels of outreach and
financial viability. A grant provided to the Grameen Trust assists other credit

organizations replicating Grameen Bank methods. A grant to ACCION established
a fund from which equity capital can be provided to NGOs making the transformation
to formal financial institutions. A Colombian NGO received a grant to develop a
business-training program for its microcredit clients.
Another pool of funds – the PRIME Fund – is for co-financing projects with
USAID missions so as to insure that the best mission-based projects are adequately
supported. Other Office programs assess the impact of microenterprise services and
examine and share the best practices of microenterprise organizations. In FY1999,
the Microenterprise Office provided about $12 million in grants, down from $25
million in FY1998, and the lowest amount since FY1994.¹⁵
Office of Private and Voluntary Cooperation (PVC). For many years,
the Office of Private and Voluntary Cooperation has provided funds directly to U.S.
microenterprise support organizations to strengthen their management and technical
capacities, and, through them, to help local non-governmental partner organizations
in developing countries. Grants in FY1999 enabled nearly half of recipients to offer
microenterprise services for the first time. A cooperative development program
similarly assists cooperatives, including credit unions, many of which provide
microenterprise services to their clients. In FY1999, 21 U.S. PVOs received a total
of $8.4 million in funding from this Office for microenterprise activities.
USAID Mission Activity. Nearly four-fifths of USAID support for
microenterprise in FY1999 came from the agency’s field missions. Each mission
targets this activity in order to support its wider strategic development objectives in
a country – objectives such as empowerment of women, increasing incomes, and
democracy building.
While USAID provides a range of assistance to the microenterprise sector, most
funds are used to support the development and strengthening of actual microfinance
institutions. One aspect of this work, funded by both USAID/Washington and
missions abroad, is the strengthening of U.S.-based intermediary organizations, such
as ACCION and Finca, that deal with multiple finance institutions throughout the
world. USAID funds helped ACCION develop its methodology for assisting
microfinance institutions move toward sustainability, for example by exposing
ACCION staff to the successful Indonesian BRI, and by providing capital grants to
enable ACCION’s affiliate institutions to make their first loans. In 1999, ACCION
worked with institutions in 14 Latin American countries which disbursed more than
$501 million in loans averaging $580 to more than 452,000 clients and with a¹⁶
repayment rate of 98%. USAID is currently supporting ACCION’s expansion into
Africa.
One beneficiary of USAID’s funds and ACCION’s guidance was Bolivia’s
BancoSol, “the first private commercial bank in the world that caters specifically to

¹⁵ The level is expected to rise to $22.8 million for FY2000.
¹⁶ ACCION website “media kit”: [http://www.action.org].

microentrepreneurs.”¹⁷ USAID provided start up capital to PRODEM, the indigenous
PVO that spawned BancoSol in 1992. It also provided technical assistance to help
BancoSol set up a savings program. The USAID MSED Program, described below,
helped ACCION set up a bridge fund that guarantees loans from commercial banks,
providing access to private sector capital. It also guaranteed BancoSol’s first issue
of CDs on the U.S. market. BancoSol now serves 72,000 clients, more than all other
Bolivian banks combined.
In addition to institution building, USAID funds have been used to encourage
positive changes in government policy affecting microenterprise. For example, in
Bolivia, USAID assisted with the drafting of legislation providing for a new class of
specialized financial institution that might assist microentrepreneurs. Elsewhere, it has
encouraged the deregulation of small business interest rates, previously set at a level
that discouraged the creation of microfinance institutions.
USAID business development services include providing training courses in
business skills and efforts to link specific microbusiness sectors with larger markets.
In Uganda, for example, a USAID-funded organization has introduced new food
processing technologies – a peanut grinder, manual oilseed press, and cassava slicer
– that significantly enhance the productivity of microentrepreneurs. In South Africa,
USAID has helped strengthen an indigenous business development service
organization by funding efforts to analyze and streamline the organization and set up
satellite service centers in neglected communities.
Micro And Small Enterprise Development Program (MSED). MSED
projects, funded centrally in Washington, and initiated and supported by USAID field
missions, target financial institutions, including commercial banks, directly. Begun in
FY1994, but with antecedents back to 1983, the MSED employs U.S. government
guarantees (and to a lesser extent direct loans) to encourage developing country
banks to open lending windows to both small and micro businesses. For FY2001,
$1.5 million was appropriated to cover subsidy costs for guarantees which can be
made on up to 50% of a loan (at as much as a 20 to 1 ratio of U.S. funds to actual
value of guarantees, a small appropriation can leverage considerable resources).¹⁸
With half the risk carried by the United States, indigenous banks are more willing to
loan to small and micro businesses. The MSED also employs additional grant funds
to train bank managers in this form of lending. Although it has been instrumental in
the development of microcredit, the MSED chiefly benefits small business. Of nearly
$29 million in outstanding loans (as of September 2000), only 3% went towards
loans under $1,000.
For FY2001, USAID had proposed the consolidation of its credit programs,
including MSED, into one Development Credit Authority program which would fund
its guarantees by drawing on transfers from other accounts, rather than direct
appropriations. USAID argued that this would save money on administration and
insure that appropriated funds were used only for the most beneficial loans.

¹⁷ See Amy J. Glosser, “The Creation of BancoSol”, p. 229-250, in The New World of
Microenterprise Finance, Maria Otero and Elisabeth Rhyne, eds., Kumarian Press, 1994.
¹⁸ Another $500,000 went for administrative expenses in FY2001.

Congress, however, rejected integration of MSED with other credit programs, partly
because of a concern that micro funding would be adversely affected if it had to
“compete” with other development objectives.¹⁹ Microcredit programs, however, can
now be funded under both MSED and the separate Development Credit Authority
program.
Issues for Congress
Funding Levels
For more than a decade, U.S. supporters of microenterprise programs both in
and out of Congress have argued for increased funding levels. To insure that
sufficient funds were spent on microenterprise programs, Congress, in the foreign
operations appropriations, earmarked $50 million in FY1988 and $75 million from
FY1989 through FY1992. Under the Microenterprise Initiative, USAID agreed with
Members of Congress to provide $130 million in FY1994, $140 million in FY1995,
and $135 million for each year from FY1996 to FY2000, levels not always achieved
but sometimes surpassed due to use of multiple year obligation authority, availability
of local currencies, and fluctuations in appropriated accounts. The Microenterprise
for Self-Reliance Act of 2000 authorizes a level of $155 million for each of fiscal
years 2001 and 2002.
Although pressure to raise spending levels is likely to continue – the PVO-
supported Microenterprise Summit in 1997 sought an additional $7.5 billion in donor
funding by 2005 (of which $3 billion would be loans from MDBs) – continued
increases may be difficult to achieve in view of limited funds and competing priorities.
Congressional cuts in foreign aid in the mid-1990s made it difficult for USAID to live
up to its microenterprise commitments then, and aid levels would have to rise broadly
in the future for microenterprise funding to increase. Popular earmarks favoring
objectives such as child survival further limit the amounts available for
microenterprise. In the case of Nepal, the need to utilize child survival funds
reportedly squeezed out microenterprise development entirely as part of the USAID
mission strategy. On the other hand, favoring microenterprise with an appropriation
earmark or strong funding recommendation would limit other objectives such as
environmental protection and democratization.
Should Congress seek to earmark microenterprise spending in the appropriations
bill, it will find it a complicated exercise because funding for this activity comes from
numerous spigots – four appropriations accounts and local currencies generated by
sales of goods funded under these accounts and PL 480, Title II, programs. This is
one reason why, in recent years, appropriators have chosen to recommend target
funding levels in report language.

¹⁹ During debate on the issue in 2000, USAID staff noted that micro programs could still be
protected if Congress directed that a portion of the consolidated program be used for this
purpose.

Assistance Strategies and Priorities
Supporters of microenterprise development have varied priorities and objectives.
For example, some argue that funds should be dedicated largely for poverty
alleviation purposes while others want to focus on approaches that more effectively
stimulate economic growth. Some favor funding for microloans rather than business
services or policy reform. Such differences in approach are discussed below.
Poverty Lending. “Poverty lending” programs are those aimed at the poorest
of microentrepreneurs. Proponents of this approach argue that to reach the very
poorest – those in the lowest half of the population living below the poverty level –
programs should make relatively small loans, often in amounts of less than $300. The
extent to which programs are directed at women is also considered by some a
measure of poverty lending. For many years, report language accompanying House
and Senate foreign operations bills has recommended that half of microenterprise
spending be for poverty lending, and, in its Microenterprise Initiative, USAID agreed
to ensure that at least half of its microenterprise lending would go for loans under
$300 ($1,000 in Europe) and that women would be the chief beneficiaries of
microfinance programs.
The Microenterprise for Self-Reliance Act of 2000 requires that half of all
assistance be targeted at the very poorest, but bends to arguments long made by
USAID and many microfinance implementors that there is a fundamental problem
with the insistence on a $300 average loan level and that a degree of flexibility is
needed to address the poor. These critics point out that microenterprises, especially
successful ones, move on to incrementally larger loans that will raise the average loan
amount provided by microcredit organizations. Further, the greater profits derived
from lending to these larger micro and small businesses help microfinance institutions
to subsidize more numerous, smaller loans for the poorest – so a mix is recommended
by many support organizations. Finally, a $300 average loan level is possibly
sufficient for the very poorest in India, but has little utility in Europe and some other
parts of the world where the cost of doing business is higher. If the objective is to
help people do more than increase their inventory of retail items – such as buying an
oven for a bakery or a sewing machine for a tailor shop – then larger sums may be
necessary. The Act allows poverty loan levels to rise to $1,000 in Europe and
Eurasia, $400 in Latin America, and $300 in the rest of the world.
Some poverty lending advocates are dissatisfied with the level of USAID
assistance. They point out that while 58% of USAID microfinance program funding
may go to poverty lending, only 40% of total microenterprise development funding
(including BDS and policy reform) is used for this purpose. They question the value
and cost effectiveness of business development services as a tool to help the poorest
as compared to credit, suggesting that there is little evidence as yet of the positive
impact of BDS. Further, only 29% of USAID BDS-assisted clients were among the
very poor. They believe insufficient effort is being made in Africa, where many of the
poorest live, to introduce poverty lending. Only half of microenterprise funding in
Africa is for financial programs, and only 63% of that goes to poverty lending. In all,
they assert that not enough is being done to make credit assistance available to the
very poorest.

The “poverty lending” approach to microfinance is not universally esteemed.
Some argue that concentration of funds on the very poorest would miss a large
number of potentially productive recipients that also cannot obtain credit, such as
larger microenterprises as well as many small businesses. These somewhat larger
enterprises have, in the view of many, a better chance of creating employment and
achieving “graduation” into the formal sector. Some skeptics suggest that enthusiasm
for microenterprise assistance as a solution to poverty is unfounded. They point to
research suggesting that the most beneficial results from microcredit accrue to those
just below the poverty line, not those well below it.²⁰ One critic also argues that
women “do not necessarily benefit from loans disbursed in their names.”²¹ Others
note that the poorest often lack the education, skills, and confidence to start a viable
business. While acknowledging that microfinance alone may not be the solution to
world poverty, a USAID expert maintains it does provide a service for which there
is a clear demand from the poor.
Loan Programs vs. Other Assistance. Since the 1980s, some have sought
to insure that the lion’s share of U.S. microenterprise assistance was used to fund the
loan programs of microcredit organizations. While this strategy is no longer as
strongly argued – the Microcredit Act recognizes the importance of other
interventions, such as business services, as ways of helping the poor – there remain
disparate views of where assistance funds might best be used. According to some,
financial support is not the first preference of many entrepreneurs — it is business
training, planning support, and marketing advice. Others suggest that financial
services other than credit – savings and insurance – would help alleviate the
vulnerability of the poor to job loss, disease, or natural disasters. Still others believe
that changes in government economic policies and regulations would have a broader
and more dramatic impact on the livelihood of micro entrepreneurs than does credit.
USAID currently supports each of these activities, but to a lesser extent than loan
activity which accounted for two thirds of FY1999 funding.
Central vs. Mission Programs. During the past decade, under the
Microenterprise Initiative and through specific report language, Congress has
recommended the channeling of more microenterprise funds through central
USAID/Washington offices. In response, USAID strengthened and expanded the role
of its centrally funded programs, in particular the Office of Microenterprise
Development. Centrally allocated funds rose substantially in the mid 1990s, from

²⁰ One study notes, “...Microfinance is only one of many possible anti-poverty modalities, but
the question of whether it is the best or the most efficient has rarely been investigated. In
Bolivia, we find it to be an efficient and low-cost method of reducing poverty (down to about
75% of the poverty line) but a poor and expensive method of reducing extreme poverty. Other
approaches, in particular investment in social and physical infrastructure and expansion of
the labor market, show more promise in reducing extreme poverty.” Paul Mosley,
Microfinance and Poverty: Bolivia Case Study, p. 4, May 1999.
²¹ See Ben Rogaly, “Micro-finance Evangelism, `Destitute Women’, and the Hard Selling of
a New Anti-Poverty Formula”, in Development in Practice, Volume 6, Number 2, May 1996.
See also, Microfinance and Poverty: Questioning the Conventional Wisdom, Hege Gulli,
Inter-American Development Bank, 1998; and Microfinance and Poverty Reduction, Susan
Johnson and Ben Rogaly, Oxfam, 1997.

roughly $13 million in FY1994 to $37 million by FY1998, but dropped to $31 million
in FY1999.
Congressional and U.S. interest group support for centrally funded mechanisms
was partly based on the fact that funds, particularly those funneled through the Office
of Private and Voluntary Cooperation, tend to go directly to U.S. NGOs, such as
ACCION, Freedom from Hunger, and Finca. Further, the Office of Microenterprise
Development is perceived as having considerable expertise and supporting more
“cutting-edge” projects and research into best practices. On the other hand, some
suggest that USAID missions are in the best position to identify indigenous,
innovative groups in the field.
For supporters of central funding, there may be new reasons to be concerned.
The drop-off in funding noted above may represent a lack of commitment to the
funding targets for the Microenterprise Office and PVC established in the 1990s. It
also reflects a 1998 change in USAID procedures by which the Microenterprise Office
no longer had its own pool of funds – all of its funding came from USAID regional
bureaus and had to be channeled to projects in those regions.²² Contributions by the
different bureaus have been uneven. In FY1999, more than half of funding came from
the Africa Bureau alone. Currently, as a result of the new procedure, the Asia and
Europe regions receive few grants from the Microenterprise Office.
New Challenges for Microenterprise Support Programs
As microenterprise programs have spread throughout the world, donor agencies
and implementing organizations have moved from the simple introduction of credit
programs to a set of related concerns centered on how to make these programs more
effective, widespread, and lasting. Future congressional interest may focus on
progress on these issues.
Reaching the Poor. Research suggests that current programs do not answer
many of the problems of active or potential microentrepreneurs, especially the very
poorest.²³ Microenterprise practitioners are exploring various avenues of activity that
might lead to provision of more effective services. Among the ideas being discussed
are microfinance programs that provide short-term emergency loans; more accessible,
non-loan related, savings services; insurance programs; and home improvement and
construction financing. New business development services programs could include
efforts to establish leasing services; and use of communication technologies, including
the Internet.
Making Programs Sustainable. A leading question since the introduction
of microenterprise credit support programs has been whether any of them would be
viable without regular infusions of donor financing. It was thought that micro loan
organizations — even charging market rates of interest and with their high incidence

²² In FY2001, the Office did receive $3 million of its own funds.
²³ For further discussion, see Microfinance, Risk Management, and Poverty, Jennifer Sebstad
and Monique Cohen, Assessing the Impact of Microenterprise Services (AIMS) study, Office
of Microenterprise Development, USAID, March 2000.

of repayment — would be less able than commercial banks to cover their costs
because of the voluminous number of small loans involved and the consequent
expense of paperwork. These organizations also had enormous difficulty getting
funding from private capital markets. USAID has long sought to facilitate
sustainability by financing research and testing methodologies that might lead to it.²⁴
Although the road to self-sufficiency is difficult – one implementor estimates
that, of the thousands of microfinance institutions, only 200 have the capacity to
become sustainable – a growing number of microcredit organizations have achieved
it. In the USAID 1998 microcredit report, eleven percent of reporting microfinance
institutions claimed financial sustainability. In its 1999 report, 42 percent said they
had achieved it. ACCION International reports that 14 of its 19 Latin American
institutions are financially self-sufficient.²⁵
Despite this success, several concerns remain. One is that donors will give
insufficient time to helping microfinance organizations reach sustainability.
International experience, according to USAID, shows that successful institutions have
achieved financial self-sufficiency (defined as covering all administrative costs, loan
losses, and financing costs at non-subsidized rates from client revenues) within five
to ten years. But some experts think that it could take more, especially in difficult
environments like Africa. USAID guidelines, however, say it should take seven years
to reach sustainability, leaving some wondering if assistance will be cut-off before
organizations are ready.
For those targeting assistance to the poorest of the poor, the achievement of
sustainable microfinance is not a completed task. Sustainability is often seen as being
at odds with efforts to reach the very poorest. Microfinance institutions have found
that a mix of income levels in the loan portfolio helps to generate additional revenue
as well as cut costs through economies of scale. How to achieve both sustainability
and serve the poorest remains a challenge.
Further, there is much more for donor agencies to do to insure sustainability.
One is helping organizations to make linkages with private capital markets, that will
supplant donors as a source of funds. As noted above, the MSED and
Microenterprise Office grants have been used for this purpose on a number of
occasions. Another is helping organizations deal with the exponential growth rates
that successful organizations have already experienced and must continue to
experience if the large field of microentrepreneurs is to be served and if non-
subsidized lending is to be cost-effective. In the view of USAID officials, even
financial or technical assistance to the organizations that have achieved full
operational sustainability should continue in some cases to help them do something
they haven’t done yet, such as expand deeper into the lower income levels of the poor
or provide a new service, such as insurance.

²⁴ Maximizing the Outreach of Microenterprise Finance: An Analysis of Successful
Microfinance Programs, Robert Peck Christen, Elisabeth Rhyne, Robert C. Vogel, and
Cressida McKean, USAID Assessment Report No. 10, July 1995.
²⁵ Reaching Down and Scaling Up, USAID Microenterprise Results Reporting for 1999,
p.24, September 2000.

Commercialization. As NGOs demonstrate the potential sustainability and
profitability of microfinance, commercial banks are increasingly stepping into the
field.²⁶ USAID has facilitated this trend by working on changing the policy and
regulatory framework that often discourages bank entry, by providing loan guarantees
to make entry financially more attractive, and by offering technical expertise. Some
credit commercial banks with introducing new financial services and technological
innovations. While the commercialization of microfinance promises to meet the
objective of making such services more widespread, it may not solve the problem of
reaching the poorest. Perhaps because banks are primarily seeking profitability, they
tend to serve the upper reaches of the micro and small entrepreneurs – bank loan sizes
tend to be larger than those of NGOs. One impact of commercialization, therefore,
may be that NGOs are left with the poorest clients, making it difficult for NGOs to
achieve financial sustainability. If commercial banks squeeze out the NGOs, one loss
would likely be the social objectives that many NGOs support as adjuncts to
microfinance, including literacy and health programs. Another would be the loss of
innovative approaches that NGOs have historically brought to this field.
Geographic Challenge. Reaching the poor in some cases is a geographic
challenge. Micro programs tend to concentrate in urban areas, because of the ease
and cost-effectiveness of serving a dense population. Although USAID microfinance
programs in Latin America and Asia have done a good job of helping rural clients,
elsewhere rural populations are underserved. Whereas 66% of the population of sub-
Saharan Africa lives in rural areas, only 44% of microfinance clients do, in the Near
East the figures are 42% and 7% respectively, and in Europe/Eurasia, 33% and 3%.
For Africa, in the Seeds of Hope Act of 1998, (P.L. 105-385, sec. 102), Congress
directed USAID to use credit assistance to help “small-scale farmers and small rural
entrepreneurs”. The proportion of rural clients has risen in recent years, and USAID
is encouraging the spread of programs to the hinterlands by providing incentives to
institutions to expand their operations and by demonstrating new ways of delivering
services to rural areas.
New Technologies. New technologies may transform current
microenterprise practices. For example, a pilot project in Nigeria is using smart card
technology, in which the account is maintained on the card, allowing loan officers and
borrowers the security of not having to carry cash, providing better downloadable
information to the NGO or bank, and permitting farmers to make payments in excess
of what is due in order to build savings. Elsewhere, loan officers are using palm pilots
to record transactions. USAID is exploring the use of innovative technologies to
make microfinance services more affordable and deliver them more efficiently.
Impact of Crises and HIV/AIDS. Microentrepreneurs and microfinance
institutions are particularly vulnerable to the dislocations caused by natural disaster
or economic crisis. USAID has sought ways to respond to these problems, including
the establishment of a special fund to assist Central American microfinance institutions

²⁶ See Microfinance Enters the Marketplace, Elisabeth Rhyne and Robert Peck Christen,
USAID Office of Microenterprise Development; and Commercial Banks in Microfinance:
New Actors in the Microfinance World, Mayada M. Baydas, Douglas H. Graham, and Liza
Valenzuela, August 1997, USAID.

affected by Hurricane Mitch. In Ecuador, USAID used the MSED program to
provide microfinance organizations with “portable guarantees” that enabled them to
quickly obtain funds to meet the large drawdown demand on client savings during the
1999 economic crisis there. Recognizing such problems, Congress included language
in the Microenterprise Act of 2000 that authorizes creation of a microfinance loan
facility that would help institutions avoid bankruptcy in the event of natural or other
crises. While the problem faced by most microfinance institutions in these situations
is a short-term liquidity crisis, it may not be in the interest of the U.S. assistance
program to resolve an actual default caused by the failure of clients to repay their
loans. The damage done to the reputation of the institution in such an event could be
irreparable, preventing it from ever becoming self-sustaining.²⁷
The HIV/AIDS epidemic poses another challenge to microfinance institutions,
with loss of staff and clients, and greater loan delinquency, among the possible effects.
Policy analysts have begun to consider and test numerous approaches to dealing with
these concerns, including allowing a healthy member of a household to replace a sick
client, provision of death insurance, and development of pre-paid medical payment
programs. As a preventative measure, USAID currently supports the integration of
health education with microfinance programs.²⁸

²⁷ See Disaster Loan Funds for Microfinance Institutions: A Look at Emerging Experience,
Warren Brown and Geetha Nagarajan, USAID Microenterprise Best Practices Project,
October 2000.
²⁸ See Discussion Paper: Microfinance and HIV/AIDS, Joan Parker, USAID Microenterprise
Best Practices Project, May 2000.