Microenterprise Development: USAID's Program Has Met Some Goals; Annual Reporting Has Limitations

Published by the Government Accountability Office on 2003-11-17.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States General Accounting Office

GAO             Report to the Chairman, Committee on
                International Relations, House of

November 2003
                USAID’s Program Has
                Met Some Goals;
                Annual Reporting Has

                                                November 2003

                                                MICROENTERPRISE DEVELOPMENT

                                                USAID’s Program Has Met Some Goals;
  Highlights of GAO-04-171, a report to the
  Chairman, House Committee on
                                                Annual Reporting Has Limitations
  International Relations

 Microenterprises—small                         USAID’s microfinance activities have met some, but not all, of the agency’s
 businesses owned and operated by               microenterprise program objectives. These objectives are to (1) reduce poverty
 poor entrepreneurs—have                        among participants; (2) target the poor and very poor; (3) encourage women’s
 potential to help the world’s poorer           participation; and (4) develop sustainable microfinance institutions (MFI). First,
 populations. For this reason, the
                                                regarding reducing poverty—defined as alleviating its impacts or lifting and
 U.S. Agency for International
 Development (USAID) included                   keeping a large number of people above the poverty line—GAO found that
 microenterprise development in its             microfinance can help alleviate some impacts of poverty, incrementally
 programming. In 2001, the agency               improving borrowers’ income levels and quality of life and offering an important
 reported that its was conducting               coping mechanism to poor workers and their families. However, there is little
 microenterprise projects in 52                 evidence that it can lift and keep many over the poverty line. Second,
 countries and had obligated almost             microfinance generally has served the poor clustered around the poverty line but
 $2 billion since 1988 to support its           not the very poor. Third, USAID has successfully encouraged the participation of
 program. The program supports                  women, who have comprised about two-thirds of micro loan clients since 1997.
 micro loans, among other services,             Fourth, USAID has emphasized the importance of MFI sustainability. In fiscal
 to assist poor entrepreneurs. Since            2001, of 294 USAID-supported MFIs that reported on sustainability, 38 percent
 1996, USAID has annually reported
                                                reported achieving full sustainability—a percentage consistent since 1999.
 the program’s results.

 To help Congress oversee USAID’s               The basic data in USAID’s Microenterprise Results Reporting (MRR) system are
 management of its microenterprise              reliable, but certain methodological problems may affect the accuracy of some
 development program, GAO was                   of the agency’s reporting on key program objectives. Specifically, USAID may
 asked to (1) determine the extent              not be reporting accurately (1) the amounts it has obligated to microenterprise
 to which the agency’s microfinance             activities; (2) whether 50 percent of its resources went to the very poor, as
 activities are meeting the program’s           required by Congress; and (3) the sustainability of USAID-supported institutions.
 key objectives, (2) assess the                 Further, although the agency reports annually on the activities of institutions it
 reliability of USAID’s reporting on            supports, it does not show the percentage of those institutions’ total funding that
 its overall microenterprise                    its contribution represents.
 activities, and (3) examine the
 agency’s role in identifying and               USAID has identified and disseminated microenterprise best practices, providing
 disseminating microenterprise best             information to its missions and implementing partners through policy guidance,
 practices.                                     training, and technical assistance. In addition, USAID has collaborated with
                                                microenterprise development provider networks and others to publish
                                                information about these practices.
 GAO recommends that the
 Administrator of USAID review the              Microentrepreneur from a USAID-Supported Project in Egypt
 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


To view the full product, including the scope
and methodology, click on the link above.
For more information, contact David
Gootnick at (202) 512-3149 or

Letter                                                                                   1
               Results in Brief                                                         2
               Background                                                               4
               USAID Has Met Some Program Objectives                                   10
               MRR Data Generally Reliable but May Not Accurately Reflect
                 USAID’s Microenterprise Activities                                    26
               USAID Has Identified and Disseminated Best Practices                    30
               Conclusion                                                              33
               Recommendation to USAID                                                 33
               Agency Comments and Our Evaluation                                      33

Appendix I     Scope and Methodology                                                    36

Appendix II    Microenterprise Best Practices                                           38

Appendix III   Review of Microenterprise Studies                                        43

Appendix IV    USAID’s Microenterprise Results Reporting                                52

Appendix V     Comments from the U.S. Agency for International
               Development                                                              54
               GAO Comments                                                            65

Appendix VI    GAO Contact and Staff Acknowledgements                                   69
               GAO Contact                                                             69
               Staff Acknowledgements                                                  69

               Table 1: Findings and Recommendations from 22 Selected Studies
                        on Microfinance and Microenterprise Development                44

               Page i                               GAO-04-171 Microenterprise Development
          Figure 1: USAID’s Microenterprise Development Program,
                   Highlighting Microfinance Activities                                              7
          Figure 2: Conceptual Diagram of Populations along the Poverty
                   Scale                                                                             9
          Figure 3: Microentrepreneurs in Bulgaria                                                  11
          Figure 4: Microentrepreneurs with Loans from Various USAID-
                   funded MFIs                                                                      13
          Figure 5: Financial Sustainability of Institutions, by Average Loan
                   Size                                                                             18
          Figure 6: Clients in USAID-funded Micro Loan Projects, by Gender,
                   1997–2001                                                                        19
          Figure 7: Women Entrepreneurs at USAID-funded MFIs in Peru                                21
          Figure 8: Financial Sustainability of MFIs, by Average Number of
                   Borrowers                                                                        24
          Figure 9: Available USAID Obligations Data for Poverty Lending,
                   Fiscal Years 2000 and 2001                                                       28


          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

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          Page ii                                        GAO-04-171 Microenterprise Development
United States General Accounting Office
Washington, DC 20548

                                   November 17, 2003

                                   The Honorable Henry Hyde
                                   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 2000,1 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; 2
                                   target the poor and the very poor;3 encourage participation by women; and

                                    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).
                                    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.
                                    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.

                                   Page 1                                           GAO-04-171 Microenterprise Development
                   develop sustainable microfinance institutions (MFI).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.)

                   USAID’s microfinance activities have met some, but not all, of the
Results in Brief   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

                    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

                   Page 2                                          GAO-04-171 Microenterprise Development
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

Page 3                                 GAO-04-171 Microenterprise Development
             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.

             Microenterprise development and its primary component, microfinance,
Background   emerged in the 1980s. Microfinance—the supply of micro loans,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

              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.

             Page 4                                       GAO-04-171 Microenterprise Development
    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.6

    USAID’s microenterprise development program focuses on three key

•   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

    World Bank, CGAP Report 2000, Consultative Group to Assist the Poorest (Washington,
    D.C.: 2000).

    Page 5                                      GAO-04-171 Microenterprise Development
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.

Page 6                                 GAO-04-171 Microenterprise Development
Figure 1: USAID’s Microenterprise Development Program, Highlighting Microfinance Activities

                                                           (Microenterprise Development Division)

                                Types of        Miocrofinance     Business development           Policy
                                activities        services              services                 reform

                                                          Implementing organizations
                                                     (e.g., contractors, nongovernmental organizations)

                                Financial                            Other financial
                                                Loans    Savings
                                services                                services


                                     Group                 Individual
                                    lending                 lending

                          Group lending: Peru                                  Group lending: Bulgaria                           Individual lending: Egypt

                                                                Countries where USAID had microenterprise development programs as of fiscal year 2001.
Sources: GAO analysis and MapArt.

                                                     Page 7                                                     GAO-04-171 Microenterprise Development
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 countries7 and
synthesized key findings from a number of other studies,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.

 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).
 Jennifer Sebstad and Monique Cohen, Microfinance, Risk Management, and Poverty
(Washington, D.C.: Management Systems International, 2000).

Page 8                                     GAO-04-171 Microenterprise Development
Figure 2: Conceptual Diagram of Populations along the Poverty Scale

     Income level

                                        Vulnerable nonpoor

     National Poverty Line


     50 percent below
     the poverty line

                                             Very poor

Source: GAO.

Note: This diagram is for illustrative purposes only and is not drawn to scale. The national poverty line
is defined by each country.

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,

Page 9                                                 GAO-04-171 Microenterprise Development
                              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’s microfinance activities have achieved some of the agency’s key
USAID Has Met Some            program objectives but made limited progress toward others. First,
Program Objectives            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         Our fieldwork and review of USAID-funded studies and research literature
Alleviate Some of Poverty’s   showed that microfinance can alleviate some of the impacts of poverty
Impacts                       among recipients.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

                               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.

                              Page 10                                       GAO-04-171 Microenterprise Development
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

Source: GAO.
This husband-and-wife team manufactures and sells flavored popcorn with the help of three
employees. The husband borrowed $2,300 from a USAID-funded MFI, which provides loans for
individuals. The entrepreneurs said that they used the loan to buy additional machinery for their
enterprise. (Stara Zagora, Bulgaria)

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

Page 11                                               GAO-04-171 Microenterprise Development
levels. According to the study, economic recession in Peru during 1997 and
1999 may have limited the effects of the small loans.10 A study in Egypt
found that a microfinance program offering group lending to poor women
helped its clients establish and expand their businesses.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.)

  Elizabeth Dunn and J. Gordon Arbuckle, Jr., The Impacts of Microcredit: A Case Study
from Peru, (Washington, D.C.: USAID/AIMS, 2001).
  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]).

Page 12                                        GAO-04-171 Microenterprise Development
Figure 4: Microentrepreneurs with Loans from Various USAID-funded MFIs

A tailor in a rented shop who reported receiving
a $250 loan from the individual lending program
operated by a USAID-funded MFI in northern
Egypt. He said that the loan enabled him to buy
his own cloth and sell ready-made clothes.
(Rushid District, Egypt)

This grocery store owner opened a new shop with
the assistance of an $1,800 loan from a USAID-
funded MFI. (Nova Zagora, Bulgaria)

Members of a group lending program for women,
which began in 1999 in northern Egypt. These
women, with loans ranging from $20 to $100,
bought waste materials from a nearby garment
factory; they sorted and cleaned this material and
used it to weave rugs. (Fowa District, Egypt)

Source: GAO.

                                                     Page 13             GAO-04-171 Microenterprise Development
                           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.”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.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     Although the agency’s microfinance activities serve the poor, they
Reached the Poor but Not   generally appear not to reach the very poor, according to our review of
the Very Poor              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

                            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.
                            Shahidur Khandker, Fighting Poverty with Microcredit: Experience in Bangladesh.
                           (New York: Oxford University Press, Inc., 1998).

                           Page 14                                     GAO-04-171 Microenterprise Development
                                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

USAID’s Microfinance            USAID studies and other research literature on microfinance show that
Activities Generally Have Not   microfinance activities serve those clustered just above and below the
Reached the Very Poor           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 study14 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 study15 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.

                                 Sebstad and Cohen, Microfinance, Risk Management, and Poverty.
                                 Sergio Navajas et al., “Microcredit and the Poorest of the Poor: Theory and Evidence from
                                Bolivia,” World Development 28, no. 2 (2000): 333-346.

                                Page 15                                        GAO-04-171 Microenterprise Development
Small Loan Size an Inadequate   Although most MFIs use small loan size as an indicator of loans to the very
Measure of Whether Loans        poor (as mandated in the 2000 act), in practice this is an inadequate
Reach the Very Poor             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.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       Although some evidence suggests that micro loans may help alleviate the
Ineffective Unless Combined     impacts of poverty, evidence also suggests that in some cases these loans
with Other Services             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

                                 PL 108-31, enacted June 17, 2003.

                                Page 16                                GAO-04-171 Microenterprise Development
                                reaching the very poor, and with a well-targeted program attuned to the
                                needs of very poor clients, microfinance can have positive impacts.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. 18 For example, a 2002
                                strategic evaluation of the Consultative Group to Assist the Poorest
                                (CGAP)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,20 a view that also reflects USAID’s
                                policy, according to agency officials.

Poverty Lending Requirement     USAID officials stated that implementing the requirement that 50 percent
May Hamper MFI Sustainability   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

                                 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.)
                                 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.)
                                 CGAP, a consortium funded by 29 bilateral and multilateral donor agencies that support
                                microfinance, is affiliated with the World Bank.
                                 Donor Brief, No. 13, July 2003, CGAP.

                                Page 17                                        GAO-04-171 Microenterprise Development
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.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

Figure 5: Financial Sustainability of Institutions, by Average Loan Size

Percentage of financial sustainability

100                                               Full financial





         Small    Medium      Large
         ($135)   ($755)     ($1,420)
          n=58     n=77        n=6
         Institutions, by average loan size
Source: GAO analysis of data from the MicroBanking Bulletin (November 2002).

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.

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

 USAID applies the poverty lending requirement on an agency wide basis. However, it does
not ask that individual missions or MFIs meet this requirement.

Page 18                                                            GAO-04-171 Microenterprise Development
                          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      USAID data indicate that the agency succeeded in reaching large numbers
Activities Have Reached   of women clients through its microcredit activities in fiscal years 1997 to
Many Women                2001 (see fig. 6).22

                          Figure 6: Clients in USAID-funded Micro Loan Projects, by Gender, 1997–2001
                          Number of clients in thousands








                                      1997    1998      1999    2000   2001
                                     Fiscal year

                                               Male clients

                                               Female clients

                          Source: GAO analysis of USAID data.

                          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

                           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.

                          Page 19                                             GAO-04-171 Microenterprise Development
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.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 lending24 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.)

  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.
  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.

Page 20                                        GAO-04-171 Microenterprise Development
Figure 7: Women Entrepreneurs at USAID-funded MFIs in Peru

Members of a village bank (a form of group
lending), operated by a USAID-funded MFI,
discuss self-esteem with an MFI employee prior
to their loan repayment meeting. This MFI offers
loans of $400 or less. In addition to providing
micro loans, the MFI also offers services such as
training, healthcare, and childcare to borrowers.
(Puno, Peru)

Members of a village bank at a loan repayment
meeting. This village bank, 1 of 65 in the district,
was started by a USAID-funded MFI about 8
months ago. Some borrowers at the meeting
reported receiving loans of between $100 and
$150. Almost 90 percent of the village bank
members are women. (Juliaca District, Peru)

Source: GAO.

                                                       Page 21   GAO-04-171 Microenterprise Development
Some Progress Made          USAID has emphasized developing sustainable MFIs, and available data
toward MFI Sustainability   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

USAID Has Emphasized MFI    Within the microfinance industry, USAID is a leader in promoting MFI
Sustainability              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

                            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    Available data suggest that USAID-supported MFIs have made some
Some Progress toward Full   progress toward achieving full sustainability. In fiscal year 2001, 294
Sustainability              USAID-supported MFIs reported sustainability levels;25 of these, 112, or 38
                            percent, said that they were fully sustainable, a percentage that had

                             USAID provided funding to 492 organizations in fiscal 2001. The agency does not
                            disaggregate these data by MFIs, BDS providers, or policy advocacy organizations.

                            Page 22                                        GAO-04-171 Microenterprise Development
remained consistent since 1999.26 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 MFIs27 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”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

  To the extent that financially stable institutions are more likely to report sustainability
data, this percentage may be biased upward.
 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).
 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.

Page 23                                           GAO-04-171 Microenterprise Development
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
Percentage of financial sustainability

100                                                   Full financial





         Small       Medium        Large
        (4,519)      (14,650)    (165,175)
         n=42          n=75        n=30
       Microfinance institutions (average number of borrowers)
Source: GAO analysis of MicroBanking Bulletin data (November 2002).

Note: MicroBanking Bulletin defines MFI size by the average number of borrowers.

Page 24                                                               GAO-04-171 Microenterprise Development
                                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       In analyzing the status of 81 USAID-funded MFIs that reported on financial
Transient                       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

                            •   CARITAS, an MFI affiliated with Catholic Relief Services, experienced
                                declines in full sustainability at five29 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

                                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.”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

                                 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.
                                 Bulgaria Microfinance Assessment (Arlington, VA: The Peoples’ Group, Ltd., 2002), p. 8.

                                Page 25                                         GAO-04-171 Microenterprise Development
                             this MFI between fiscal year 2001 and fiscal year 2002, because loans were
                             disbursed in dollars but collected in the local currency.

                             Although the basic data collected for USAID’s MRR are generally reliable,
MRR Data Generally           certain methodological problems may impede accurate reporting on the
Reliable but May Not         agency’s progress in meeting key goals. Specifically, it may not be
                             reporting accurately (1) the actual amounts obligated to microenterprise
Accurately Reflect           activities, (2) whether 50 percent of USAID’s resources went to the very
USAID’s                      poor, and (3) the sustainability of USAID-supported MFIs. Moreover,
                             although the annual MRR reports on the overall activities of MFIs that
Microenterprise              receive any USAID monies, it does not provide sufficient data on USAID’s
Activities                   contribution to MFIs and other service providers.

Basic MRR Data Are           We assessed the reliability of basic MRR data in terms of accuracy,
Generally Reliable           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   We observed several problems with the reporting of USAID’s obligations
Data Is Uncertain            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.”31 For example, of

                              USAID, Microenterprise Results Reporting for 2001 (Washington, DC: 2003) p.4.

                             Page 26                                      GAO-04-171 Microenterprise Development
                              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         USAID reported that 53 percent of its obligated microenterprise funds
Funds Going to the Very       went to the very poor in fiscal years 2000 and 2001. However, our analysis
Poor May Be Inaccurate        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).

                              Page 27                                  GAO-04-171 Microenterprise Development
    Figure 9: Available USAID Obligations Data for Poverty Lending, Fiscal Years 2000
    and 2001

    Obligations in millions of dollars



    120      111            94
            (68%)         (59%)



     40      53             65
           (32%)          (41%)

            2000           2001
          Fiscal year

                    No data
                    Available data
    Source: GAO analysis of USAID data.

    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.

•   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

    Page 28                                                GAO-04-171 Microenterprise Development
                             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      Because USAID-supported MFIs use different definitions to calculate
May Not Be Reliable          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         The MRR does not provide information on USAID’s level of contributions
Sufficient Data on USAID’s   to MFIs and other service providers it supports, making it difficult to
Contributions                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.

                             Page 29                                 GAO-04-171 Microenterprise Development
                             USAID has funded several studies and projects, such as the
USAID Has Identified         Microenterprise Best Practices project, to publish emerging best practices.
and Disseminated             In addition, the agency has provided information on best practices to
                             missions and implementing partners through policy guidance, training, and
Best Practices               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       According to officials from the World Bank and other organizations,
to Identify and              USAID has recognized the importance of identifying and disseminating
Disseminate Best Practices   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

                             Page 30                                 GAO-04-171 Microenterprise Development
    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.

    Page 31                                GAO-04-171 Microenterprise Development
USAID Has Collaborated         USAID has collaborated with implementing partners, networks of
with Other Organizations       implementing organizations, and the World Bank in identifying and
in Identifying and             promoting best practices. These organizations have published handbooks,
                               bulletins, and other documents on best practices; maintained Internet sites
Promoting Best Practices       devoted to best practices; and sponsored seminars and workshops. For

                           •   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.32 The network
                               also sponsors conferences and workshops on improving microenterprise

                           •   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.33 The group also
                               provides information through MicroBanking Bulletin and the
                               Microfinance Information Exchange.

                                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).
                                Joann Ledgerwood, Microfinance Handbook: An Institutional and Financial
                               Perspective (Washington, D.C.: World Bank, 1998).

                               Page 32                                      GAO-04-171 Microenterprise Development
                     We found that microenterprise projects—including those funded by
Conclusion           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.

                     We recommend that the Administrator of USAID review the agency’s MRR
Recommendation to    system with the goal of ensuring that its annual reporting is complete and
USAID                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.

                     USAID provided written comments on a draft of this report (see app. V).
Agency Comments      USAID concurred with the report’s recommendation that it make
and Our Evaluation   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

                     Page 33                                GAO-04-171 Microenterprise Development
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.

Page 34                                  GAO-04-171 Microenterprise Development
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

Page 35                                GAO-04-171 Microenterprise Development
             Appendix I: Scope and Methodology
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

             Page 36                                GAO-04-171 Microenterprise Development
Appendix I: Scope and Methodology

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.

Page 37                                  GAO-04-171 Microenterprise Development
                          Appendix II: Microenterprise Best Practices
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   •   Perform due diligence reviews. USAID officials require their
Practices                 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

                      •   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.

                          Page 38                                       GAO-04-171 Microenterprise Development
    Appendix II: Microenterprise Best Practices

•   Adopt an appropriate lending model. Some models, such as group lending
    or village banking,1 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

     In group lending and village banking, group members, rather than an individual, accept
    joint responsibility for repaying the loan.

    Page 39                                        GAO-04-171 Microenterprise Development
                             Appendix II: Microenterprise Best Practices

                             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

Implementation-Related   •   Require transparency and accountability in operations. USAID requires
Best Practices               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

                             Page 40                                       GAO-04-171 Microenterprise Development
    Appendix II: Microenterprise Best Practices

    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

•   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

    Page 41                                       GAO-04-171 Microenterprise Development
Appendix II: Microenterprise Best Practices

microenterprise activities in Indonesia and Bangladesh concluded that
MFIs must have a commitment to, and a plan for, reaching sustainability.2

 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).

Page 42                                       GAO-04-171 Microenterprise Development
              Appendix III: Review of Microenterprise
Appendix III: Review of Microenterprise


              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.)

              Page 43                                   GAO-04-171 Microenterprise Development
                                             Appendix III: Review of Microenterprise

Table 1: Findings and Recommendations from 22 Selected Studies on Microfinance and Microenterprise Development

     source                      Primary findings                                                  Author recommendations
1    Bhatt, Nitin; Tang, Shui-   • Attempts to replicate best-practice models of                   • The best solution for the
     Yan.                           microfinance based on successful programs (Grameen,              microfinance industry is to have a
                                    BRI, BancoSol) have largely been disappointing.                  diverse array of institutions that are
     Delivering Microfinance
                                 • Few programs have lived up to their original objective of         both non- and for-profit, subsidized
     in Developing
                                    “including the excluded.”                                        and unsubsidized, and bare-bones
                                                                                                     and integrated.
     Controversies and           • In most cases, subsidies have ended up funding
     Policy Perspectives.           inefficient and lax management practices that have             • There is a need for better, more
                                    resulted in limited outreach, high loan default rates, and       accurate financial reporting and
     2001. Policy Studies                                                                            cost-benefit analysis in
     Journal 29 (2): 319-333.       unsustainable operations.
2    Cohen, Monique.             •   The microfinance industry has been largely a single           •   To achieve outreach to
                                     product industry; this product has worked well for people         underserved market segments and
     Making Microfinance
                                     around the poverty line but is less effective at reaching         to the very poor, the microfinance
     More Client-Led.
                                     the very poor.                                                    industry must focus on clients’
     2002. Journal of            •   Although most MFIs serve a wide range of clients, the             specific financial needs and design
     International Development       majority of clients are clustered just above and just below       appropriate financial services
     14 (3): 335-50.                 the poverty line.                                                 accordingly.
                                 •   Many poor people are highly indebted and microfinance
                                     loans are only one component of the debt burden of many
                                 •   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
                                 •   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.

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                                          Appendix III: Review of Microenterprise

3   Steven Haggblade; Mead,   •   In analyses of the impacts of micro loan programs on            •   In the future, improvements in rural
    Donald C.; Meyer,             rural nonfarm economies, outreach has proven                        welfare will need to go beyond
    Richard.                      impressive, financial sustainability has proven elusive,            financial markets and services to
                                  and income increases have been generally documented                 develop new engines of economic
    An Overview of Policies
                                  at the household and firm levels, particularly for the              growth, new technologies, and new
    and Programs for
                                  better-off poor and in Asia.                                        ways of doing business.
    Promoting Growth of the
    Rural Nonfarm             •   Micro loans have not advanced our understanding of the          •   A focus on subsectors, supply
    Economy.                      challenge of lending to enterprises in rural areas where            chains, and clusters can lead to
                                  population densities are lower and where the seasonality            tailored systemic interventions that
    Forthcoming. In               in cash flows and lending costs is higher.                          unleash growth potential for large
    Developing the Rural                                                                              numbers of rural firms.
    Nonfarm Economy, edited   •   Business development services involving the delivery of
    by Steve Haggblade,           nonfinancial services to rural nonfarm enterprises are
    Peter Hazel, and Thomas       more heterogeneous, more problematic, and have
    Reardon.                      produced decidedly fewer results than the delivery of
                                  financial services to rural nonfarm enterprises.
4   Hulme, David.             •   Microfinance impact assessments vary greatly in their           •   Impact assessments must be
                                  range, rigor, and practicality; there have been relatively          tailored to the resources, needs,
    Impact Assessment
                                  few quasi-experimental, control-treatment studies, and              and time frames defined by the
    Methodologies for
                                  practitioners have found such studies to be expensive               program’s context.
    Microfinance: Theory,
                                  and difficult to use.
    Experience, and Better
    Practice.                 •   There is increasing movement toward mixed studies
                                  incorporating quantitative and qualitative elements and
    2000. World Development       toward designing impact assessment activities into
    28 (1): 79-98.                microfinance programs.
5   Khandker, Shahidur R.     •   Globally, micro loan programs have been able to reach           •   In replicating microfinance
                                  the poor and enhance both their productive and human                programs, it is necessary to design
    Fighting Poverty with
                                  capital by generating self-employment.                              a socially conscious and
    Microcredit: Experience
                              •   The long-run cost-effectiveness of micro loans depends              transparent system of accountability
    in Bangladesh.
                                  on the overall growth of the economy.                               that works for both program officials
    1998. New York: Oxford                                                                            and borrowers.
    University Press.         •   Bangladesh is one of the few countries in which micro
                                  loan programs have been successfully replicated.                •   The poor and women need special
                                                                                                      banking, so the commercialization
                              •   Microfinance in the Bangladesh programs reduced                     of micro loans should not divert
                                  poverty by increasing per capita consumption among                  attention from meeting this special
                                  program participants and their families; poverty reduction          need.
                                  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.

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                                              Appendix III: Review of Microenterprise

6   Matin, Imran; Hulme,          •   Poor people must and do save in order to finance the            •   A shift away from credit for
    David; Rutherford, Stuart.        large lump sum payments needed to deal with an array of             business development toward
                                      life- and environment-based needs and crises.                       financial services of all types for the
    Finance for the Poor:
                                  •   The poor are a heterogeneous group of vulnerable                    poor will help them to effectively
    from Microcredit to
                                      households with complex livelihoods and varied needs.               manage the many risks and crises
    Microfinancial Services.
                                                                                                          that emerge in their lives.
    2002. Journal of              •   The success of the group lending model globally is mixed.
    International Development     •   Weekly frequency of repayment and repayment
    14 (2): 273-94.                   incentives (typically larger repeat loans) correlate strongly
                                      with success, defined in terms of arrears rate and subsidy
                                      repayment index.
7   Mayoux, Linda.                •   Some policies introduced for financial sustainability result    •   An empowering gender policy
                                      in adverse impacts on empowerment.                                  should include increasing women’s
    From Access to
                                  •   Beneficial impacts of microfinance per se on women                  incomes from their own activities;
                                      cannot be assumed; impacts vary substantially across                control of income from loans and
    Widening the Debate on
                                      cases and programs.                                                 activities; negotiated improvements
    Gender and Sustainable
                                                                                                          in household well-being, and
    Micro-Finance.                •   Microfinance services have enabled some, but not all,               access to support networks.
    2000. Journal fur                 women to increase their incomes and negotiate
                                      improvements in their family and community position;            •   A gender policy that supports
    Entwicklungspolitik 16 (3):                                                                           financial sustainability and
    247-273.                          microfinance alone is the most limited for the poorest and
                                      most disadvantaged women.                                           empowerment should consider
                                                                                                          improving the conditions of service
                                  •   Women’s decisions about loan use involve assessments                delivery, reducing costs of
                                      of benefits, costs, and risks in the context of the gender          complementary services (e.g.,
                                      norms of household resource allocation and decision-                training, gender
                                      making.                                                             awareness/support), and
                                  •   Women’s choices about activity and ability to increase              mainstreaming gender policy.
                                      income are constrained by gender inequality; market,
                                      resource, and skill constraints; and microfinance delivery.
8   Mead, Donald C;               •   House-to-house baseline surveys make clear that the             •   Policies and projects for supporting
    Liedholm, Carl.                   number of micro and small enterprises (MSE) is far larger           MSE development must be aware
                                      than that reported in most official statistics.                     of the diversity of MSEs and focus
    The Dynamics of Micro
                                  •   In most countries, the majority of MSEs operate in rural            on the types of enterprises and on
    and Small Enterprises in
                                      areas, are engaged in the trade and manufacturing                   the stages in the enterprise’s life
    Developing Countries.
                                      sectors, are owned and operated by women, and are                   cycle where interventions can do
    1998. World Development           more likely to be operated from the home.                           the most good.
    26 (1): 61-74.
                                  •   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
                                  •   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.

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                                            Appendix III: Review of Microenterprise

9    Morduch, Jonathan.         •   There are few reliable studies of the net poverty impacts        •   Savings programs will strongly
                                    of microfinance programs; those which do exist suggest               complement the credit-driven
     The Microfinance
                                    some limited positive impacts, as well as other mixed                approach that has dominated
                                    results.                                                             microfinance to date.
     1999. Journal of           •   Sustainable microfinance programs have by and large not          •   To alleviate poverty, new
     Economic Literature (37)       been able to reach the very poor in large proportions or             approaches to management
     4: 1569-1614.                  numbers.                                                             structures and product/program
                                •   Microcredit supplements clients’ income and does not                 design are necessary.
                                    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
10   Morduch, Jonathan.         •   There is a strong consensus among prominent policy               •   A diverse array of socially oriented,
                                    making organizations that microfinance institutions (MFI)            subsidized, and profit-oriented,
     The Microfinance
                                    that focus on profitability (through high interest rates) will       sustainable microfinance
                                    have the strongest effects on poverty.                               institutions is best for the
     2000, World Development    •   This consensus on best practices is at odds with actual              microfinance industry and for wide-
     28 (4): 617-629.               practice, where the large majority of MFIs are not focused           scale poverty alleviation.
                                    on profitability, have not given up subsidies, and are not       •   If subsidized programs are to
                                    sustainable.                                                         continue at current funding levels,
                                •   Moderate subsidies have been necessary in some                       they will likely need to rely
                                    programs to attain social objectives not present in for-             increasingly on their own
                                    profit MFIs.                                                         governments.
                                •   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.

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11   Navajas, Sergio;           •   In a study in La Paz, Bolivia microfinance lenders tended     •   Policy-makers and MFIs should
     Schreiner, Mark; Meyer,        to serve those near the poverty line, not the “poorest of         consider all aspects of outreach in
     Richard; Gonzalez-Vega,        the poor.”                                                        making judgments about the focus
     Claudio; Rodriquez-Meza,   •   Rural and group lenders tended to serve larger numbers            and social benefits of microfinance.
     Jorge.                         of poorer clients than urban and individual lenders.
     Microcredit and the        •   In addition to depth, defined as the degree to which an
     Poorest of the Poor:           MFI reaches the very poor, factors such as worth, cost,
     Theory and Evidence            breadth, length, and scope are important in evaluating
     from Bolivia.                  outreach to and the social welfare of the poor.
     2000. World Development    •   Length of outreach (time frame in which an organization
     28 (2): 333-346.               produces loans) is the key aspect of outreach because it
                                    prompts improvements in the five other aspects.
12   Rankin, Katherine N.       •   There is substantial evidence that microfinance and micro     •   Development agencies and policy
                                    loan programs have served to strengthen existing                  should place greater emphasis on
     Social Capital,
                                    patterns of male and class-based power relations, rather          finding ways to empower the poor
     Microfinance, and the
                                    than empowering women.                                            and disadvantaged so that they can
     Politics of Development.
                                                                                                      overtly challenge dominant social
     2002. Feminist Economics                                                                         power relations.
     8 (1): 1-24
13   Rhyne, Elisabeth.          •   The microfinance industry has to date primarily been a        •   Maintaining sustainability, while
                                    one-product industry, based on short-term (3 to l2                becoming more attuned to the
                                    months) group-based lending, with frequent repayments,            needs of clients, is critical; MFIs
     Institutions in
                                    and small loan sizes.                                             must adapt to the changing needs
     Competitive Conditions.
                                •   Microfinance institutions have traditionally taken an             of clients to survive and develop in
     2002. In The                   inward-looking approach to their development, focusing            the newly competitive microfinance
     Commercialization of           primarily on streamlining operations to achieve greater           environment.
     Microfinance: Balancing        outreach.                                                     •   MFIs must be attuned to the
     Business and                                                                                     problem of overlending.
     Development, edited by     •   In some countries, there has been a substantial increase
     Elisabeth Rhyne and            in competition among MFIs for clients, e.g., Bolivia,
     Deborah Drake. Kumarian        Bangladesh, Nicaragua, and Uganda, which has
     Press.                         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
14   Robinson, Marguerite S.    •   Sustainable microfinance only occurs in systems               •   The shift away from donor-assisted
                                    providing commercial financial intermediation; other              credit delivery to sustainable
     The Microfinance
                                    models (e.g., subsidized credit) are not sustainable in the       financial institutions that provide
     Revolution: Sustainable
                                    long term and are not affordable on a global scale.               commercial microfinance is
     Finance for the Poor
                                •   Only institutional commercial microfinance can provide            essential to meet the global
     (Chapters 1 and 2).
                                    sustainable financial services to the working poor by             demands for microfinance.
     2001. Washington, D.C.:        providing low-cost credit and wide outreach.                  •   Governments must support
     The World Bank.                                                                                  commercial microfinance through
                                •   The lowest levels of the poor need food, employment,
                                    and/or government or donor assistance and grants.                 regulation, supervision, and public
                                                                                                      education to ensure success.

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                                             Appendix III: Review of Microenterprise

15   Rutherford, Stuart.         •   The poor can save, do save, and want to save money;            •   The key to microfinance is to find
                                     the poor have to save to make the large lump sum                   creative ways to collect small sums
     The Poor and Their
                                     payments that come up frequently in their lives.                   (savings, repayments, insurance
                                 •   The argument about whether the poor need savings or                premiums) and turn them into large
     2000. New Delhi, India:         loans is false; they need both.                                    sums (loans, withdrawals from
     Oxford University Press.                                                                           savings, or insurance pay-outs).
                                 •   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.
16   Schreiner, Mark.            •   There are six interacting dimensions of outreach: worth to     •   Microfinance institutions should
                                     clients, cost to clients, depth, breadth, scope, and length.       focus on sustainability because the
     Aspects of Outreach: A
                                 •   Tradeoffs exist in achieving outreach: programs focusing           longer an MFI is in operation the
     Framework for
                                     on sustainability achieve breadth, length, and scope at            greater the number of clients and
     Discussion of the Social
                                     the expense of depth; programs focused on poverty                  the greater the overall impact on
     Benefits of
                                     alleviation achieve depth at the expense of breadth,               poverty.
                                     length, and scope.
     2002. Journal of
     International Development
     14 (5): 591-603.
17   Sebstad, Jennefer;          •   Microfinance programs have been more successful in             •   Future programs should link
     Cohen, Monique.                 reaching clients from moderately poor and vulnerable               services to clients’ needs and
                                     non-poor households than from extremely poor                       demands, should become more
     Microfinance, Risk
                                     households.                                                        flexible, and should diversify
     Management, and
                                 •   Clients use loans for a wide range of purposes beyond              services offered.
                                     enterprise development.                                        •   Linking financial services with other
     2000. AIMS. U.S. Agency                                                                            supportive services could improve
     for International           •   Micro loans are more useful for clients in protecting
                                     against risks ahead of time than in smoothing                      clients’ ability to deal with risks.
                                     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

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18   Snodgrass, Donald R.;        •   Overall, microfinance makes a difference to people’s           •   Expanding and diversifying services
     Sebstad, Jennefer.               lives; however, microfinance does not have the                     to include savings, insurance, and
                                      unequivocally large, positive impact on microenterprise            emergency loans will increase
     Clients in Context: The
                                      development and poverty reduction that has been                    impact and enhance clients’ ability
     Impacts of Microfinance
                                      claimed for it by some.                                            to cope with shocks.
     in Three Countries.
     Synthesis Report             •   Microfinance impact is a function of product
                                      characteristics, the macroeconomic situation, and the
     2002. AIMS. U.S. Agency          length of time the client has been in the program.
     for International
     Development.                 •   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
19   Snow, Douglas R; Buss,       •   We have very scant knowledge of the relationships              •   Governments, if not all donors,
     Terry F.                         between program designs and outcomes.                              ought to have specific goals for
                                  •   There have been very few strong microfinance program               micro loan programs and these
     Development and the
                                      outcomes studies; as a consequence, “there is good                 should be grounded in strong
     Role of Microcredit.
                                      reason to fear reliance on program design as a surrogate           research and knowledge of
     2001. Policy Studies             for outcomes.”                                                     impacts.
     Journal 29 (2): 296-307.
                                  •   If forced to stand alone, few micro loan programs, if any,
                                      would survive.
                                  •   The twin concepts of sustainability and outreach are
                                      inherently contradictory.
20   Von Pischke, J.D.            •   Major players in both sustainability- and poverty-oriented
                                      MFIs have developed a consensus about preferred
     Current Foundations of
                                      microfinance strategies.
     Microfinance Best
     Practices in Non-            •   They have generally agreed upon 12 best practices:
     Industrialized Countries.         • Create sustainable institutions.
     2001. In Replicating              • Charge interest rates that will enable the lender to
     Microfinance in the United           cover costs.
     States, edited by Jim Carr        • Control arrears.
     and Zhong Yi Tong.
                                       • Use subsidies for institution building, i.e., technical
     Washington, D.C.: Fannie
     Mae Foundation.                      assistance and capitalization.
                                       • Behave competitively from the outset.
                                       • Maintain uncompromising commitment to the target
                                       • Select “owners” who will provide effective
                                       • Manage risk, explore failure.
                                       • Develop good management information systems.
                                       • Be transparent.
                                       • Focus on incentives.
                                       • Exchange information on defaulters.

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21   Woller, Gary M.; Dunford,    •   There is general agreement in microfinance that poverty         •   There is no need for a once-and-
     Christopher; Woodworth,          reduction and the achievement of financial self-sufficiency         for-all choice between competing
     Warner.                          are the basic goals for the industry.                               approaches; the microfinance
                                  •   The industry disagrees on how to achieve these goals:               industry should be characterized by
     Where to Microfinance?
                                      the institutionists emphasize financial self-sufficiency over       a diversity of microfinance
     1999. International              a focus on the very poor; the welfarists emphasize                  institutions that cater to various
     Journal of Economic              assisting the very poor over the need for financial self-           segments of low-income
     Development 1 (1): 29-64.        sufficiency.                                                        communities.
                                  •   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
                                  •   Most microfinance institutions lie somewhere along a
                                      continuum ranging from traditional business and
                                      traditional social service orientation.
22   Wright, Graham.              •   Replication of a best practices model for microfinance          •   To be successful, microfinance
                                      program design has been difficult, because the contexts             programs must be adapted and
     Replication. Regressive
                                      in which such a model would be implemented vary so                  tailored to the cultural, economic,
     Reproduction or
                                      greatly.                                                            social, and political features of the
     Progressive Evolution?
                                  •   Institutions attempting to replicate the same general               contexts in which they are
     2000. Journal of                 microfinance model are characterized by a high level of             implemented.
     Microfinance 2 (2): 61-81.       diversity in implementation methodologies.                      •   Implementation and replication of
                                  •   The poor often participate in a variety of formal and               programs must include a period of
                                      informal financial institutions.                                    research, experimentation, and

                                              Page 51                                           GAO-04-171 Microenterprise Development
              Appendix IV: USAID’s Microenterprise
Appendix IV: USAID’s Microenterprise
              Results Reporting

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

              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

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Appendix IV: USAID’s Microenterprise
Results Reporting

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.

Page 53                                GAO-04-171 Microenterprise Development
                            Appendix V: Comments from the U.S. Agency
Appendix V: Comments from the U.S. Agency
                            for International Development

for International Development

Note: GAO comments
supplementing those in
the report text appear at
the end of this appendix.

See comment 1.

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                 for International Development

See comment 2.

See comment 3.

See comment 4.

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for International Development

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for International Development

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                 for International Development

See comment 5.

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                 for International Development

See comment 6.

See comment 7.

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                 for International Development

See comment 8.

See comment 9.

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                  for International Development

See comment 10.

See comment 4.

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for International Development

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                  Appendix V: Comments from the U.S. Agency
                  for International Development

See comment 11.

See comment 12.

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for International Development

Page 64                                     GAO-04-171 Microenterprise Development
               Appendix V: Comments from the U.S. Agency
               for International Development

               The following are GAO’s comments on USAID’s letter dated November 6,

               1. USAID stated that our report does not address the full range and scope
GAO Comments      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

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Appendix V: Comments from the U.S. Agency
for International Development

    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

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.

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Appendix V: Comments from the U.S. Agency
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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

    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

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for International Development

    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.

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                  Appendix VI: GAO Contact and Staff
Appendix VI: GAO Contact and Staff


                  Phillip Herr (202) 512-8509
GAO Contact
                  In addition to the person listed above, Edward George, Jim Strus,
Staff             Martin De Alteriis, Mona Sehgal, David Dornisch, Yesook Merrill,
Acknowledgments   Valerie Caracelli, and Reid Lowe made key contributions to this report.

                  Page 69                                GAO-04-171 Microenterprise Development
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