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REVIEWING THE PROGRESS AND CHARTING THE

PATH AHEAD: THE MICROENTERPRISE RESULTS

AND ACCOUNTABILITY ACT OF 2004

HEARING

BEFORE THE

SUBCOMMITTEE ON AFRICA, GLOBAL HUMAN 

RIGHTS AND INTERNATIONAL OPERATIONS

OF THE

COMMITTEE ON 

INTERNATIONAL RELATIONS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

JULY 27, 2006

Serial No. 109–193

Printed for the use of the Committee on International Relations

(

Available via the World Wide Web: http://www.house.gov/international—relations 

(II)

COMMITTEE ON INTERNATIONAL RELATIONS 

HENRY J. HYDE, Illinois, Chairman 

JAMES A. LEACH, Iowa 

CHRISTOPHER H. SMITH, New Jersey, 

Vice Chairman 

DAN BURTON, Indiana 

ELTON GALLEGLY, California 

ILEANA ROS-LEHTINEN, Florida 

DANA ROHRABACHER, California 

EDWARD R. ROYCE, California 

PETER T. KING, New York 

STEVE CHABOT, Ohio 

THOMAS G. TANCREDO, Colorado 

RON PAUL, Texas 

DARRELL ISSA, California 

JEFF FLAKE, Arizona 

JO ANN DAVIS, Virginia 

MARK GREEN, Wisconsin 

JERRY WELLER, Illinois 

MIKE PENCE, Indiana 

THADDEUS G. MCCOTTER, Michigan 

KATHERINE HARRIS, Florida 

JOE WILSON, South Carolina 

JOHN BOOZMAN, Arkansas 

J. GRESHAM BARRETT, South Carolina 

CONNIE MACK, Florida 

JEFF FORTENBERRY, Nebraska 

MICHAEL MCCAUL, Texas 

TED POE, Texas 

TOM LANTOS, California 

HOWARD L. BERMAN, California 

GARY L. ACKERMAN, New York 

ENI F.H. FALEOMAVAEGA, American 

Samoa 

DONALD M. PAYNE, New Jersey 

SHERROD BROWN, Ohio 

BRAD SHERMAN, California 

ROBERT WEXLER, Florida 

ELIOT L. ENGEL, New York 

WILLIAM D. DELAHUNT, Massachusetts 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

JOSEPH CROWLEY, New York 

EARL BLUMENAUER, Oregon 

SHELLEY BERKLEY, Nevada 

GRACE F. NAPOLITANO, California 

ADAM B. SCHIFF, California 

DIANE E. WATSON, California 

ADAM SMITH, Washington 

BETTY MCCOLLUM, Minnesota 

BEN CHANDLER, Kentucky 

DENNIS A. CARDOZA, California 

RUSS CARNAHAN, Missouri 

THOMAS E. MOONEY, SR., Staff Director/General Counsel 

ROBERT R. KING, Democratic Staff Director 

SUBCOMMITTEE ON AFRICA, GLOBAL HUMAN RIGHTS AND INTERNATIONAL

OPERATIONS

CHRISTOPHER H. SMITH, New Jersey, Chairman 

THOMAS G. TANCREDO, Colorado 

JEFF FLAKE, Arizona 

MARK GREEN, Wisconsin 

JOHN BOOZMAN, Arkansas 

JEFF FORTENBERRY, Nebraska 

EDWARD R. ROYCE, California, 

Vice Chairman 

DONALD M. PAYNE, New Jersey 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DIANE E. WATSON, California 

BETTY MCCOLLUM, Minnesota 

EARL BLUMENAUER, Oregon 

MARY M. NOONAN, Subcommittee Staff Director 

GREG SIMPKINS, Subcommittee Professional Staff Member 

NOELLE LUSANE, Democratic Professional Staff Member 

SHERI A. RICKERT, Subcommittee Professional Staff Member and Counsel 

LINDSEY M. PLUMLEY, Staff Associate 

(III)

C O N T E N T S 

Page

WITNESSES 

The Honorable Jacqueline E. Schafer, Assistant Administrator, Bureau for 

Economic Growth, Agriculture and Trade, U.S. Agency for International 

Development ......................................................................................................... 4

Mr. Joe Mwangi-Kioi, Director of Monitoring and Evaluation, Grameen Foundation USA ........................................................................................................... 25

Gary M. Woller, Ph.D., President, Woller & Associates ....................................... 32

Ms. Susy Cheston, Senior Vice President, Opportunity International ................ 44

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

The Honorable Christopher H. Smith, a Representative in Congress from 

the State of New Jersey, and Chairman, Subcommittee on Africa, Global 

Human Rights and International Operations: Prepared statement ................ 3

The Honorable Jacqueline E. Schafer: Prepared statement ................................ 7

Mr. Joe Mwangi-Kioi: Prepared statement ........................................................... 28

Gary M. Woller, Ph.D.: Prepared statement ......................................................... 39

Ms. Susy Cheston: Prepared statement ................................................................. 48

APPENDIX 

Material Submitted for the Hearing Record .......................................................... 63

(1)

REVIEWING THE PROGRESS AND CHARTING 

THE PATH AHEAD: THE MICROENTERPRISE 

RESULTS AND ACCOUNTABILITY ACT OF 

2004

THURSDAY, JULY 27, 2006

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON AFRICA, GLOBAL HUMAN RIGHTS

AND INTERNATIONAL OPERATIONS,

COMMITTEE ON INTERNATIONAL RELATIONS, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 2 o’clock p.m. in 

room 2200, Rayburn House Office Building, Hon. Christopher H. 

Smith (Chairman of the Subcommittee) presiding. 

Mr. SMITH. Good afternoon to everyone. I would like to welcome 

Members and our witnesses to this hearing of the Subcommittee on 

Africa, Global Human Rights and International Operations. 

Today we will review a topic which has been of great interest to 

me and to other Members of this Subcommittee for many years, 

and that is the issue of microenterprise. While the term ‘‘foreign 

aid’’ can sometimes assume a rather negative connotation, the tools 

of microfinance and microenterprise provide a shining counterpoint 

to some other programs that simply don’t perform. 

It was not uncommon in the past to see foreign aid delivered in 

a top-down manner to corrupt governments and organizations 

where it could never realistically reach its intended recipients. 

Such programs never delivered the benefits they promised. 

Microenterprise, on the other hand, takes advantage of a very 

different method. It uses a trickle-up approach that focuses on 

helping the most impoverished people in the world build themselves up little by little into self-sufficiency by providing them with 

access to financial services like small loans and savings accounts. The sum of $58 does not seem a great deal of money to most of 

us in the developed world, but it is precisely the amount that 

helped change forever the life of Janet Korutaro, a widow from 

Nsike Village, Uganda. 

Opportunity International, represented today by its Senior Vice 

President, Susy Cheston, who has been a great help over the years 

in crafting our legislation, provided Janet with a loan in this 

amount so that she could expand the small grocery store that she 

runs in her house. 

This loan and subsequent loans, of $115 and $171, have allowed 

Janet to significantly expand her business, adding sugar, salt, eggs, 

and a refrigerator to hold juice, soda and fruits, along with other 

2

improvements. Janet’s daily net profit is just $1.15, but this goes 

very far in Uganda. These three small loans have helped to take 

a widow in Africa from barely surviving and not daring to dream 

to believing that all of her dreams might actually come true. Today 

Janet anticipates being able to educate all of the children in her 

care, buy land and build a little house. 

Similar microloans have benefited over 5.8 million other clients 

of USAID-assisted microprograms in fiscal year 2005. 

The result is clear—microenterprise has the power to dramatically change lives for the better. 

Success stories like Janet’s are what microfinance and the Microenterprise Results and Accountability Act of 2004, as well as the 

legislation we did in 2003, Public Law 108–484, are all about. 

When I offered these pieces of legislation we worked very hard in 

the House and the Senate and with the Administration and nongovernmental organizations to encourage the best possible microfinance programs, allowing us to reach the greatest number of people with services that truly have an impact on their lives. 

The act directs USAID to report to Congress on the status of the 

agency’s microenterprise programs each year at the end of June. I 

am pleased to have read and reviewed the first such report which 

covers USAID’s activities through 2005. It is a comprehensive, 

thorough and informative report that will benefit not just the 

United States Congress but the whole industry. While I am sure 

that Members will have several questions today concerning the 

content of the report, I want to congratulate and thank USAID, 

Ms. Schafer, for a very, very high quality product. 

The Microenterprise Results and Accountability Act of 2004 also 

includes a number of other provisions that we believe will improve 

the quality of microfinance initiatives around the globe. Among 

these are provisions that mandate the development of more reliable 

poverty assessment tools and of systems to measure effectiveness 

of for-profit contractors and not-for-profit partners. In addition, we 

included directives on USAID’s central funding and on microenterprise programs for people afflicted with HIV/AIDS and for victims 

of human trafficking. 

The final question that we must examine is this: Are these programs focused enough on directly benefiting the poor and other 

groups who would benefit the most from the tools of microfinance? 

Our witnesses today, who represent the Administration and the 

non-profit, consultant, and academic communities, will help to provide us with the answers to these vital questions. 

I want to conclude with a story. When I went to Uganda just a 

few months ago, I visited Mbuya Reach Out, a faith-based organization under the auspices of Our Lady of Africa Church in Mbuya, 

Kampala. This center, like many others around the world, is using 

microcredit to transform lives, serving over 1,800 HIV-positive clients and their families. Not only did these individuals get the antiretrovirals that were needed, that were life-sustaining, they also 

had the hope that my job brings, and my wife and I and other 

members of our delegation all spent several dollars on the items 

that were being sold in one of the outlets that was the result of a 

microfinancing loan. 

3

Income generation and self-reliance are encouraged in Mbuya 

through Bread for Life, a microfinance program that has provided 

more than a thousand small loans for small business investment 

and skills training through the Roses of Mbuya, a tailoring workshop that targets unemployed HIV-infected women. 

Is this exactly how all microfinance programs are focused? No. 

But it does illustrate well the profound impact that American foreign aid can have on real human lives when the tools of microenterprise are put to work. I hope we can continue the discussion 

of this topic constructively today and I can firmly say that this 

Subcommittee, and I do believe the Full Committee as well, will remain involved in this very important area. 

[The prepared statement of Mr. Smith follows:]

PREPARED STATEMENT OF THE HONORABLE CHRISTOPHER H. SMITH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW JERSEY AND CHAIRMAN, SUBCOMMITTEE ON AFRICA, GLOBAL HUMAN RIGHTS AND INTERNATIONAL OPERATIONS

Good afternoon. I would like to welcome fellow Members, our witnesses, and other 

visitors to this hearing of the Subcommittee on Africa, Global Human Rights and 

International Operations. Today we will review a topic of great interest to me and 

to other Members of this Subcommittee for many years—microfinance. 

While the term ‘‘foreign aid’’ can sometimes assume a rather negative connotation, 

the tools of microfinance and microenterprise provide a shining counterpoint to 

other programs that just don’t perform. 

It was not uncommon in the past to see foreign aid delivered in a top-down manner to corrupt governments and organizations, where it could never realistically 

reach its intended recipients. Such programs never delivered the benefits they promised. 

Microenterprise, on the other hand, takes advantage of a very different method. 

It uses a ‘‘trickle-up’’ approach that focuses on helping the most impoverished people 

of the world build themselves up, little by little, into self-sufficiency by providing 

them with access to financial services like small loans and savings accounts. 

The sum of $58 does not sound like a great deal to most of us in the developed 

world, but this is precisely the amount that helped change forever the life of Janet 

Korutaro, a widow from Nsike Village, Uganda. 

Opportunity International, represented today at our hearing by its Senior Vice 

President, Susy Cheston, provided Janet with a loan in this amount so that she 

could expand the small grocery store that she runs in her house. This loan and two 

subsequent loans ($115 and $171) have allowed Janet to significantly expand her 

business, adding sugar, salt, eggs, and a refrigerator to hold juice, soda, and fruits, 

along with other improvements. 

Janet’s daily net profit is just $1.15, but this goes far in Uganda. These three 

small loans have helped take a widow in Africa from barely surviving and not daring to dream, to believing that all of her dreams might actually come true. Today, 

Janet anticipates being able to educate all of the children in her care, buy land, and 

build a little house. 

Similar microloans have benefited over 5.8 million other clients of USAID-assisted 

micro programs in Fiscal Year 2005. The result is clear—microenterprise has the 

power to dramatically change lives for the better. 

Success stories like Janet’s are what microfinance and the Microenterprise Results and Accountability Act of 2004, PL 108–484, are all about. When I authored 

that legislation, we worked very hard in the House and the Senate with both the 

Administration and with non-governmental organizations to encourage the best possible microfinance programs, allowing us to reach the greatest possible number of 

people with services that truly have an impact on their lives. 

The Act directs USAID to report to Congress on the status of the Agency’s microenterprise programs each year at the end of June, and I am pleased to have read 

and reviewed the first such report, which covers USAID’s activities through FY 

2005. It is a comprehensive, thorough and informative report that will benefit not 

just the United States Congress, but the whole industry. While I’m sure that Members will have several questions today concerning the content of the report, I want 

to congratulate and thank USAID for such a quality product. 

4

The Microenterprise Results and Accountability Act of 2004 also includes a number of other provisions that we believe will improve the quality of microfinance initiatives around the globe. 

Among these are provisions that mandate the development of more reliable poverty assessment tools and of systems to measure the effectiveness of for-profit contractors and not-for-profit partners. In addition, we included directives on USAID 

central funding and on microenterprise programs for people afflicted with HIV/AIDS 

and for victims of human trafficking. 

The final question that we must examine is this: Are these programs focused 

enough on directly benefiting the poor and other groups who would benefit the most 

from the tools of microfinance? Our witnesses today, who represent the Administration and the non-profit, consultant, and academic communities, will help to provide 

us with answers to this vital question. 

I will conclude with a story. When I went to Uganda just a few months ago, I 

visited Mbuya Reach Out, a faith-based organization under the auspices of Our 

Lady of Africa Church in Mbuya, Kampala. This center, like many others around 

the world, is using microcredit to transform lives, serving over 1,800 HIV-positive 

clients and their families. 

Income generation and self reliance are encouraged at Mbuya through ‘‘Bread for 

Life,’’ a microfinance program that has provided more than 1,000 small loans to clients for small business investment, and skills training through ‘‘Roses of Mbuya,’’ 

a tailoring workshop that targets unemployed HIV-infected women. 

Is this exactly how all microcredit programs are focused? No, but it illustrates 

well the profound impact that American foreign aid can have on real human lives 

when the tools of microenterprise are put to work. I hope that we can continue the 

discussion of this topic constructively today, and I can firmly say that this Subcommittee will certainly remain involved in this very important area. Thank you. 

I now yield to my good friend and colleague from New Jersey, the Ranking Member Mr. Payne.

Mr. SMITH. And having said that, I would like to now introduce 

our very distinguished witnesses. We will begin first with the Honorable Jacqueline Schafer, who is Assistant Administrator of the 

Bureau for Economic Growth, Agriculture and Trade of the U.S. 

Agency for International Development since November 2005. Prior 

to joining USAID, Ms. Schafer served as Director of the Arizona 

Department of Environmental Quality, as Assistant Secretary of 

the Navy, and a member of President Ronald Reagan’s Council on 

Environmental Quality. And I would also point out that she has 

lived in New Jersey, in Haddon Heights, and went to school in Teaneck, New Jersey. 

So, my fellow New Jerseyan, welcome and please proceed as you 

would like. 

STATEMENT OF THE HONORABLE JACQUELINE E. SCHAFER, 

ASSISTANT ADMINISTRATOR, BUREAU FOR ECONOMIC 

GROWTH, AGRICULTURE AND TRADE, U.S. AGENCY FOR 

INTERNATIONAL DEVELOPMENT 

Ms. SCHAFER. Thank you, Mr. Chairman, and Members of the 

Subcommittee, for the opportunity to appear before you today to report on USAID’s progress in implementing the Microenterprise Results and Accountability Act of 2004. I respectfully request, Mr. 

Chairman, that my entire written statement be included in the official record of this hearing. 

Mr. SMITH. Without objection, so ordered. 

Ms. SCHAFER. In fiscal year 2005, USAID obligated $211 million 

for microenterprise development, which supported 435 institutions 

in 68 countries throughout the developing world. USAID-assisted 

microfinance institutions served 5.8 million loan clients as well as 

6.4 million savings clients. Enterprise development support reached 

5

more than 690,000 clients. In Africa and Asia in particular, institutions serving these clients also implement programs that aim to increase the productivity and profits of smallholder farmers through 

access to more and better inputs, improved practices, value-added 

processing, and access to high value markets. 

Sixty-one percent of the clients that benefited from USAID 

microenterprise support were women, like Maria Terese Perez, an 

entrepreneur I met in Mexico City who has after 2 years of loans 

from FinComun, a USAID-supported microfinance institution, expanded her business of sewing and selling school uniforms and 

children’s clothing to the local market. Although Mrs. Perez is not 

among the poorest clients that benefited from USAID microenterprise support, the impact of the loans that she received extends to 

her nine employees, who now have higher incomes and can invest 

in their own family’s futures by meeting their education and health 

care needs. 

Mr. Chairman, I say that she is not the poorest, but her workroom is maybe 10-by-10, including storage for the cloth, and a third 

floor walk-up in what we might call a rough part of town. She was 

cheerful, hopeful and appreciative of the services of FinComun and 

aware that the United States supported her business in an important way. 

The impact of USAID microenterprise programs extends beyond 

people like Mrs. Perez, her family, her employees, and her customers to Mexico’s entire financial sector, which is undergoing a 

long-term structural change, integrating poor households and enterprises into the vision, business model and product range of the 

country’s major financial institutions. 

I would like to update you and the Committee, Mr. Chairman, 

on the status of activities required by the most recent amendments 

to the statute, including new grant programs, increased assistance 

to USAID’s field missions that implement microenterprise programs, and improvements in our data collection system. 

First, the FIELD-Support Leader’s with Associates cooperative 

agreement, LWA, was competitively awarded in 2005 to a team of 

highly qualified organizations led by the Academy for Educational 

Development. This team, comprising 10 core members and 17 resource organizations, has a proven track record of reducing poverty 

and promoting sustained, equitable growth through microenterprise development, microfinance, value chain development, institution and human capacity building, and the promotion of marketbased approaches. This year’s tranche of leader funding from my 

bureau’s Microenterprise Development Office is supporting initial 

activities worldwide that will focus on testing new approaches and 

sharing knowledge widely within the practitioner community about 

remittances, natural resources management affecting agricultural 

productivity, health services and mapping the social performance of 

microfinance institutions. I am told that, while still procurement 

sensitive, in fiscal year 2006 associate awards from our missions 

will encumber nearly 20 percent of the $350 million ceiling for this 

5-year procurement instrument. So we are off to a good start. 

The Agency will also award grants this year totaling up to $10 

million through the Implementation Grants Program. These grants 

will go to institutions working to increase access to financial servVerDate Mar 21 2002 17:02 Sep 19, 2006 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6601 F:\WORK\AGI\072706\28970.000 HINTREL1 PsN: SHIRL
6

ices for very poor clients and to link very poor people into markets. 

In addition, awards under the Grants Under Contract mechanism 

totaling almost $3 million will be made to three different types of 

institutions. The first are institutions working to increase their capacity to learn from their activities and share that knowledge with 

the broader industry. The second are institutions working to fund 

innovative ways to serve poor and very poor clients in Europe and 

Eurasia, and third are institutions using information technology to 

broaden their outreach and reduce transaction costs. 

USAID also has increased its technical support to missions in 

2005. Our bureau’s microenterprise technical officers helped regional bureaus and missions to conduct thorough reviews of proposed strategies and activities, and they have been proactive in 

supporting missions that are developing new strategy elements and 

components. For example, extensive technical assistance to USAID 

Afghanistan has supported a major new rural finance program that 

will extend credit savings and other financial services and support 

to tens of thousands of smallholder producers and rural families 

that have extremely limited access to finance. 

In this past year our staff has provided on-site assistance to 

about 25 other missions, including Sudan, Liberia, Uganda, Tanzania and South Africa, and extensive virtual technical support in 

both strategy and activity design for others, including Iraq. 

In fiscal year 2005, USAID instituted changes to our Microenterprise Results Reporting system to, among other things, identify the 

portion of obligated funds that are sub-obligated by the original recipient to other awardees, and thus improve our understanding of 

who the ultimate recipients of the funding are. We found, however, 

that the direct recipients considerably understated the amounts 

that will benefit local organizations. So we have revised the data 

collection process for 2006 to capture more accurately the portion 

of funding that is intended for eventual sub-obligation even when 

the sub-obligation is not completed during the fiscal year in which 

the initial award was made. There is some time lag. We expect this 

change to yield more accurate details of USAID microenterprise 

funding by institution type. 

With regard to development of the poverty measurement tools 

mandated by the Microenterprise for Self-Reliance Act of 2000, a 

rigorous effort involving methodologists, academic advertisers and 

practitioners has led to the completion of the development, testing 

and certification of two new tools that can be implemented by partners beginning in October 2006. While USAID and its partners had 

hoped that these two tools that have been developed and certified 

for use at the regional or international level would predict client 

poverty status with acceptable accuracy, this has not proven to be 

the case. The testing process has yielded results that indicate that 

tools tailored to specific country, and even sub-national, characteristics would achieve significantly better accuracy. Practitioner organizations selected on a competitive basis have received funding to 

field-test country-level tools to ensure that these instruments meet 

the law’s practicality standard; that is, that the diverse range of 

practitioners with which USAID works can comply at a reasonable 

cost. 

7

By October 1, 2006, country specific tools will be available or in 

development for many countries, including some of those with the 

largest microenterprise development programs. USAID will continue to work in partnership with researchers and practitioner 

communities to develop and/or certify country specific tools for 

other countries in which USAID operates microenterprise programs. 

Mr. Chairman, allow me to touch briefly on the umbrella study 

that we referenced in our 2005 report. Generally it found that the 

ability of umbrella programs to work with a range of institutions 

on a variety of interventions at multiple levels of the financial system results in a more sustainable financial system in which poor 

people are more likely to enjoy the benefits of economic growth. 

Moreover, the study found that the nature of the program that is 

umbrella versus single institution was not a factor in determining 

either cost effectiveness or the sustainability of the institutions 

themselves. 

Mr. Chairman, that concludes my oral statement and I appreciate again the opportunity to present our program. 

[The prepared statement of Ms. Schafer follows:]

PREPARED STATEMENT OF THE HONORABLE JACQUELINE E. SCHAFER, ASSISTANT AD- MINISTRATOR, BUREAU FOR ECONOMIC GROWTH, AGRICULTURE AND TRADE, U.S. 

AGENCY FOR INTERNATIONAL DEVELOPMENT

Thank you, Mr. Chairman and Members of the Subcommittee, for the opportunity 

to appear before you today to report on USAID’s progress in implementing the 

Microenterprise Results and Accountability Act of 2004, since your September 20, 

2005 hearing. 

Generating economic growth in developing countries while reducing poverty is a 

fundamental development challenge. It is also critical to national strategic and security interests, as reflected in the growing role USAID is being asked to play in rebuilding, developing, transforming and sustaining partnership countries. 

Only a few weeks ago here in Washington, President Bush addressed the privatesector Initiative for Global Development saying that ‘‘the reduction of extreme poverty in our world must be a key objective of American foreign policy.’’ And, the 

President added, the effort to eliminate global poverty ‘‘needs to be part of the calling of the United States in the 21st century.’’ The President also emphasized that 

he expected principles of transparency, performance and accountability to be applied 

to all our development aid, saying, ‘‘We’re going to be generous in our contribution 

and demand results in return.’’ So, Mr. Chairman, our assistance programs are 

being held to account by both the Congress and the Chief Executive. 

USAID’s vision for microenterprise development is to strengthen economic opportunities for poorer households and the business activities on which they typically 

rely to enable these families to build assets, cope with the risks and vulnerability 

that accompany poverty, and plan for better futures for their children. These strategies support delivery of effective financial and business services that poorer families 

and entrepreneurs need to succeed in these challenges, as well as policy changes 

that reward initiative and hard work. USAID’s partnerships with hundreds of diverse U.S. and local microenterprise practitioners have also demonstrated that 

microfinance and microenterprise development services can contribute to poverty alleviation in a sustainable and commercially viable way. 

In September’s hearing, the Agency presented the status of our efforts to implement the law in the context of these overall strategies and programs. Today, I will 

present the Agency’s response to the twelve reporting requirements in the Microenterprise Results and Accountability Act of 2004, as well as our implementation 

of key activities that we know to be of special interest to the committee. 

RESULTS

Funding, client results and program examples 

In Fiscal Year (FY) 2005, USAID obligated $211 million for microenterprise development, supporting 435 institutions (218 of which had new agreements this fiscal 

8

year) in 68 countries throughout Africa, Asia and the Near East, Latin America and 

the Caribbean, and Europe and Eurasia. Nearly $22 million of this support came 

from central programs. 

USAID’s microfinance support has helped strengthen financial sectors to better 

meet the needs of poor households and new and growing microenterprises. Microfinance institutions (MFIs) and other financial institutions that received USAID 

microenterprise assistance in FY 2005 served 5.8 million loan clients, as well as 6.4 

million savings clients. Sixty-one percent of these clients were women. 

What does USAID support mean for these clients? In Mexico City, I met Maria 

Terese Perez, a businesswoman who makes her living sewing and selling school uniforms. In her two years as a client of FinComun, a USAID-supported microfinance 

institution, Ms. Perez was able to expand her business to nine employees, buying 

material more cheaply in the low season with a loan from FinComun, and sewing 

enough uniforms to have on hand when the high season hits. A new type of loan 

from FinComun will enable her to buy a machine that can embroider cloth, so she 

can expand into higher-value fashions. 

Ms. Perez and her employees, who now have higher incomes, can invest in their 

families’ futures by meeting their education and health care needs. But the impact 

extends beyond Ms. Perez, her family, her employees and her customers, to Mexico’s 

financial sector, which is undergoing a long-term, structural change geared toward 

integrating poor households and microenterprises into the vision, business model 

and product range of the country’s major financial institutions. This means that millions of Mexicans like Ms. Perez can count on the sustained access to the financial 

services they need to cushion against financial shocks, meet their families’ needs, 

build their businesses and other assets and invest in the future of their communities and their nation. 

Some of the institutions USAID supported in FY 2005 were able to gain access 

to and increase their loan capital through the use of USAID’s partial credit guarantees. USAID’s partial credit guarantees of $6.361 million leveraged $224 million in 

private sector credit for institutions serving microfinance clients. 

There are many impressive examples. USAID and Deutsche Bank launched the 

Global Commercial Microfinance Consortium in November 2005 in an effort to empower low-income households and small enterprises through increased availability 

of financial services. Spearheaded by Deutsche Bank, the $75 million program aims 

to channel financing from conventional and social investors into high-performing 

microfinance institutions around the world, so they can scale up their offerings of 

diverse financial services to low-income households and small enterprises. The 

USAID guarantee (put together through a team effort between EGAT’s Development 

Credit and Microenterprise offices and the Global Development Alliance Secretariat) 

helped bring private commercial investors to the table. In its first full quarter of 

activity, the Consortium has approved and disbursed eight loans to microfinance institutions (totaling $13 million). Eleven new approvals are pending (totaling $24.4 

million), and the value of deals under discussion exceeds remaining funds. 

USAID also leverages outside funding through matching requirements. The Agency frequently requires that its funds for a particular purpose be matched by financing from other sources, including the recipient institution itself. In FY 2005, $27.6 

million in USAID funds generated an additional $9.2 million from other sources. 

Sources of matching funds can encompass private donations, multilateral funding, 

commercial and concessional borrowing, savings and program income. 

More than 690,000 clients received enterprise support services through USAIDfunded institutions. In Africa and Asia in particular, these institutions implement 

programs that aim to increase the productivity and profits of smallholder farmers 

through access to more and better inputs, improved practices, value-added processing, and access to higher-value markets. 

An example of this work can be found in the USAID-supported KenyaBDS (Kenya 

Business Development Services) project. This project focused on helping Kenya avocado producers enter the seasonal avocado market during the time of year when 

producers in South Africa and elsewhere do not meet demand. While KenyaBDS 

was able to identify a market in the United Kingdom with growth potential, the 

value chain for avocados in Kenya was unorganized, and farmers needed to upgrade 

their operations to improve the quality of their produce and provide exporters with 

a consistent supply of exportable avocados. 

One of KenyaBDS’s most significant accomplishments was to help farmers organize into producer groups, and link them, as groups, to exporters. Initially, there 

was little trust on either side: Exporters doubted whether farmers could deliver the 

quality and quantity they needed to meet the demands of the UK market, and farmers were not sure that exporters would be trustworthy buyers and give them a fair 

price for their upgraded product. 

9

1The countries are Mali, South Africa, Sudan, Nepal, Tibet, Albania, Serbia, Bolivia, Brazil, 

Colombia, Ecuador, Guatemala, Mexico, Panama and Peru. 

Ultimately, though, KenyaBDS’s experiment paid off. As farmers learned about 

the power of organizing, upgrading and delivering on time, exporters learned that 

small suppliers could provide the quality they needed and the quantity they were 

unable to access without these small suppliers. As the success of KenyaBDS’s pilot 

spread, more and more exporters sought to partner with small avocado farmers. 

Most recently, these Kenyan exporters have been able to gain access to supermarkets in London—a clear indication that KenyaBDS’s strategy has benefited both 

exporters and small farmers. 

USAID also worked in FY 2005 to assist members of particularly vulnerable 

groups. Fifteen missions with microenterprise programs reported a relationship between poverty and race/ethnicity in their countries.1 Clients benefiting from microenterprise funding in these countries constitute a significant share of all clients benefiting from USAID microenterprise funding: they are 38 percent of all loan clients, 

44 percent of all savings clients, and 10 percent of all enterprise development clients. 

Moreover, $15 million of USAID’s microenterprise funding in FY 2005 assisted 

victims of trafficking in persons and women who are particularly vulnerable to other 

forms of exploitation and violence. 

Poverty measurement tools 

The Microenterprise for Self-Reliance Act of 2000, as amended, mandated that 

half of all USAID microenterprise funds benefit ‘‘very poor people’’, defined as those 

living on less than $1 a day (adjusted for purchasing power parity), or those in the 

bottom 50 percent of people below their country’s poverty line. The lack of widely 

applicable, low-cost tools for poverty assessment had made it difficult for USAID to 

determine whether it was meeting these mandated targets. Therefore, the 2000 Act 

also required USAID to develop and certify at least two tools for assessing the poverty level of its microenterprise clients. 

In FY 2005, USAID completed work on the development of two new tools to measure the poverty status of clients of USAID-assisted microenterprise institutions and 

better gauge our service to them. We are also collaborating with our partners to develop country-specific tools that may achieve greater accuracy. 

The Microenterprise for Self-Reliance Act initially set October 2005 as the deadline for USAID-assisted microenterprise institutions to begin implementing the 

tools; subsequently, the Microenterprise Results and Accountability Act of 2004 extended that deadline to October 1, 2006. A rigorous effort involving methodologists, 

academic advisors and practitioners has led to the completion of the development, 

testing and certification of two tools that can be implemented by partners beginning 

October 1, 2006. While USAID and its partners had hoped that these two tools that 

have been developed and certified for use at a regional or international level would 

predict client poverty status with acceptable accuracy, this has not proven to be the 

case. The testing process stipulated in the Act has yielded results that indicate that 

tools tailored to specific country (and even sub-national) characteristics will achieve 

significantly better accuracy. Practitioner organizations selected on a competitive 

basis have received funding to field-test country-level tools to ensure that these instruments meet the law’s practicality standard, i.e., that the diverse range of practitioners with which USAID works can comply at reasonable cost. 

By October 1, 2006, country-specific tools will be available or in development for 

many countries, including some of those with the largest microenterprise development programs. USAID will continue to work in partnership with researchers and 

the practitioner community to develop and/or certify country-specific tools for other 

countries in which USAID operates microenterprise programs. More complete information about the process of developing, testing and certifying the tools can be found 

online at www.povertytools.org. 

Performance goals and indicators 

USAID also established and measured quantifiable performance goals and indicators in FY 2005. These appear in Table 1, appended to this statement. 

On a worldwide basis, USAID and its implementing partners substantially met 

or exceeded all targets except that for the percent of funds benefiting the very poor 

(for which results are inconclusive). Performance was particularly strong in the 

number of clients served (44 percent above the target of 4.5 million) and financial 

strength of microfinance implementing partners. 

USAID can state with confidence that, in FY 2005, 37 percent of financial services 

funding, and 18 percent of enterprise development funding, benefited the very poor. 

10

USAID assumes that a significantly larger share of microenterprise funding benefited very poor clients but cannot validate that assumption due to the poor fit between the mandated poverty loan proxy and the services that enterprise development institutions deliver to their clients. 

FY 2005 is the last year for which the regionally-adjusted loan size proxy serves 

as the yardstick for measuring the extent of service to very poor clients. Beginning 

with the FY 2006 MRR report, progress toward targets will be determined through 

use of improved client poverty assessment tools currently under development by 

USAID. The loan size proxy has proven increasingly problematic in estimating service to very poor microenterprise and microfinance clients. Many microfinance clients 

are gaining access to financial services other than loans, such as savings, insurance 

and affordable remittance services, limiting the relevance and utility of a metric 

based solely on loans. For those benefiting from diverse enterprise support—access 

to better markets, improved technologies—the loan size proxy is clearly not relevant, which contributes to the low enterprise development percentages shown in 

Table 1. As the share of funding for enterprise development activities has grown, 

this bias has in turn lowered the overall estimate of funds benefiting very poor clients, a trend noted over the past several years. 

Another factor that affects the estimate of the extent to which USAID and its 

partners serve very poor clients is the geographic composition of microenterprise 

funding worldwide. The share of the population that meets the statutory definition 

is very small in some countries that have large microenterprise development obligation levels, such as Ukraine. 

With the phase-in of the poverty measurement tools, USAID expects to have a 

better basis on which to determine the extent of service it provides to very poor clients for the full range of microenterprise development activities. This in turn will 

provide a better basis for identifying opportunities to prescribe specific actions to 

improve performance. 

USAID is already taking steps to increase the extent of service to very poor clients. For example, the MD office has focused its competitive grant programs specifically on identifying and supporting program models that promise to improve both 

the extent of service and the impact of that service on very poor microfinance and 

microenterprise clients. Intra-agency working groups are identifying, testing and 

disseminating interventions that work for specific client segments that have a higher incidence of poverty, such as youth, refugees and internally displaced persons, 

and residents of conflict-affected zones, remote rural communities, and areas with 

high HIV–AIDS incidence. 

RELATIONSHIPS WITH MISSIONS AND PARTNERS

USAID continued to provide program guidance to field missions in FY 2005, extending the impact of support through ensuring mission access to expert technical 

assistance in microenterprise development. The Microenterprise Development office 

continued its intensive work with field missions on designing, implementing and assessing programs that apply the knowledge of how best to serve the very poor that 

is emerging from this focused experimentation and applied research. Through collaboration, USAID’s technical experts in microenterprise development can help missions apply best practices to their microenterprise programming. For example, extensive technical assistance to the Afghanistan mission resulted in a major new 

rural finance program that will extend credit, savings, and other financial services 

and support to tens of thousands of smallholder producers and rural families that 

have extremely little access to finance and are likely to be poorer than those benefiting from other USAID programs on the ground. 

To comply with the new statutory requirement that the Microenterprise Development office concur in strategies of USAID missions and bureaus that include microenterprise and microfinance components, MD staff has engaged with regional bureaus and missions to conduct thorough reviews of proposed strategies and activities. MD staff has been proactive as well in meeting the related provision in the 

law, i.e., that the office provide support and technical assistance to missions in developing new strategy elements and components. In the past year, for example, the 

MD staff has provided on-site assistance to missions including Afghanistan, Pakistan, Indonesia, Mexico, Haiti, Brazil, Albania, the Central Asian Republics, Azerbaijan, Serbia, Morocco, Egypt, Jordan, India, Sri Lanka, Sudan, Liberia, Uganda, 

Tanzania and South Africa. The staff has also provided extensive virtual technical 

support in both strategy and activity design for diverse missions, including Iraq. 

Also, in June 2006, USAID held its first learning conference on microenterprise 

development. We convened more than 300 partners and other practitioners in the 

microenterprise field in order to alert them to changes in the U.S. Government apVerDate Mar 21 2002 17:02 Sep 19, 2006 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6621 F:\WORK\AGI\072706\28970.000 HINTREL1 PsN: SHIRL
11

proach to foreign assistance, engage them on the key strategic questions currently 

facing the microenterprise development field, and enable all of our grantees and 

contractors to learn from each other about the USAID-supported work they’re doing, 

the discoveries they are making, and the successes they need to be replicating. 

NEW FUNDING MECHANISMS

We continue to work closely with our partners through our new funding mechanisms as well: through our Leader With Associates mechanism, which links a diverse consortium of partners directly with USAID missions; and through other grant 

programs, such as the Implementation Grant Program (IGP) and our Grants Under 

Contract mechanism. 

Financial Integration, Economic Leveraging, Broad-Based Dissemination (FIELDSupport) Leader with Associates 

The Agency has begun implementing a new microenterprise FIELD Support Leader with Associates (LWA) mechanism. This LWA has been designed to mobilize the 

expertise of the nonprofit community and strengthen their relationships with, and 

relevance to, USAID missions. FIELD-Support will operate through FY 2010, with 

a possible five-year extension through 2015. 

The LWA is designed to implement innovative, comprehensive, and integrated approaches to sustainable economic growth with poverty reduction. This includes 

building more inclusive financial systems, improving the competitiveness of industries in which micro and small enterprises participate, and enhancing the overall 

policy and regulatory environment to enable broad-based economic growth. FIELDSupport is also designed to respond to the economic security needs of special populations, such as families hurt by civil conflict and natural disaster, and communities 

hit hard by HIV/AIDS and other health issues; as well as address the livelihood and 

enterprise needs of difficult-to-reach clientele such as the poor in remote rural 

areas, youth, women, refugees, and internally displaced persons. 

The FIELD-Support LWA was competitively awarded by USAID’s Microenterprise 

Development office to a team of 27 highly qualified organizations, led by the Academy for Educational Development (AED). The team, comprising 10 core members 

and 17 resource organizations has a proven track record in reducing poverty and 

promoting sustained, equitable growth through microenterprise development, microfinance, value chain development, institution and human capacity-building, and the 

promotion of other market-based approaches. Experiences include supporting micro 

and small enterprises’ access to market opportunities, strengthening and deepening 

financial systems, promoting sustainable livelihoods and improving the national and 

local enabling environment. Sustainable livelihood work increases poor household 

assets and strengthens their coping strategies, while enabling environment work focuses on both the national and local levels to boost productivity, earnings, and competitiveness. 

The LWA—which has an overall ceiling of $350 million over five years—is off to 

a strong start, with initial Mission associate awards in the pipeline. By the end of 

this fiscal year, the Microenterprise Development office expects to obligate a cumulative total of $2 million for the base ‘‘leader’’ agreement to implement pilot projects 

that address these objectives throughout the world. In addition, USAID missions are 

showing great interest in utilizing the FIELD Support LWA to address regional 

needs. By the end of FY 2006, USAID expects missions to enter into ‘‘associate’’ cooperative agreements totaling approximately $60 million, nearly 20 percent of this 

mechanism’s ceiling. 

USAID Missions and USAID/W offices and operating units are able use the LWA 

over a five-year period. The LWA provides a streamlined procurement mechanism 

for missions to partner with NGOs and PVOs to meet growth and poverty alleviation goals, as an attractive alternative to working with contracts and for-profit 

firms. Design and implementation of the LWA is one of a number of steps USAID 

has taken to ensure that it has access to the best possible combination of partners 

with which to implement its microenterprise programs. 

Implementation Grant Program (IGP) 

The FY 2006 Implementation Grant Program will include awards to both financial 

services and enterprise development institutions. The Financial Services grant 

round, focused on ‘‘Access to Financial Services for the Very Poor,’’ attracted fewer 

responses than anticipated, but assessments of those that are the top contenders indicate strong programs involving a range of financial institutions (banks, NGOs, 

multi-sectoral programs and specialized microfinance institutions) working to integrate a variety of clients into the financial system (including youth and rural and 

agricultural producers as well as traditional clients who are poor or very poor). 

12

The Enterprise Development grant round, ‘‘Linking Economic Growth to Poor 

Households,’’ focuses on approaches that foster the competitiveness of industries in 

which large numbers of very small firms participate, by improving microentrepreneurs’ access to the finance, business services and knowledge they need to compete in growing markets, while ensuring that the poor who operate these very small 

firms benefit from participating in growing markets. 

Awardees will collaborate through a learning network with a structured learning 

agenda to share with each other and the larger industry those strategies, products 

and services that show promise in reaching and retaining very poor clients. 

The combined funding for these worldwide grant competitions is $10 million. 

Awards will be made by the end of the fiscal year. 

Grants Under Contract (GUC) 

The Agency also continues to implement its grants under contracts program, 

which provides targeted grants to key implementing partner organizations. These 

grants are used to help institutions address key implementation and institution 

building issues which would normally not be funded by donor programs. The program emphasizes joint learning and the sharing of results, so that the impact of 

these grants can be leveraged across a broader swath of implementing partners, 

rather than accruing just to the benefit of the grantee. The total value of this program is $2.86 million. 

In 2005, the Agency, in collaboration with a number of implementing partners, 

determined an industry-wide need for institutional support to develop or reinforce 

learning and knowledge management capacity. Institutions had repeatedly requested that USAID provide assistance to institutionalize frameworks that will help 

them to learn from current operations and apply the knowledge they gain to benefit 

future programs. In December, the Agency made six awards totaling $650,000 to increase recipient institutions’ capacity to learn from their activities, apply their 

learning in order to adapt their activities and generate new ideas, and share their 

new knowledge with the broader industry. 

In early 2006, the Europe and Eurasia Bureau identified the need to develop approaches to increase the incomes of historically marginalized populations by improving or creating access to markets and financial services. In late spring, the Agency 

released a request for grant applications for programs supporting these hard-toserve populations. These programs will develop channels to integrate the targeted 

populations into the broader economy, and to build a knowledge base of successful 

tools for integrating poor people into the markets and financial systems from which 

they have been excluded. The Agency expects at least some of the applicants to be 

non-traditional partners, including youth-serving organizations or health programs. 

Grant applications have just been received with about half coming from international PVOs and half coming from local NGOs. Only proposals for integrating 

these populations permanently into markets will be selected for awards totaling 

$500,000. Recipients will be required to collaborate through a ‘‘learning network’’ to 

share the knowledge they gain reaching hard to reach populations. Proposals have 

been received; awards will be made by the end of fiscal year 2006. 

In the remainder of FY 2006, the Agency will release two more requests for grant 

applications, with one targeted to rural and agricultural populations (this may be 

combined with an information technology focus), and one to test the cost-effectiveness of newly developed poverty assessment tools. 

Sub-obligations, cost-effectiveness, sustainability 

In FY 2005, the amount of funds obligated directly to all non-profits was approximately 37 percent of total microenterprise support, which included funds to U.S.-

based PVOs (16 percent), local NGOs (16 percent), cooperatives (2 percent), credit 

unions (2 percent) and research and educational institutions (1 percent). The 

amount obligated to consulting firms was 51 percent of total funds, an increase from 

38 percent in FY 2004. 

USAID is working to supplement data on direct obligations with better data on 

the (often substantial) portions of funding that are sub-obligated, usually from consulting firms to non-profits. Sub-obligations are a key aspect of large ‘‘umbrella programs,’’ which are sometimes used by missions to accomplish a range of activities 

without adding to their management burden. Missions often use umbrella programs 

in countries where local capacity is limited, and comprehensive, multi-level interventions are required for program success. In these programs, a single awardee (either a consulting firm or a PVO/NGO) carries out a broad range of activities to boost 

economic opportunities for microenterprises or expand financial services for the 

poor. While managed by a lead implementer or ‘‘prime’’ recipient single entity, the 

umbrella program in most cases is carried out by a consortium of partners that 

13

bring distinct expertise, given the breadth of skills required by the program, and 

that receive a portion of the funds obligated to the ‘‘prime’’ through sub-contracts 

or sub-grants. Microfinance umbrella projects generally aim to reduce dependence 

on donor funding and subsidized technical assistance by addressing the market-level 

constraints to mainstreaming microfinance for the poor. These constraints often 

take the form of lack of services on which microfinance institutions rely. Umbrellas 

address these constraints by building locally available supporting services, and 

strengthening the policy, regulatory, or legal framework for microfinance. 

In FY 2005, the Agency completed a study on umbrella mechanisms in an effort 

to better understand the use of these agreements by USAID missions, their relative 

cost-effectiveness and that of other mechanisms, and their role in USAID’s microenterprise development support. Many of this study’s findings apply to umbrellas 

but also more broadly to other agreements with for-profit and non-profit partners. 

This study was recently reviewed by the advisory group, comprised of non-profit and 

for-profit practitioners, other donors, and researchers; release to the general public 

expected this summer. 

The study’s findings indicate that USAID-funded microfinance programs have 

been implemented successfully as both umbrella projects and as single-purpose 

projects by both for-profits and not-for-profits. Detailed analysis of the cost structures of not-for-profits and for-profits offers no evidence that these programs have 

been implemented inefficiently. Likewise, there is little evidence that either for-profits or not-for-profits are more cost-effective in achieving project results. This study 

found that it is extremely difficult to directly compare cost-effectiveness between organizations and projects across countries, and virtually impossible to draw broad, 

general conclusions about relative cost-effectiveness. 

Recent refinements to USAID’s microenterprise data collection and reporting system allow umbrella institutions to include more details on the various forms of assistance that may be transferred to local organizations via the umbrella institution. 

Analysis of the database of microfinance umbrellas compiled for the study indicates 

that since 1997, nearly 47 percent of total funding for microfinance umbrellas was 

sub-obligated; most of these sub-obligations go to not-for-profits and their local affiliates. In addition, although for-profits served as primes for the majority of the umbrella programs, not-for-profits and their affiliates received much of the in-kind 

technical assistance and training, as well as funding, associated with these programs. 

Sub-obligations, usually made by a for-profit managing a program to non-profits 

in the form of subcontracts and sub-grants, are often a central component of microenterprise umbrella programs. Additional detail on the subcontracts and sub-grants 

will eventually aid in providing a more comprehensive picture of the allocation of 

USAID funds. For FY 2005, the majority of umbrella awardees with agreements 

signed late in the fiscal year showed much of their funding still in hand at the time 

of reporting. Most of these funds will eventually be channeled to local organizations, 

but are not reflected in the data captured for FY 2005. 

To enhance our understanding of the portion of funds that get sub-obligated, and 

who the ultimate recipients of funding are, USAID in FY 2005 requested additional 

information on the amounts allocated to local institutions through umbrella agreements, apexes or other types of wholesale institutions. The amount of detail provided by the direct recipients considerably understates the amounts that will benefit 

local organizations. The data on funding flows between for-profits (primarily consulting firms) and non-profits (primarily PVOs and NGOs) is also likely to be incomplete. This is the first year for which USAID has attempted to collect data on subobligations for technical assistance as well as direct obligations. The data collection 

exercise and analysis proved far more difficult than anticipated. Reasons that the 

data is incomplete are many, and are explained in the Annual Report to Congress. 

USAID has adapted the data collection process for FY 2006 to capture more accurately the portion of funding that is intended for eventual sub-obligation even if the 

sub-obligation is not completed during the fiscal year. We expect this change to yield 

more accurate data on the breakdown of USAID microenterprise funding by institution type. 

The microfinance umbrella study also addressed the issue of sustainability. The 

study found that, for umbrella and other USAID programs, the instrument is not 

a factor in determining sustainability. USAID uses contracts to procure goods or 

services to implement its own program, and cooperative agreements or grants to 

support or stimulate the recipient’s program. The sustainability of the program is 

the result of sound analysis that ensures that benefits continue well beyond program subsidies. Umbrella programs are usually implemented under contracts rather 

than grants, as USAID perceives the need to exercise greater control over these 

14

large and complicated public investments. USAID staff have more control over the 

direction of programs implemented under a contract. 

The amount of USAID support specifically for microfinance that flowed through 

umbrella agreements between FY 1997 and FY 2005 was less then 30 percent of 

new USAID obligations for microfinance, indicating that most USAID support for 

microfinance is still distributed through single-purpose programs, which are generally grants directly to not-for-profits. The share of microfinance funding programmed through umbrella programs during this period seems to have peaked at 

37 percent of total USAID funding for microfinance in FY 2002, while just 10 percent of FY 2005 funding was obligated through umbrella programs. 

Finally, the study also addressed the issue of sustainability. It found that, for the 

cases studied (which included institutions assisted through umbrella programs as 

well as those assisted through single-institution programs), nearly all of the institutions assisted experienced increased financial sustainability and growth. The form 

of assistance program—whether an umbrella program or a single-institution program—did not influence the sustainability of the institution(s) involved in the program. However, the form of assistance program did influence the sustainability of 

the broader financial sector. That is, the study found that programs focused at the 

level of a single institution cannot be as effective as umbrella programs at creating 

a financial system that permits greater and more sustainable access to financial 

services. Ultimately, the ability of umbrella programs to work with a range of institutions on a variety of interventions at multiple levels of the financial system results in a more sustainable financial system in which poor people are more likely 

to enjoy the benefits of economic growth. 

Thank you Mr. Chairman. I would be happy to answer any questions you may 

have. 

APPENDIX 1:

Table 1. Performance Goals and Results, FY 2005

Microfinance 

Total Loan 

Clients

#

Women Clients 

%

Rural Clients

% 

Funds Benefiting 

Very Poor 

Clients %

Financially 

Sustainable MFIs

%

FY 05 goal 3.8 million 60 40 50 50

FY 05 actual 5.8 million 61 45 37 58

Enterprise 

Development

FY 05 goal 700,000 30 80 50

FY 05 actual 694,649 29 95 18

All clients

FY 05 goal 4.5 million 50

FY 05 actual 6.5 million 23

The count for microfinance clients is restricted to loan clients, as adding in clients for other financial services (savings, insurance, and remittances) may result in double counting. 

Mr. SMITH. Thank you so very much for that testimony. Mr. 

Tancredo? 

Mr. TANCREDO. No. I have nothing. 

Mr. SMITH. Thank you. I will ask a couple of opening questions. 

You just mentioned a moment ago how the tools tailored to a 

specific country or even sub-national characteristics will achieve 

significantly better accuracy than tools certified for regional and 

international use. You said that by October 1st many of these will 

be available. Can you give us any sense of how many countries will 

be ready by the October 1st deadline and how many will be a work 

in progress at that point? 

15

Ms. SCHAFER. I don’t have the exact number of—I don’t think we 

really know yet the exact number of countries, but it will represent 

a good portion of our microenterprise development program worldwide. So I think we will be able to get a good indicator of whether 

these are in fact as we expect that they will be. 

Mr. SMITH. You noted in your testimony that there was little evidence that either for-profits or not-for-profits are more cost effective. In evaluating who gets Federal funding, is that a surprise? Is 

that something that you didn’t expect to be the case, and how will 

that be factored into further distribution of funding? 

Ms. SCHAFER. There is so much variability in the nature of the 

programs on a local basis that I guess it is not too surprising that 

the ability to compare program to program is difficult but this 

study, you know, made an effort to look at it in a variety of ways 

and found that this cost effectiveness issue, most programs try to 

be cost effective regardless of how they are designed but they are 

of quite great diversity in the nature of the programs on the 

ground, and that not one nor the other type of activity or type of 

approach proved to be more cost effective than the other. 

Mr. SMITH. Let me say that we deeply appreciate your leadership, but I have concerns about the vacant Director position in the 

Office of Microenterprise Development. Is that person to be named 

soon? 

Ms. SCHAFER. That position isn’t quite vacant yet. That person 

who has led this office for I think 8 years now is with us until the 

middle of next month, and then I will be looking at what we might 

do. We certainly will have somebody in the office working in the 

interim and then we would conduct a search or make some arrangement to find a successor. Meanwhile, we have a very fine 

staff that is doing this work on the ground with our partners in 

missions around the world, and I expect that work will continue at 

its pace without any hitch or delay. 

Mr. SMITH. So you see a seamless transition? 

Ms. SCHAFER. Yes, I do. 

Mr. SMITH. That is good. Because so often, and this is regardless 

of the Administration, when somebody leaves and they have done 

a good job, sometimes months, even years pass before we get somebody back in. So hopefully that won’t be the case. 

Ms. SCHAFER. We will find an interim leader if that is necessary 

in order to make sure that we don’t lose the momentum that I 

think we have gained in implementing these programs over the 

past few years. 

Mr. SMITH. Do you know if the search is already on for that Director? 

Ms. SCHAFER. No. It is not yet. 

Mr. SMITH. Just to encourage you. 

You note that there are over 5.8 million loan clients and 6.4 million savings clients. Is it your sense that clients in the developing 

world benefit more from saving services or from microloans, or is 

there a balance there? 

Ms. SCHAFER. We are finding that many people who require financial services who are very poor actually value having a savings 

instrument that they can rely on and others will borrow money. 

Some will do both. What we want to have is a variety of services 

16

that are available and tailored to what the actual demands are by 

people who need these very small loans. Some people are just reluctant to borrow money at a point in time and other people will borrow money from more than one financial institution. So it really 

depends on what the demands are for the individual. We are trying 

to make services available to the whole spectrum of people. 

Mr. SMITH. When we had our last hearing on this subject on September 20, 2005, Acting Administrator James Smith testified, and 

this is something for which Congress, I think, is to be blamed, perhaps Administrations past and present, as well, that USAID technical staff—and I know that Administrator Natsios has complained 

about this, as does our current Administrator, Ambassador 

Tobias—that as we cut technical staff at USAID it becomes harder 

and harder for you and your counterparts at other USAID-assisted 

programs to do their work. Mr. Smith said that they were down to 

about 200 officers in the field at that time. 

Has anything changed? Are we doing anything to try to build up 

that technical capability, or is that still a problem? 

Ms. SCHAFER. USAID was able to bring in two classes of new 

entry professionals which have technical expertise in a whole variety of technical subject areas, including finance. So we are trying 

to rebuild our foreign service capability. We are also able to use 

non-operating expense instruments to bring in technical expertise 

and we have a considerable number of those in my own office. 

We could never run the program just on our own staff basis 

alone. That is why we have implementing partners throughout the 

world. The program is large and the demand is very great. 

What I tried to do is make sure that we have the right mix of 

technical people who can give the value of their expertise to our 

missions that have microenterprise development programs. An example of a skill set that we have been trying to recruit for is in 

the remittances area where we know that there are a lot of opportunities for investments in host countries by people who have sent 

remittances home that will advance the development of that country. And having someone with good knowledge in that area is one 

of the things that we are trying to recruit for. 

So my goal is to have a skills mix that actually is needed for the 

program so that we can provide the technical leadership for the 

missions and work with our partners to actually get the impact 

throughout the world. 

Mr. SMITH. That is a tremendous goal. Have you been able to 

achieve that? 

Ms. SCHAFER. As I said, we have got a pretty strong staff in our 

Microenterprise Development Office. Now we are always trying to 

make sure that we get the right mix, and I was giving an example 

of one that we are trying to recruit for now. 

Mr. SMITH. If there are ways that we could be helpful, either our 

Committee or, you know, Congressman Frank Wolf is a close personal friend and obviously the foreign aid appropriations cycle and 

State Department cycle is something that we discuss often. If there 

are specific requests that you think would enhance the program, 

don’t be a stranger. Please let us know because we can work to 

achieve that. We have done that on a number of instances, most 

recently with the Trafficking in Persons Office. There was a need 

17

for more personnel, and we went and worked with Mr. Wolf in this 

case, and we were able to beef up the number of people for next 

year. So let us know if there is a need and it has gone unmet. 

Let me ask you two final questions. You stated in your testimony 

that the financial services grant round of the Implementation 

Grant Program attracted fewer responses than anticipated. I wonder if you can elaborate as to why that is the case, and is it your 

view that focusing on the very poor limited potential responses 

from agencies which might have otherwise implemented successful 

programs? 

Ms. SCHAFER. I am not sure that it rose to the occasion or rises 

to the occasion of being concerned that we don’t have good candidates because we do. Our staffs are in the final rounds of looking 

at the various projects and programs that are competing for that 

money. So I think we are going to have a good strong award in that 

area. But the idea that—the difficulty in reaching the poor is not 

something that everyone feels like they are ready to be able to 

tackle that technical problem. But the proposals that we do have 

to tackle that technical problem are strong ones, and we think we 

are going to have a good outcome from that competition. 

Mr. SMITH. You describe in your testimony the problem of accounting for sub-grants and sub-obligations and umbrella programs 

administered by USAID. Why is it that grant and contract lenders 

were not previously required to report to USAID regarding their 

sub-grants and subcontracts? Will more detailed information on 

such sub-obligations be provided to the Congress in subsequent 

USAID reports on microenterprise? 

Ms. SCHAFER. We began to require that last year. And we posed 

the question. The information that we got as a result when we actually looked carefully at it appeared to us to seriously underreport 

the sub-contracting. Partly we often do not make our awards until 

very late in the fiscal year, but we started collecting the data at 

the beginning of the following fiscal year. The subcontracts often 

are not made until several months, if not longer, into the overall 

contract period. 

So there is a lag in getting the information to catch up to be able 

to report it to you in the time frame that you requested. Sub-obligations have grown in importance in recent years, and that is why 

we are now trying to require them in the report, and we think that 

in fiscal year 2006 we are giving them some better tools to make 

that report and we should have better information so you know 

who was ultimately getting the benefit of those funds. 

Mr. SMITH. As you know, Ambassador Tobias serves as both head 

of USAID and as Deputy Secretary of State for Foreign Assistance. 

Do you see any positive impact coming from that very strategic 

dual position that he holds? 

Ms. SCHAFER. The Ambassador has really, as a Director of Foreign Assistance, really taken personal control of the reins for developing a transparent foreign assistance framework by which the Administration will be making its request for foreign assistance to the 

Congress. 

The first thing that he and the Secretary want to show is that 

we are doing things that will allow us to meet the overall foreign 

assistance goal of the United States, which is helping to build and 

18

sustain democratic, well-governed states that will respond to the 

needs of their people and conduct themselves responsibly in the 

international system. 

The framework subdivides the various countries that we provide 

foreign assistance to into rebuilding countries, developing countries, transforming countries, and sustained partnerships, and we 

are arranging our various programs under categories that fall generally broadly under peace and security, governing justly, and 

democratically, investing in people, economic growth, and humanitarian assistance, and you will be able to see and you will be able 

to make trade-offs once you see how much money has been proposed for a country and how that arrays itself underneath these 

categories, and you will be able to make trade-offs among programs 

to have the maximum impact for development assistance. 

Mr. TANCREDO. If you don’t mind, I do have a couple of questions 

as I listen, and I am sorry, I was not able to be here for the bulk 

of your testimony so some of this may be asking you to say things 

that are redundant and I apologize. 

Could you help me understand the process a little bit in terms 

of how, exactly how the entrepreneur, him or herself, makes contact with the subcontractor. Which way does it flow? Is it a 

proactive sort of involvement on the part of the subcontractor to go 

out and find people who actually would be eligible that have some 

sort of criteria that they have established or is it the other way 

around? They sit there and somebody comes to then and say I need 

a loan? 

Ms. SCHAFER. The people who work in the developing world that 

have been involved in this program, and this is now almost 30 

years old, have a good understanding of what the demand is. They 

live there. They work with the community, and they are trying to 

develop tools that will be beneficial to the people who——

Mr. TANCREDO. How do they actually connect right there on the 

ground? How does it happen? Who comes where? Do you come to 

a little office and he says I would like to——

Ms. SCHAFER. People in the community, word gets around on 

whether an institution that is set up—I had an opportunity to visit 

a slum in Uganda not so long ago, with a microfinance institution, 

and it was teeming with people using the microfinance institution. 

So I am not sure what the origins of it were, but once you are out 

there providing a service that people need, people will come and 

take advantage of it. 

They make applications, there is information developed that 

showed that they are able to repay loans or have bank accounts, 

savings accounts that they can draw on. But exactly how it began 

30 years ago, I am not sure I can describe to you. 

Mr. TANCREDO. A person who comes in to take advantage of this 

opportunity, do they have any idea where the money is coming 

from? Do they know that it is USAID essentially supporting the activity or in conjunction with other nongovernmental organizations? 

Ms. SCHAFER. As I mentioned in my opening statement, a case 

that I am familiar with was a lady I met in Mexico City who has 

been a customer of FinComun, which is a USAID-assisted microfinance institution. She was very aware that this finance institution was being helped by the United States. She appreciated the 

19

services that were provided to her and she was able to create jobs 

for a number of people who were hired to work in a very small 

business sewing school uniforms. 

Mr. TANCREDO. How do they know that? Is that simply a matter 

of word of mouth or do we actually—when someone does apply and 

they obtain the loan, is there something that tells them here is 

where it comes from? 

Ms. SCHAFER. In the first instance I suspect that they know they 

do their business with the financial institution. More recently we 

have required that all of the groups that we work with, and many 

grantees have complied with this as well, brand their activities so 

that people realize that the United States Agency for International 

Development is helping to support them. But I think it is well 

known that at least by the people that I have had an opportunity 

to deal with that the U.S. is at least one of the donors that is helping to create these institutions. 

Mr. TANCREDO. And if a loan goes bad, who has been primarily 

responsible and takes the hit for it, I guess? Is it the contractor the 

subcontractor? 

Ms. SCHAFER. The finance institution is going to have, you know, 

a certain number of bad loans and that would be absorbed as part 

of the costs of doing business but what we are finding is that very, 

very few of these loans fail to be paid back. There is an extremely 

high success rate in this program. 

Mr. TANCREDO. Do you know the percentage? 

Ms. SCHAFER. It is well above 98 percent, I believe. If I am wrong 

about that, I will correct it for the record. 

Mr. TANCREDO. Thank you very much. That is all. 

Mr. SMITH. I have some additional questions. One is on the issue 

of financing. Have we appropriated sufficient money? I think it is 

about $211 million for this fiscal year for microfinance. Is that 

enough? Is there a significant unmet need that we should be doing 

more about? I would say that one of the bills I had put in would 

have bumped it up to $225 million at some point. But the powers 

that be thought that was too much. What could we do with more 

money and is it enough that we have now? 

Ms. SCHAFER. A couple of things. One is of course there are a 

number of well-run programs that really are demanding, competing 

for the limited development assistance dollars that overall we can 

provide, and that is always going to be the situation. This program 

since 2001 has increased from about 156 million to 211 million, so 

there clearly is a demand out there for this program that has been 

responded to by the Congress. 

The other thing that you should be aware of is that the private 

sector has invested in microfinance institutions more and more. 

There is something like $2 billion of capitalization out there by the 

private sector. They have discovered that this is a money making 

operation and are willing to invest in it. And people that are in this 

business have told me that hundreds of millions of dollars, even 

through raising that money through bond issuance, are pouring 

into microfinance institutions which can then be loaned to these 

very small but needy customers. 

20

So this is catching on and this is real sustainability. This is what 

the program, you know, has wanted to do and aimed to do from the 

outset and the evidence is mounting that this is happening. 

We have also been able to leverage our program somewhat. We 

have something called the Development Credit Authority, which 

provides partial credit guarantees to local financial institutions 

that will actually lend money in local currency in the country. And 

my testimony points out that we have been able to leverage hundreds of million of dollars with very few million dollars in development assistance funds that will also help capitalize the microfinance institutions. So we have a program ourselves that the private sector is increasingly discovering the benefits of lending in 

this sector. 

Mr. SMITH. Yesterday I hosted a meeting, and many of my colleagues were there, with Salva Kiir, who is, as you know, the First 

Vice President of Sudan. He is also the President of Southern 

Sudan. I remember meeting him when he took that position in 

Khartoum a year ago. We talked about what is needed to rebuild 

Sudan in general and Southern Sudan in particular, and microfinancing was something he mentioned as being important. 

I understand that we are spending some $2 million in microfinancing for Sudan, and I am wondering if there are any plans to 

significantly ratchet up that money. Is that being spent in Southern Sudan currently? It is just important to me that—I mean for 

people who have lost everything. As you know, there were 4 million 

people displaced, 2 million dead in Sudan, and Darfur has its own 

set of equally egregious problems. Is this a priority for this mission 

to look at Sudan and see how we might help in the south in rebuilding? 

Ms. SCHAFER. I am not familiar in detail with all that they are 

doing, but I did have a briefing on it last January. We do have a 

new head of USAID in Sudan now who is probably taking a good 

comprehensive look at everything that they are doing. 

There are so many areas that Sudan needs help with. Education 

is a particularly big one. Just basic human needs. But to improve 

the economy there is something that is going to require lots of components and microfinance and microenterprise development work 

in coordination with other activities, such as agricultural sector development, creating markets for and creating job opportunity for 

people. So I see this as a tool that would be used by any program 

for rebuilding Sudan, which is a big enterprise that we will be undertaking in the foreseeable future. 

[Additional information follows:]

ADDITIONAL WRITTEN INFORMATION RECEIVED FROM THE HONORABLE JACQUELINE E. 

SCHAFER TO QUESTION ASKED DURING THE HEARING BY THE HONORABLE CHRISTOPHER H. SMITH

SUDAN

The USAID Mission in Sudan is obligating $2.45 million in FY 2006 to fully fund 

the current microfinance program, which is a five-year $10 million program focused 

on Southern Sudan. The project has had a good track record in setting up the first 

microfinance institution in the difficult operating environment of Southern Sudan. 

This year, the project is supporting the establishment of a second microfinance institution to target other areas of Southern Sudan. The project has also established a 

Microfinance Forum for parties interested in good practice in microfinance in SouthVerDate Mar 21 2002 17:02 Sep 19, 2006 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6621 F:\WORK\AGI\072706\28970.000 HINTREL1 PsN: SHIRL
21

ern Sudan. In addition, a number of NGOs have programs with small grants and 

revolving funds and are looking to transition to sustainable micro-finance programs. 

Rapid expansion in Southern Sudan is difficult for several reasons: lack of banks 

and common currencies; continuing insecurity in some areas; limited development 

of markets; low understanding of financial services; limited human resource capacities; and lack of other institutions. USAID’s Mission in Sudan intends to remain 

engaged in this sector and promote expansion as rapidly as conditions and funding 

allow.

Mr. SMITH. I know Mr. Tancredo notes that he did make an appeal for lifting sanctions on Southern Sudan, that at this point they 

are counterproductive because it is hurting the victims of that most 

recent war. 

I have two final questions. How can microfinance be integrated 

and mainstreamed throughout all foreign aid, for example, natural 

resources and AIDS. I travel a lot, usually going to places where 

there are grave humanitarian and human rights problems, and 

when there is a crisis—like during the tsunami, for example, I 

went to Phuket, and in each of those meetings microcredit was 

high on the agenda. So there it seemed to be very much front and 

center, but is it being sufficiently integrated into other areas of 

aid? Do our missions understand how important this is? 

Ms. SCHAFER. I think the program has been increasing, the example I gave of after we have a large program in Iraq that is under 

way. I think that even in cases where the country is rebuilding and 

that category coming out of a crisis, there is a demand and a utility 

for microfinance for so many of the people whose jobs really depend 

on microenterprise. These are small individual entrepreneurs that 

don’t have a big, you know, Ford Motor Company factory to go to 

work at. This is where their jobs are. So there is a demand for it 

and we are seeing our missions use it all over the world. The other 

question that you posed was the integration with the other programs. I mentioned here that in my testimony also that we are 

working with our women development program to make microfinance available to women who are recovering from being victims 

of trafficking of HIV/AIDS. We are working closely with the programs that support that sector with, you know, opportunity for recovery that could involve the kind of assistance that the Microenterprise Development Program gives. And the better—I mean, 

we would be much better off if we integrated all of our programs 

to improve the economy so that people can—so that the economy 

can grow and bring people out of poverty. 

I do want to stress that one of the most important elevators of 

poverty is economic growth itself, and scholars have found we need 

about a 2 percent annual growth rate in order for people to really 

grow out of poverty. And so integrating what we need and to make 

sure that everybody gets to benefit from the growth as well, so that 

is what the microenterprise program does. It helps broaden the 

reach of the economic growth programs that a country would pursue. 

Mr. SMITH. With regard to amounts and allocations, Africa gets 

about 20 percent, and it has a disproportionate share of HIV/AIDS 

victims and general poverty as well. Is there any sense of trying 

to enhance that, and again, would more resources enable you to do 

that? There was $32 million for Africa. I would just say, and I congratulate USAID on this, on another trip recently to Ethiopia, I 

22

went to a human trafficking shelter where there must have been 

in excess of 40 women who had been trafficked, mostly into the 

Middle East, who were the lucky ones that came back and were 

rescued. They were learning skills and some of them were hoping 

to get microcredit loans courtesy of the U.S. Government. These 

women were just amazing. They were making shoes and learning 

skills, including computer skills, that were extraordinary. They 

were putting out some very high quality merchandise. And it 

struck me that it was great, but not enough of it. 

Ms. SCHAFER. In Africa we do have several programs. The Microfinance Program I think is smaller than the Microenterprise Development Program. And that is partly because it is so difficult for the 

African people specifically who live in the rural areas that are so 

remote from the markets. The costs for them to do business is very, 

very high. So we are trying to help them develop their businesses 

as well as the ability to finance the trading of the products that 

they produce into a local regional store and in some cases international markets. 

I went to Kenya in January on a trip and encountered a business 

development program there that found a market for local avocado 

growers who get into Europe on a seasonal basis when the trees 

weren’t producing in Southern Africa. And so they found East Africa to produce in the off season. And originally there was a bit of 

skepticism by the people who are going to import and whether they 

could actually get a reliable high quality product and this program 

helped those people develop that reliable high quality product. It 

was sent to market on a timely basis, but a lot of things had to 

happen before they were actually able to earn additional income, 

including improving the quality of the fruit on the tree through 

grafting and the right kind of pruning and sprays. And I created 

several industries that supported these farmers as well that were 

experts in different parts of the productivity chain. Previously 

those trees were being cut down for firewood. 

So the people that understand how to make these market lines 

work are an important part of the overall economic development 

and microenterprise picture in Africa. In this case also we did some 

household level surveys and found that a very large percent of the 

people that were actually benefiting from this particular program 

were very poor people, which might not have otherwise been shown 

in the way we measured very poor people, but when we did this 

on a household level basis we are finding that they are reaching 

a lot of people. 

So these programs have multiple aspects to them. They are balanced and overall many of them are meeting with real successes 

that I think we can be proud of. 

Mr. SMITH. Thank you so much. 

Mr. TANCREDO. The longer that you sit there and talk about it 

the more questions that keep popping up. 

But you mentioned earlier the degree to which you were involved 

with the remittances and trying to use that in this process. Considering the fact that there are now seven countries, I believe, have 

more than 10 percent of their GDP made up of remittances from 

their nationals working in the United States, it amounts to a huge 

23

sum of money flowing out of the country, $20 billion to Mexico 

alone. 

How do you interact with that? How does this become part of a 

business program? 

Ms. SCHAFER. The case I am familiar with is in the state of 

Zacatecas in Mexico, where the treasurer of that state has told us 

that. We have been working with them to try to be able to raise 

money in the private sector for infrastructure to build schools and 

roads and water and waste water facilities, and he has told us that 

the remittances that come back into his state account for about 

half of the ability that he has to raise money to pay off the loans 

that—and the bonds that he has been issuing. 

So we are working with them technically to help tap this resource as a development tool. It is larger than official development 

assistance. Flows up remittances as a percent of the total flows of 

U.S. capital overseas has now outpaced development assistance in 

the last 5 or 10 years. 

Mr. TANCREDO. Thank you. 

Mr. SMITH. Ms. McCollum. 

Ms. MCCOLLUM. Thank you, Mr. Chairman. 

One of the things that I have been asked and I have been especially in Africa traveling is where we have AIDS projects a lot of 

women have been widowed and that are looking to supplement 

their income and they can be very resourceful with very small 

amount of money. We have our big programs like the dairy, the 

dairy that we do—that is not microenterprise but a lot of the 

women in particularly have said that it would be very helpful to 

have access to more microenterprise. Is there any synergy between 

trying to make sure that more in-country—that we are working on 

HIV/AIDS if there is an opportunity to kind of seize this as an opportunity to get some microenterprising moving forward and, if so, 

can you give me some examples of what I should be taking a look 

at? 

Ms. SCHAFER. What USAID has done to make use of the microenterprise program to help people afflicted with HIV/AIDS falls 

into several categories. The first is research so that we better understand what the needs are of the HIV/AIDS affected clients. We 

are also trying to innovate new approaches to reach the affected 

populations. An example of that would be in Zimbabwe, where it 

seems very simple but it is actually very effective. We are supporting honey production and marketing of what is really a low 

labor but high return activity for the target group so that the effort 

needed to actually earn income from this particular agricultural activity is commensurate with their ability to do the work. 

Another example is in Ethiopia, where urban household gardens 

will yield not only better nutrition for patients but also some cash 

that will help them out. So these are a couple of examples of where 

we are trying to help. 

We also have a policy of including HIV/AIDS clients in main, 

straight microenterprise programs such as the Opportunity International Bank that is doing this particular work with us. A community focus is needed. HIV/AIDS impacts entire communities. So 

members of the community——

24

Ms. MCCOLLUM. If I may. Ms. Schafer, I have been in the communities. I understand. You are doing research? You are taking the 

microenterprise dollars that are allocated and doing research with 

them? Did I hear you correctly? 

Ms. SCHAFER. Our partners are. Part of the work that they are 

doing with us is to make sure that we understand what the needs 

of the HIV/AIDS affected clients are and I call this research, but 

we are basically trying to identify who those clients are and what 

they need. 

Ms. MCCOLLUM. Could I get a breakdown in Africa of dollars 

going directly toward individual families versus how much in 

microenterprise is going toward identifying—I mean, I think the 

identification after this many years being in Africa working on this 

issue should be kind of self-evident. If you could get that to me. 

And a little more on your new approach. I think what you are 

doing in Ethiopia sounds very exciting, but I would like more examples of how those dollars are being spent out of the total dollar 

amount. 

Thank you. 

[The information referred to follows:]

WRITTEN RESPONSE RECEIVED FROM THE HONORABLE JACQUELINE E. SCHAFER TO

QUESTION ASKED DURING THE HEARING BY THE HONORABLE BETTY MCCOLLUM

MICROFINANCE AND HIV/AIDS

Funding for microenterprise programs specifically designed to assist HIV-affected 

households and communities was approximately $5 million in each of FY 2004 and 

FY 2005. This amount captures programs that focus on innovations to address the 

impact of HIV on microfinance institutions and their clients, and to curb HIV transmission. It does not capture the resources going to programs such as FINCA Uganda’s microfinance work or Opportunity International Bank of Malawi—programs 

that work in communities with high rates of HIV/AIDS and can count many HIVaffected people among their clientele. 

Early work in microfinance illuminated the hazards of directly targeting people 

with HIV/AIDS because it so often results in stigma. It also made clear that not 

just individuals but whole households and communities suffer the effects of high 

rates of HIV infection. This is why we work in a number of ways to mitigate the 

impact of HIV on households and communities, and on the financial institutions 

that serve them. The work we support includes research, which I’ll describe, and 

other methods as well. 

One method is what I’ve discussed, that is, identifying and promoting income generating activities for HIV-affected households. Low-labor, high-return activities such 

as honey production and urban gardening are particularly suitable for families in 

which adults’ productivity may be compromised by illness. 

Another method we support to meet the needs of HIV-affected communities is the 

method of combining life skills training and behavior change communications with 

microfinance services. In Tanzania, for example, the Private Enterprise Support Activities Project runs a training program, in conjunction with its rural outreach efforts, that integrates training in sustainable agricultural practices, nutrition, HIV/

AIDS prevention, and skills for living with HIV. And in South Africa, USAID has 

supported the integration of HIV/AIDS prevention activities into all microenterprise 

and market linkage programs in order to begin to mitigate the wide-ranging economic problems fostered by the disease. 

A third method we use to support HIV-affected communities is through developing 

financial products to meet client needs. In Rwanda, for example, the World Council 

of Credit Unions conducted research on the amount of money households spend on 

health care in order to determine what kinds of savings and insurance products and 

services are appropriate for those communities. They are testing a credit product to 

help families smooth out payments for health care premiums, which is intended to 

ease the burden on families but can pose risks for the microfinance institutions, 

since premium payment is not a productive activity—although it can help enable an 

infected household member to get the health care they need to continue working. 

25

We also support research in other countries on demand for microinsurance in order 

to assess whether such products, which are riskier in Africa than in many places, 

can benefit communities without compromising the stability of the microfinance institutions that offer them. This research also supports development of microinsurance products that could cover opportunistic infections, which most microinsurance 

products developed to date do not cover; and it has contributed to established guidelines for microinsurance products that can aid MFIs that are assessing whether and 

what types of microinsurance they may want to add to their offerings. 

Finally, in recognition of the ways that microfinance institutions can be affected 

by illness among their staff as well as among clients, who may default due to medical care costs or their inability to work, we support a training called Defining Options, which helps MFIs assess and plan for the impact of HIV/AIDS on their institutions. This training is designed for managers of microfinance institutions and focuses on working with HIV/AIDS-affected clients, forming strategic alliances with 

local HIV/AIDS support organizations to better serve clients, monitoring the financial impact of HIV/AIDS on an institution’s portfolio, refining products to meet the 

financial needs of a changing clientele, changing workplace policies to address HIV/

AIDS, and handling internal staff issues. In addition, we support the provision of 

technical assistance to MFIs that have undergone the Defining Options training and 

have created action plans for their institutions. Trainings for staff have been conducted in Ethiopia, Kenya, South Africa, and Mozambique. Trainings for trainers 

have been conducted in Uganda, Kenya, South Africa, Zimbabwe, Zambia, Mozambique and Ethiopia. 

So, in response to your concern about research, I would argue that the research 

as well as the product development, institution strengthening, and life skills and behavior change activities that we support all benefit HIV/AIDS-affected families and 

communities.

Mr. SMITH. Thank you. Ms. Schafer, thank you so much for your 

leadership. Thank you for being a tremendous witness and we look 

forward to working with you going forward. 

Ms. SCHAFER. Thank you very much, Chairman, Members of the 

Committee. 

Mr. SMITH. I would like to now welcome our second panel, beginning with Mr. Joe Mwangi-Kioi, who is the Director of Monitoring 

and Evaluation for the Grameen Foundation. He has over 20 years 

of experience in commercial banking and microfinance. Before joining the Grameen Foundation, he worked in finance for 15 years at 

the Commercial Bank. 

We will then here from Gary M. Woller, who is President of 

Woller & Associates, an international development consulting firm 

specializing in microfinance and public policy analysis. 

A former academic, Dr. Woller has published numerous articles 

and scholarly articles on development. He is the co-founder and 

editor of the Journal of Microfinance. 

And then finally, we will hear from Ms. Susy Cheston, who is 

Senior Vice President of Policy for Opportunity International, advocating greater access to microfinancing and AIDS programs to help 

the poor. She is also Co-Chair of the Microenterprise Coalition. Ms. 

Cheston co-authored Empowering Women Through Microfinance

and has written a number of articles on women and microfinance. 

Mr. Mwangi-Kioi. 

STATEMENT OF MR. JOE MWANGI-KIOI, DIRECTOR OF 

MONITORING AND EVALUATION, GRAMEEN FOUNDATION USA 

Mr. MWANGI-KIOI. Mr. Chairman and Committee Members, good 

afternoon. I am humbled by the honor given to me to testify on behalf of the Grameen Foundation and the Microenterprise Coalition, 

and I am grateful for both the opportunity to speak to you today 

26

and also to thank you for your past support for microfinance and 

microenterprise. 

I hope that I can add emphasis to the united voice of the microfinance industry for increased support in response to the unheard 

‘‘silent screams’’ of the poor in Africa and around the world who are 

crying out for our help. 

Mr. Chairman, I would like to summarize my statement and 

highlight the important role of microfinance in fighting poverty and 

the great need for all of us to continue concerted efforts to allocate 

increased resources and action in support of microfinance. 

In this respect, Mr. Chairman, I would like to share some of my 

personal experiences in microfinance. Eight years ago when I 

transitioned to microfinance from commercial banking, I was very 

impressed with the incredible impact of microfinance in transforming the clients’ lives. 

I remember clearly a poor kiosk operator who was a borrower in 

the SunLink project of Pride Africa in Nairobi, Kenya, my homeland. He was invited to the launch of another branch to share his 

story of how he had benefited from a loan of only $50, as new clients were getting their first loans of $50 each. 

The man was so happy to share his story and he came smiling 

broadly from ear to ear and literally bouncing on his toes as he 

came to the podium. He eagerly narrated how his loan of $50 enabled him to purchase stock for his kiosk which he turned over 

many times in that month and he was able to repay his loan within 

1 month and also increase his stocks and sales. 

He advised the new clients to utilize their loans well and emphasize that with his good record he qualified for a second loan of a 

hundred dollars. 

The next story I recall is of a tea kiosk lady who also borrowed 

$50 in the same project. Within 18 months she had expanded her 

small shop and even opened a second location through increasing 

her loan size to $2,500 and investing in and growing her business 

for her family’s future. 

These real cases demonstrate the power of microfinance to increase the income generation capacity of the poor and confirm that 

microfinance is ‘‘a hand up, not a hand out.’’

Mr. Chairman, these are only two of literally millions, and I repeat, millions of success stories of microfinance in Africa and 

worldwide. 

Unfortunately, these successes are but a drop in the ocean of 

poverty, and there is a compelling need to do more to expand access to microfinance by the poor. 

Another example of the power of microfinance is Grameen Foundation’s collaboration with the Lift Above Poverty Organization, or 

LAPO, in Nigeria. With the support of a grant of 1.3 million from 

USAID over a period of 3 years, Grameen Foundation assisted 

LAPO to build its capacity for expansion. This was done through 

institutional strengthening, covering operations, MIS, financial controls and training. 

I was the lead consultant on the LAPO assignment and must say 

I was impressed with their capacity to learn and to serve their 

communities. 

27

In 3 years they were able to double the number of branches to 

36 from 18 and increase outreach to 44,000 borrowers from 18,000. 

LAPO currently has 56 branches with plans to further expand 

and reach 220,000 poor borrowers by 2008. This kind of success, 

Mr. Chairman, would not have been possible without USAID’s support. 

In addition to the traditional microfinance business that its clients operate, LAPO is also offering a farming loan product. This is 

especially important in Nigeria where 75 percent of the people 

work in agriculture. Today LAPO is the most robust successful 

microfinance institution in Nigeria. 

As for impact of microfinance, Mr. Chairman, research such as 

Grameen Foundation’s white paper titled ‘‘Measuring Impact of 

Microfinance,’’ published in December 2005, clearly shows that 

microfinance generates strong financial benefits and impacts the 

entire family of the borrower including increasing income for expenditures for housing, health care, nutrition and education. 

Today the Grameen Foundation is working with 52 microfinance 

partners in 22 countries around the globe reaching 2.2 million borrowers and impacting 11 million people. Our strategic target is to 

reach 5 million new clients by 2008, impacting 25 million people. 

In addition to LAPO in Nigeria, the Grameen Foundation also 

works in Uganda and Rwanda. As part of our strategy in Africa, 

we plan to partner with at least 5 additional MFIs by 2007 and 

then add more by 2009 with plans to reach at least 1 million new 

clients in Africa by 2010. 

To accomplish this goal and to enable all the Microenterprise Coalition members to impact poverty, significant resources will be required. For that reason, Mr. Chairman, I would like to respectfully 

encourage the Committee to ensure that at least 50 percent of 

USAID funding is targeted for the very poor, as specified by the act 

and that not less than 50 percent of the funding shall be directed 

toward nongovernmental organizations providing services directly 

to the poor. 

In conclusion, Mr. Chairman, I would like to stress that microfinance is a very powerful poverty alleviation strategy. Recent statistics reveal that, by December 2004, 3,194 microfinance institutions reported serving more than 92 million who were poor when 

they joined their programs. Of these, 67 million were listed as poorest clients. This outreach of poorest clients is a dramatic increase 

of 776 percent, nearly 800 percent, Mr. Chairman, above 7.6 million poorest recorded to have been served in 1997. This is massive 

and very impressive progress and needs to be supported in every 

way possible. But even with these impressive numbers, we are only 

scratching the surface of global poverty. The current goal is to 

reach 175 million by 2015 and to do so will require significant resources. For this ambitious goal to be achieved, congressional leadership and support and collaboration with microfinance practitioners and networks like ours for continued focus on providing 

services to the poor and the poorest is essential. I conclude my remarks, Mr. Chairman, my verbal remarks and thank you very 

much for the opportunity to testify before you today. 

[The prepared statement of Mr. Mwangi-Kioi follows:]

28

PREPARED STATEMENT OF MR. JOE MWANGI-KIOI, DIRECTOR OF MONITORING AND

EVALUATION, GRAMEEN FOUNDATION USA 

Mr. Chairman and Members of the House Committee, good afternoon. I am truly 

humbled by the honor I have been given to appear before you on behalf of Grameen 

Foundation and the Microenterprise Coalition and I am grateful for the opportunity 

to testify today. I hope that I can add more emphasis for increased support for 

microfinance in response to the united voice of the microfinance industry and the 

unheard ‘‘silent screams’’ of the very poor that we serve in Africa and worldwide 

through microfinance. 

Mr. Chairman and Ranking member Payne, I am excited to have this opportunity 

to testify as I wish to share some real-life and wonderful experiences to illustrate 

the key contribution microfinance is making toward poverty alleviation in Africa 

where there is perhaps the greatest extent of poverty and need for action. Furthermore, I would like to highlight the work of Grameen Foundation and similar microfinance networks in poverty alleviation and to thank you and the Committee and 

also USAID for the outstanding past support you have given to microfinance and 

to underscore the importance of further collaboration to ensure full implementation 

of the Microenterprise Results and Accountability Act of 2004. 

Mr. Chairman, I would like to express to you and the Committee our deep gratitude for the leadership that you have shown not only in support of microfinance but 

also to develop initiatives to address the related human rights and the HIV/AIDS 

crises. These efforts are benefiting the poor by giving them hope of shaking off the 

yoke of poverty thereby realizing a life of dignity and freedom. I am sure I speak 

for all when I say that the microfinance industry would like to do everything possible to ensure success of the cause you are promoting. 

Eight years ago, when I transitioned to microfinance from a career in commercial 

banking, I wondered how an organization could sustainably lend to the poor who 

did not have collateral and could therefore not qualify or even be able to participate 

in the formal financial sector. But I learned quickly that not only are the poor bankable, but that lending to them employing microfinance methodologies proved them 

to be better customers than traditional commercial bank borrowers. This was evidenced by the high rates of repayments of up to 98% in the microfinance sector compared to between 60% and 70% in the commercial bank sector. And within three 

months, I was convinced that this is a sector I wanted to participate in and especially so when I saw the joy and gratitude of the clients at just being given a very 

small loan of even as little as $50 which they appreciated for opening the door of 

enterprise for them. 

The first real-life story and experience of a client that I want to share with you 

is of a borrower who was operating a small kiosk selling miscellaneous provisions 

such as bread, milk, maize meal, small bottles of Vaseline petroleum jelly, etc. Being 

a second loan level client of the SunLink project of PRIDE AFRICA in Nairobi, 

Kenya, he was invited to the launch of one of our other branches where new clients 

were getting their first loans of $50 each. He was asked to share his experience with 

the loan of only $50 and how he utilized it in his small business. 

I must say I had never seen someone look so happy at being given the opportunity 

to tell his story. He came with a broad smile from ear to ear and was so excited 

to share his story that he was literally bouncing on his toes as he came up to the 

podium. He narrated how he had utilized the amount of the loan to buy a carton 

of Vaseline. He explained that within two days his carton was all sold out and with 

the proceeds he invested in another carton. And he explained how turning that loan 

amount over and over within the month he was able to earn more than enough to 

pay for the loan and also increase his stocks. He related how he was so grateful 

to PRIDE AFRICA for having given him the opportunity of a small loan when no 

bank would. He even advised the new loan recipients to utilize their small loans 

well to benefit like he did. And he added emphasis to the fact that when his loan 

was repaid because he was prompt in his repayments without missing his installments he was able to qualify for the next level loan of $100. 

The next real-life story also is from Kenya where, as a part of the same project, 

a tea kiosk lady also borrowed $50 to support growth of her small business. She 

narrated how with that loan amount she was able to purchase supplies so that she 

could serve a larger number of patrons during the tea and lunch breaks. She too 

was able to utilize that first loan to achieve higher earnings and then when she paid 

off that loan she immediately qualified for the next loan level of $100. She utilized 

her loans well and expanded her kiosk to its maximum capacity; but she was not 

satisfied to stop there. She found another place where she could open another kiosk 

and did so. By the time I left PRIDE AFRICA one and a half years later, she was 

applying for a loan amount of $2,500. This case clearly demonstrates the power of 

29

microfinance to improve a poor borrower’s earnings by moving her from capacity for 

only $50 to an amount fifty times more within a period of 18 months. I would say 

that is quite impressive. 

These are just two of the literally millions, yes millions, of success stories of 

microfinance clients across Africa and around the world getting the opportunity of 

improving their earnings and lifting themselves and their families and indeed their 

communities out of poverty permanently. 

Unfortunately these success stories are but a drop in the ocean of the poverty that 

has devastated many in the African continent. Recent statistics published by the 

World Bank reveal that Africa receives only 6% of the total dollar investments of 

donor funds although the recipients comprise 21%. There is therefore a compelling 

need to do more in the continent through microfinance which has been proven to 

be an effective solution to alleviating poverty, generating powerful returns beyond 

income and employment including increased expenditures for housing, health, nutrition, and education that supports transformative development at the household 

level. Our Board of Directors, which includes one prominent African and many others who are deeply concerned about Africa, has indicated strong interest in us applying the microfinance strategy more broadly on this continent as part of our response to the poverty crisis there. 

To this end we at Grameen Foundation have formed a task force as a first step 

towards increasing and enhancing our work in sub-Saharan Africa. We already have 

a successful partner in Nigeria, the Lift Above Poverty Organization or ‘‘LAPO’’, an 

indigenous NGO. Our work with LAPO was funded by USAID under the IGP grant 

program which spanned three years from 2003 to 2005. Living in Kenya (my home 

country) at the time, I served as the lead consultant for Grameen Foundation on 

this project and was able to see a major transformation in the performance of LAPO 

over the course of three years. (Towards the end of this project I joined Grameen 

Foundation as director of their global monitoring and evaluation unit.) 

Thanks to USAID’s support, GF was able to achieve specific targets related to institutional strengthening, automation, outreach, operational and financial self sustainability, portfolio at risk, etc. We were able to accomplish our major targets 

under the program by enabling LAPO to:

i. increase its number of borrowers to 44,000 from 18,000 in the period of 

three years 

ii. increase branches from 18 to 36

iii. develop the systems and procedures and manuals for internal controls and 

reporting at the operational level in the branches and also in the Head Office 

iv. Structure an effective Internal Audit Department 

v. Automate the Head Office and branch operations (a major challenge since 

many of the branches are located in areas without electricity) 

vi. Train the staff on the new systems for effective and controlled operations 

vii. Maintain portfolio at risk (PAR)—a way of measuring the repayment performance of clients—at 2% or less 

viii. Achieve financial self sustainability (profitability)

On the ground, LAPO is providing a broad range of credit and savings and other 

products and services directly to the poor, supporting their efforts to grow their own 

businesses. In this respect, microfinance is really a hand up, not a hand out. LAPO 

clients operate dress-making shops, small restaurants, and family farms that benefit 

from loans to purchase fertilizer, seeds, and other essential inputs. This is especially 

important in Nigeria where approximately 75% of the population is engaged in agriculture. 

After the USAID grant, LAPO is now one of the most robust and successful microfinance NGOs in Nigeria (Africa’s most populous nation), with growth projected to 

increase from the current 55,000 clients to 220,000 clients by the end of 2008. Outreach at this level would be impacting more than one million people when family 

members of the clients are considered. This kind of success would not have been 

possible without the extensive institutional strengthening work and support that we 

executed with LAPO. As a practitioner, given this impact, I would say that programs that support service provision directly to the poorest are an appropriate and 

effective use of public funds granted by USAID. I should note that USAID staff in 

the Office of Microenterprise Development have been very supportive of us making 

mid-course corrections during the life of this grant and our partnership with LAPO, 

and their staff are to be commended for the collegial and flexible way they 

interacted with Grameen Foundation and LAPO. Within the context of being held 

accountable for reaching the poorest and achieving results, US AID staff should be 

given latitude to allow its professionals to be responsive to the fast-changing needs 

of the microfinance sector and networks like ours. Reporting requirements to ConVerDate Mar 21 2002 17:02 Sep 19, 2006 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6621 F:\WORK\AGI\072706\28970.000 HINTREL1 PsN: SHIRL
30

gress from the Office of Microenterprise Development can perhaps be consolidated 

and simplified to allow the professional staff to focus more on creating an increasing 

number of success stories like the Grameen Foundation/LAPO experience. 

In fact our work in Nigeria has extended far beyond the initial project, as we have 

played an important role in supporting LAPO to advocate on behalf of supportive 

microfinance regulations to create an enabling and conducive environment for 

microfinance institutions to be able to continue serving larger numbers of the poor 

in their communities. This process will enable MFIs in Nigeria to effectively render 

services that empower the vulnerable, mainly women and the unskilled, to lift themselves out of the grip of poverty. A more supportive regulatory environment will also 

lead to partnerships between commercial banks and MFIs like LAPO. We are very 

close to finalizing a historic transaction that will be a model for commercial bankMFI partnerships in Nigeria and beyond in the years ahead. Our ultimate goal is 

to bring microfinance in Nigeria, and indeed elsewhere in Africa and worldwide to 

scale for greater impact in poverty alleviation. 

Further to our work in Nigeria, and as part of our planned enhanced involvement 

in sub-Sahara Africa, we have already identified several countries where we are formulating plans for entry into the respective microfinance sectors. Our plan provides 

for a clear strategy to play a key role in the development and management of the 

microfinance sector in each country in order to have a positive impact on expansion 

of deeper and broader outreach as well as on the incidence of poverty. Our research 

is already underway and we project that, we shall have added at least 5 more partners in East, Central and West Africa before the end of 2007 with further additions 

projected by 2009. This will enable us to facilitate increase of outreach in this needy 

continent by at least 1,000,000 new clients by 2010. To be able to do this successfully we will need substantial funds to support our efforts. However, these funds are 

not easily accessible. Given the direct impact on poverty of organizations such as 

ours and other members of the Microenterprise Coalition, I would renew our call 

to ensure that US support for microfinance be targeted to organizations that specialize in direct services to the poor. Our networks are directly rendering services 

to the poor and through such institutions we are able to positively impact the very 

poor. Mr. Chairman, we therefore appeal to you and your committee to ensure that 

at least 50% of USAID funding for microenterprise and microfinance programs is 

reaching the very poor as specified in the Microenterprise Results and Accountability Act of 2004. We also appeal to you to ensure that the FY2007 appropriations 

process clarifies the Act’s requirement to ‘‘emphasize the use of implementing partner organizations that meet the requirements stated in the Act’’—by which we understood that a majority of resources should go to the not-for-profit organizations 

and regulated financial institutions that directly provide services to the poor. We 

are grateful, Mr. Chairman, for your support for appropriations language that clarifies that ‘‘not less than 50 percent of the amounts made available for microenterprise and microfinance activities shall be for grants to private nongovernmental organizations, networks, and practitioner institutions that provide loans and financial 

services to the poor and very poor microentrepreneurs and households.’’

Mr. Chairman, at Grameen Foundation our work in microfinance extends around 

the globe where we have 52 partners spread from the MENA region (Middle East 

and North Africa) to East and South Asia and China and also including Latin America and the Caribbean. Through our work with our partners we have increased outreach by over two million new clients in the last two years and we are on track 

to achieve our number one strategic goal of reaching five million new clients by 

2008. Our number two strategic goal is to ensure that 50% of the clients cross the 

poverty line within five years of joining the program. In this effort we have made 

significant progress with our Progress out of Poverty Index (PPI) which is among 

the poverty measurement tools being reviewed as credible indicators of measurement of progress out of poverty. The PPI is a generalized version of the a ten-point 

scale developed by the Grameen Bank that tracks clients progress towards living 

a poverty free life. When all ten indicators are satisfied, a family is determined to 

be ‘‘poverty free’’ with a reasonable degree of certainty (probably some are poverty 

free when only 8 or 9 indicators are satisfied). A survey conducted in recent years 

shows an increasing percentage of Grameen Bank’s six million clients are poverty 

free. The latest survey showed that nearly 60% of them have crossed this threshold. 

This is due to the innovative work of the Grameen Bank and associated companies 

created by Professor Muhammad Yunus, and is an inspiration and model for the entire microfinance movement. 

The PPI tool is under implementation by several of our partners and we expect 

that in the near future many in the microfinance industry will use this tool to measure the impact of their programs in poverty alleviation. Continued Congressional 

support for transparency and accountability in terms of depth of poverty outreach 

31

(i.e., focus on the poorest) will be essential to establishing industry standards and 

performance benchmarks for impact that are now lacking but which the PPI and 

a few other tools have the potential to address. 

Our third strategic goal is to develop three innovations that impact microfinance 

service delivery and management and facilitate the relevant programs to grow in 

leaps and bounds. In this strategic plan too Mr. Chairman we are well on the way 

to achieving our goal. I have already mentioned the PPI which is one of the innovations. The second innovation is the Mifos Project (Mifos) currently under beta test 

with some of our partners and is slated for official launch at the Microcredit Summit scheduled to be held in November this year in Halifax, Canada. We are very 

excited about Mifos as we are confident it will change the management of microfinance programs to facilitate more efficient and effective control of clients’ accounts 

and enable management of large volumes of clients. The third innovation is our 

growth guarantee product through which we are able to tap the capital resources 

in the local environment for required funding for our partners. We have so far closed 

five guarantees amounting to $1.6million which through our leveraging agreements 

will raise a total of $4.2million for on-lending by our partners to their poor clients. 

In addition to these closed deals we have in the pipeline for 2006 some fifteen guarantees worth $15million which when leveraged are projected to mobilize between 

$45million and $60million for poverty focused MFIs. These are resources which will 

enable our partners to reach larger numbers of the poor and contribute to the cause 

of poverty alleviation. 

Mr. Chairman I would like to conclude my statement by again emphasizing the 

importance of the work of microfinance practitioners and networks like ours to the 

cause of poverty alleviation. To illustrate this importance I would like to cite statistics released by the Microcredit Summit Campaign. These indicate that by December 2004, microcredit institutions numbering 3164 reported serving over 92million 

clients who were among the poorest when they started with the program. Of these 

66.6million were listed as poorest clients. This number records an increase of a massive 776% in growth from only 7.6million poorest clients served in 1997. The role 

of the U.S. Congress in supporting microfinance and especially microfinance for the 

poorest has played an important role in this dramatic progress. But we are still only 

scratching the surface of the opportunity to scale up microfinance. A new goal has 

been set by the Microcredit Summit Campaign to increase outreach to 175 million 

of the world’s poorest families by 2015 and ensure that 100 million of those families 

are out of poverty by then. For these goals to be achieved, Congressional support—

in terms of funding and a continued focus on ensuring that the poorest families are 

the primary beneficiaries of US AID-supported microfinance and microenterprise 

projects—will be essential. 

Mr. Chairman, I have no doubt that this achievement during a period of only 

seven years gives us results and growth we in the microfinance industry would all 

like to support in every way possible for the cause of eliminating poverty in the 

whole world by the optimistically projected 2025. It would surely be a dream come 

true to see poverty eliminated in my lifetime. As we aim for this very ambitious and 

noble goal, Mr. Chairman, I would like to propose the following suggestions for review by your committee and incorporation into your policies and procedures to promote and ensure concerted effort and collaborative process for enhanced support to 

microfinance:

i. The State Department needs to include economic growth and microfinance 

in each of its country plans 

ii. The State through USAID should set global goals for microfinance with the 

aim of regaining global leadership in microfinance 

iii. USAID should set up a process for practitioner input to ensure a collaborative effort to maximize the potential of microfinance 

iv. USAID should dedicate additional and increasing resources to microfinance 

v. Integrate microfinance, natural resource management, health, AIDS, and 

MCA, into foreign policy goals

Mr. Chairman Smith and Ranking Member Payne, I want to thank you very sincerely for the opportunity to testify here today. Thank You!

Mr. SMITH. Thank you so very much. 

And without objection, the full statements of our witnesses will 

be made a part of the record. 

Dr. Woller? 

32

STATEMENT OF GARY M. WOLLER, PH.D., PRESIDENT, WOLLER 

& ASSOCIATES 

Mr. WOLLER. Mr. Chairman and Members of the Subcommittee, 

my name is Gary Woller. I am president of Woller & Associates, 

an international development consulting firm in Salt Lake City, 

Utah. Thank you for the opportunity to appear before you today to 

discuss implementation of The Microenterprise Results and Accountability Act of 2004. Before joining the full-time consulting 

ranks, I was a professor at the Marriott School of Management at 

Brigham Young University where I researched and wrote extensively on microenterprise development and where I co-founded and 

edited Journal of Microfinance. In addition to my academic research, I have fulfilled numerous 

consulting assignments in microenterprise development. As part of 

this work, I have worked closely with practitioners and practitioner 

organizations, including several years now as a working group 

facilitator for the Small Enterprise Education and Promotion Network, which is an association of North American and international 

microenterprise practitioners. I mention this to underscore my intimate familiarity with both the academic and practitioner aspects of 

microenterprise development. This background gives me a unique 

perspective on the microenterprise world I believe which I hope will 

prove of benefit to the Subcommittee today. 

Now, rather than attempt to comment on all aspects of the 

microenterprise results and accountability act, I will limit my remarks to those aspects about which I have personal knowledge or 

experience. Some of my remarks will address specific provisions in 

the legislation. Others will address more general or background 

issues that are either directly or tangentially related through provisions in the legislation. 

I originally became involved in microenterprise development in 

1997 when I attended the first microcredit summit in Washington, 

DC. My interest in the field was motivated by two primary factors. 

First, I found it a fascinating topic, ripe for academic research. Second, I was drawn by its stated commitment to the ideal of poverty 

alleviation and to serving poor and marginalized populations. The 

message of transforming the lives of the poor and marginalized via 

enterprise development and access to financial services is a compelling one, one I suspect that attracts many Members of the Subcommittee. My interest in academic research has since ebbed and 

flowed over time depending on my work duties, particularly now 

that I am consulting full time. But my commitment to the ideal of 

the transformative power of microenterprise development remains. 

But while it remains ongoing, it has also undergone significant 

modification over the years, resulting in what is today a more 

nuanced and I believe more realistic vision of what microenterprise 

development is, what it can accomplish, and how it can get us 

there. 

In this light, I take particular interest in the poverty outreach 

figures reported by the Microenterprise Development Office of 

USAID for fiscal year 2004. I am aware that the 2005 report was 

recently released, but I did not have possession of it at the time 

that I wrote this statement. According to these figures, 28 percent 

of all funds allocated to microenterprise development in fiscal year 

33

2004 benefited the very poor, including 49 percent of funds allocated for lending and 15 percent of funds allocated for enterprise 

development. On first blush, these results appear disappointing, 

particularly the figures related to funding for enterprise development, falling below the 50 percent target established in previous 

legislation. 

I do not recommend however that the Subcommittee read too 

much into these results for several reasons. To begin with, loan 

size is an unreliable proxy for poverty. The current loan standard, 

which is, loans less than $300 in Africa, Asia and the Middle East; 

less than $400 in Latin America and the Caribbean; and less than 

$1,000 in Europe/Eurasia, which are presumably indicative of very 

poor borrowers, is notoriously imprecise. I am particularly skeptical 

about the $1,000 poverty loan cutoff in Europe/Eurasia which appears far too low to me given the price structure in several of the 

countries in that region where USAID works. Loan size or average 

loan size in general is an imprecise proxy for poverty status. Loan 

size is often as much if not more a function of institutional policy 

as borrowing capacity. As experience demonstrates, there are several reasons why non-poor borrowers will take out $300, $400 or 

$1,000 loans. In this sense, the current poverty loan standard is no 

better or perhaps worse than a rough ballpark estimate. Whether 

this estimate is too high or too low, no one really knows. The legislative requirement that USAID implement and validate poverty assessment tools by October 2006 is a direct and admirable attempt 

to circumvent the limitations of the loan size poverty proxy. But 

this approach too has its share of serious limitations which I will 

discuss later. 

Outreach to women or to rural areas are probably superior proxies of poverty outreach than loan size, as we know indisputably 

that poverty is disproportionately concentrated among women and 

rural areas. But even these are imprecise with an unknown level 

of imprecision. Short of actually measuring poverty, a preferable 

approach would be some combination of poverty proxies and perhaps combine them into a simple poverty scorecard in a way that 

compensates for the individual weaknesses of each proxy. One 

might also argue that savings constitute a better indicator of poverty outreach than loans. There are millions of poor people who do 

not want enterprise loans but who want access to secure formal 

savings. In contrast, there are comparatively few who want enterprise loans but not savings. In almost every microfinance institution which offers both loans and voluntary savings for non-borrowers, the number of savers far exceeds the number of borrowers, 

and I suspect a nontrivial percentage of those savers come from the 

ranks of the poor. The industry’s emphasis on loans over savings 

does not reflect any higher truth per se but is the result of the idiosyncratic way in which the industry has developed. It is a development that I consider unfortunate. Not surprisingly, Congress has 

adopted the industry’s bias into its own thinking and policy approach, again, I think unfortunately. Now I am not suggesting that 

the focus ought to shift disproportionately to savings over loans, 

but I am suggesting that an approach that grants more emphasis 

to savings and which acknowledges its critically important role as 

34

a livelihood and coping tool among low-income populations in developing countries. 

Now the figures for USAID support for enterprise development 

benefiting the very poor are even more imprecise and substantially 

so than those relying on the loan poverty proxy. The truth is that 

the vast majority of enterprise support programs have no clue 

whatsoever as to the poverty status of their clients. No one knows 

what criteria they are using to determine the poverty status, including sometimes the programs themselves and the criteria used 

vary widely from program to program, often evolving down to a 

wild guess. If the loan size proxy represents a rough ballpark 

guess, the estimates of poverty outreach among USAID-supported 

enterprise support programs represent a complete stab in the dark. 

I would not recommend that anybody makes policy on the basis of 

these figures. 

That said, I also believe that requiring poverty outreach figures 

for USAID-supported microenterprise programs is probably inappropriate, not that they measure poverty but requiring this as part 

of what is necessary to get funding. The basis for this statement 

hinges on what we believe the purpose of enterprise support to be. 

To me, the purpose of enterprise support is private sector development or, in other words, facilitating the emergence of a dynamic 

and growing private sector that provides, among other things, jobs, 

opportunities and a decent standard of living for low-income persons. By and large, enterprises operated by the very poor lack the 

dynamism and growth prospects that would create the types of 

jobs, opportunities and standards of living implied here. In my experience, the vast majority of enterprises supported by the typical 

microfinance NGO targeting the very poor or poor operate in the 

petty trading or service sector and have on average zero to one paid 

employees. These characteristics moreover will remain fairly consistent for a particular borrower during the lifetime of the enterprise. 

While I by no means intend to belittle the importance of financial 

services or enterprise development support to this group of enterprises—both are extremely important—they are important for reasons other than employment creation or creating the dynamic and 

growing private sector. 

The enterprises that possess the dynamism and growth potential 

to create jobs and economic activity and drive private sector development will tend to be found more among the larger of the microenterprises or among the smaller medium enterprises operated by 

the not-so-poor and often even by the non-poor. To the extent we 

wish to monitor the outreach or impact of enterprise development 

support on poverty, I believe it is more appropriate and important 

to view it from the perspective of paid employment creation or in 

creation of economic opportunities among the very poor than direct 

outreach to the very poor. Focussing on the latter purpose instead 

of the former purpose creates a risk of producing the wrong set of 

policies, policy incentives and policy outcomes. Better yet, enterprise development support will target a wide variety of interventions at different levels of the value chain, including financial service providers, input providers, buyers, trade associations and so 

35

forth, many of which serve multiple markets, including the notvery-poor or non-poor or are themselves large operations. 

I now turn to the legislative requirement that USAID implement 

and validate poverty assessment tools by October 2006. I initially 

supported this legislation. At the time, many microfinance institutions were claiming to reach the very poor but were in fact not 

reaching the very poor or more commonly had no idea whether 

they were reaching the very poor. Out of the thousands of the MFIs 

operating then, no more than a small handful of MFIs even attempted to assess the poverty status of their clients, which by the 

way continues today. And those who did, a significant portion were 

collecting and reporting information lacking in both accuracy and 

credibility. Consequently, I felt at the time that the legislation 

would serve to force the industry to be transparent about its poverty outreach, something which the industry apparently would not 

do on its own. So I enthusiastically supported it. 

In hindsight and with the benefit of experience, I now believe 

this legislation to have been misguided, well intentioned, but misguided nonetheless. The reasons for this are both conceptual and 

practical. Conceptually, I think that the legislation’s focus on the 

very poor is inappropriate. The legislation’s focus on the very poor 

is no doubt a direct result of the industries insistence that microfinance be targeted to the very poor or to take the more extreme 

rhetoric, the poorest of the poor. I understand fully this insistence, 

and I share the commitment to pushing the frontier of finance progressively down the socioeconomic ladder. The vision of reaching 

the poorest of the world with formal financial services is a vision 

we are striving for, but it is also an unduly limiting vision if that 

is its primary focus. 

The fact is that there remains hundreds of millions of people 

throughout the world who still lack access to formal financial services, and a large percentage of these are people are neither very 

poor nor even poor according to absolute or local poverty standards. 

Yet they are no less deserving and no less needful than the very 

poor. In many cases, moreover, they are also the very people who 

own and operate the dynamic growth-oriented businesses capable 

of driving private sector development. 

Poverty in developing countries is a dynamic, not a static concept. People are continually moving in and out of poverty, depending on a whole host of factors, some of which they control, but 

many of which they do not and among which access to financial 

services is rarely the most important. These include people clustering around the poverty line and people further away from the 

poverty line. Many people who are not officially poor today are but 

one shock from falling below the poverty line or perhaps even further. Vulnerability is one of the distinguishing characteristics of 

the masses of the developing world, both poor and non-poor. A poverty assessment tool provides no more than a snapshot in time that 

does not capture the dynamism of poverty or the vulnerability of 

the masses. Unfortunately there are no practical tools to measure 

vulnerability. And if there were, I am not sure they wouldn’t be 

preferable to a poverty assessment tool. 

Mr. SMITH. Dr. Woller, I hate to say this, but we have 3 minutes 

to report to the Floor to vote. If you wouldn’t mind suspending, we 

36

will reconvene after the first vote in deference to your time, and 

then we have three votes that follow, but there is some intervening 

space. So we will stand in recess for a very, very short period of 

time. Sorry about that. 

[Recess.] 

Mr. SMITH. We will resume this hearing. And again, I apologize 

for the interruption. 

Dr. Woller. 

Mr. WOLLER. Thank you. I am going to, in the interest of time, 

cut my remarks short and try to get to the highlights so that we 

can leave time for Susy and for questions at the end. 

Let me start by saying, so that my remarks are not misconstrued, I have absolutely no objection to targeting the very poor 

people or poor people with financial services or any other form of 

the development assistance. My remarks refer specifically to the 

legislative mandate requiring this and to the particular conceptual 

and practical issues relating to these particular sets of tools that 

are being developed. Let me just sort of jump—my major concern 

with this particular approach is I think, in the end, it is a non-scalable approach, meaning that at the end of the day, the institutions 

which either have a very firm poverty lending commitment or those 

institutions who are seeking money from USAID will include I 

think a very small subset of all the microfinance institutions and 

microenterprise support institutions out there. 

I think there are better ways to do it, which takes me to where 

I have the section on creating social transparency as preferred to 

measuring poverty outreach. And I will just pick up there. Rather 

than attempt to push MFIs to serve a particular clientele, I think 

that the underlying goal ought to be transparency, transparency by 

the MFI social performance. Let the MFI choose which market segment it wants to serve but then hold it accountable for demonstrating that it is reaching this market and that it is doing a 

good job in the process. Armed with this information, donors and 

investors can then make informed decisions about which MFIs to 

support and, by extension, which clientele to support. Transparency 

will lead to accountability ultimately and to a more efficient and 

to greater information so that we can have a more efficient and effective allocation not only of resources and to the industry but also 

more effective policy making. 

And if social transparency is the goal, which I think it should be, 

I think poverty assessment is an ineffective way to reach the goal. 

True social transparency requires scale; that is widespread disclosure of credible information about social performance. Regardless of 

which poverty assessment tools are used, no more—oh, excuse 

me—regardless of which poverty assessment tools are developed 

under the current process, no more than a relatively small handful 

of MFIs will bother to use the tools, including those MFIs seeking 

USAID funding support and those MFIs with a powerfully motivating commitment to poverty outreach. This does not include the 

large numbers of commercially oriented MFIs serving diverse market segments and the large universe of MFIs residing outside the 

influence of USAID. There are better approaches to creating social 

transparency and ways that have potential to achieve scale such 

that they hold potential for transforming the entire industry, inVerDate Mar 21 2002 17:02 Sep 19, 2006 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6601 F:\WORK\AGI\072706\28970.000 HINTREL1 PsN: SHIRL
37

cluding those MFIs not otherwise interested in adopting USAIDcertified poverty tools. USAID is currently playing a role in helping 

develop these approaches and its involvement in this effort I think 

should be encouraged by the Subcommittee. 

Now, I am going to skip to the brief comment on the allocation 

of funding to NGOs versus PVOs, NGOs and PVOs versus for-profit 

consulting firms. Allow me to comment briefly also in the provisions in the Microenterprise Results and Accountability Act of 2004 

related to the relative distribution of USAID funding to NGOs and 

PVOs and to for-profit consulting firms. I understand the basis for 

this provision, and I agree in principle with certain aspects of its 

underlying premise. I would caution, however, against taking the 

arguments too far. The technical and other capacities of NGOs and 

PVOs differ broadly from those of consulting firms. At the moment, 

NGOs and PVOs may enjoy some cost advantages in certain situations, but as they are asked to take on more and more technical 

tasks formerly performed by consulting firms, their cost structures 

are likely to change as they acquire the resources and expertise 

necessary to perform these tasks. They draw, after all, largely from 

the same resource pool as the consulting firms, particularly in 

terms of upper-tier skills and experience. Consulting firms are good 

at what they do, and what they do at times differs from NGOs and 

PVOs. The converse is also true. Rather than attempt to force the 

two to become more like each other, I believe it is preferable to 

identify the relative comparative advantages and to direct USAID 

funding in a way that takes optimal advantage of them, and I 

would add as well I think one of the comparative advantages to the 

NGOs and PVOs is the on-the-ground experience to do experimentation and to innovate. I think that is particularly the area where 

they shine, and to the extent that we try to redirect funding to the 

NGOs and PVOs, I would recommend that we try to do it in a way 

that really encourages experimentation, innovation, and I will come 

to that again real briefly. More broadly, I would advise the Subcommittee against any temptation to force the development of the 

industry down one path or another or to use its legislative and 

budgetary powers to favor one set of models over another. The industry is dynamic, and it is evolving, and it is evolving differently 

in different countries. The NGO model dominates in countries as 

diverse as Bangladesh and Nicaragua. All other countries, such as 

Indonesia, Bolivia or Ecuador, have largely gone the commercial 

route. India has its own unique approach in the self-help group 

model grafted onto its dense network of rural finance institutions. 

We find that some poverty-focused NGOs reach very few, very poor 

or poor persons while we find that some highly commercialized finance institutions reach a large number of poor persons. 

While there may be some general trends, there also appear to be 

sufficient exceptions that we should be wary about relying too 

heavily on generalizations. I believe the Subcommittee is sincere in 

its support of microenterprise development. The Microenterprise 

Results and Accountability Act of 2004 is evidence of this. The act 

itself does some good things to advance the agenda of microenterprise development, but it is nonetheless only chipping away at the 

margin. If I were asked to advise the Subcommittee on what it and 

by extension USAID could do to exert an even greater impact on 

38

the industry, here is what I would recommend: Encourage and support continued innovation and experimentation. The industry has 

successfully pushed the production possibility frontiers, but they 

can still be pushed down further. But to push the frontiers to their 

limits will require innovation and experimentation in addition to 

the will and resources to support it. 

Encourage and support innovation and experimentation and 

product development. This includes development of loan and other 

financial products but most importantly of savings products. The 

industry’s emphasis on credit over savings is an unfortunate remnant of its development patterns even though the demand for savings among low-income populations far exceeds the demand for 

credit. 

Much more can still be done to extend outreach to poor 

marginalized populations, particularly in rural areas. Rural enterprise development and rural finance are perhaps the keys to breaking through existing barriers to achieving truly deep outreach. If 

reaching the very poor remains a policy objective, this can best be 

done by encouraging innovation and experimentation in expanding 

outreach to rural areas. 

Encourage and support commercialization where it makes sense 

not as a blind policy that is for commercialization, but in cases 

where it makes good sense. The long-run policy objectives in microenterprise development are most likely to be achieved at significant 

scales via a large network of commercially oriented although not 

necessarily for-profit institutions. This should not mean support 

should focus solely on commercialized institutions. There will be an 

ongoing important role for NGO and PVO sectors, particularly in 

terms of innovation, experimentation and serving hard-to-reach 

populations. 

Encourage and support commercialization in part via 

transitioning institutions to private market funding. We all know 

that the capital markets offer funding potential far in excess of 

what the donor community can offer. And as USAID helps institutions to make the transition to private market funding, its own 

funding should be directed more and more toward those institutions which are innovating and experimenting, and particularly in 

rural areas and to other hard-to-reach populations. 

Encourage and support initiatives aimed at creating wide-scale 

social transparency and accountability. Were you to achieve this, I 

honestly think the impact would be far in excess above the current 

poverty tools initiative, particularly in terms of scale and the impact a scale would have, the transformative impact scale would 

have on the industry. 

Encourage and support development of enterprises with greater 

potential to create jobs and opportunities for low-income people. 

This includes in many cases larger businesses run by people who 

may not be very poor but who may be poor or even above the poverty line. These are the businesses that are most likely to drive 

economic growth. 

Assist supported institutions to develop functioning and effective 

monitoring systems. The current state of monitoring systems 

among development institutions is weak to moderate with, I think, 

important impacts on the effectiveness of policy. 

39

And finally, fund selective high-quality and credible impact assessments. It is unnecessary to perform impact assessments of 

every or even several USAID-supported programs, but there is a 

real advantage to be gained by performing a relatively small number of selected impact assessments of programs that offer high potential for yielding important learnings for future policymaking 

and funding allocation decisions. This includes in particular programs taking innovative approaches to achieving important policy 

objectives. 

Thank you for the opportunity to address the Subcommittee 

today on these important issues. 

[The prepared statement of Mr. Woller follows:]

PREPARED STATEMENT OF GARY M. WOLLER, PH.D., PRESIDENT, WOLLER & 

ASSOCIATES

Mr. Chairman and Members of the Subcommittee, my name is Gary Woller. I am 

the President of Woller & Associates, an international development consulting firm 

in Salt Lake City, Utah. Thank you for the opportunity to appear before you today 

to discuss implementation of the Microenterprise Results and Accountability Act of 

2004. Before joining the full-time consulting ranks, I was a professor at the Marriott 

School of Management at Brigham Young University, where I researched and wrote 

extensively on microenterprise development and where I co-founded and edited the 

Journal of Microfinance. In addition to my academic research, I have fulfilled numerous consulting assignments in microenterprise development. As part of this 

work, I have worked closely with practitioners and practitioner organizations, including serving several years now as a working group facilitator for the Small Enterprise and Education Promotion (SEEP) Network, which is a professional association of North American and international microenterprise practitioners. I mention 

this to underscore my intimate familiarity with both the academic and practitioner 

aspects of microenterprise development. This background gives me a unique perspective on the microenterprise world, which I hope will prove of benefit to the Subcommittee today. 

Rather than attempt to comment on all aspects of the Microenterprise Results and 

Accountability Act, I will limit my remarks to those aspects about which I have personal knowledge or experience. Some of my remarks will address specific provisions 

in the legislation; others will address more general, or background, issues that are 

either directly or tangentially related to provisions in the legislation. 

Outreach to the Very Poor by USAID-Supported Microenterprise Institutions and the 

Validity of Reported Figures 

I originally became involved in microenterprise development in 1997, when I attended the first Microcredit Summit in Washington, DC. My interest in the field 

was motivated by two primary factors. First, I found it a fascinating topic ripe for 

academic research. Second, I was drawn by its stated commitment to the ideal of 

poverty alleviation and to serving poor and marginalized populations. The message 

of transforming the lives of the poor and marginalized via enterprise development 

and access to financial services is a compelling one; one I suspect that attracts many 

members of this Subcommittee. My interest in academic research has ebbed and 

flowed over time depending on my work duties, particularly now that I am consulting full time, but my commitment to the ideal of the transformative power of 

microenterprise development remains on-going. But while on-going, it has also undergone significant modification over the years resulting in what is today a more 

nuanced, and I believe more realistic, vision of what microenterprise development 

is, what it can accomplish, and how it can get us there. 

In this light, I take particular interest in the poverty outreach figures reported 

by the Microenterprise Development Office of USAID for fiscal year 2004. (I do not 

have the figures for fiscal year 2005, although I assume they are similar.) According 

to these figures, 28 percent of all funds allocated to microenterprise development in 

fiscal year 2004 benefited the very poor, including 49 percent of funds allocated for 

lending and 15 percent of funds allocated for enterprise development. On first blush, 

these results appear disappointing, particularly the figures related to funding for 

enterprise development, falling below the 50 percent target established in previous 

legislation. I do not recommend, however, that the Subcommittee reads too much 

into these results, for several reasons. 

40

To begin with, loan size is an unreliable proxy for poverty. The current poverty loan standard (loans less than $300 in Africa, Asia, and the Middle East; less than 

$400 in Latin America/Caribbean; and loans less than $1,000 in Europe/Eurasia are 

indicative of a ‘‘very poor’’ borrower) is notoriously imprecise. I am particularly skeptical about the $1,000 poverty loan cutoff in the Europe/Eurasia region, which appears far too low to me given the price structure in several of the countries in that 

region where USAID works. Loan size, or average loan size, in general is an imprecise proxy for poverty status. Loan size is often as much, if not more, a function 

of institutional policy as borrowing capacity. As experience demonstrates, there are 

several reasons why non-poor borrowers will take out $300, $400, or $1,000 dollar 

loans. In this sense, the current poverty loan standard is a no better, and perhaps 

worse, than a rough ballpark guess. Whether the guess is too high or too low, no 

one really knows. The legislative requirement that USAID implement and validate 

poverty assessment tools by October 2006 is a direct and admirable attempt to circumvent the limitations of the loan size poverty proxy, but this approach too has 

its share of serious limitations, which I will discuss later. 

Outreach to women or to rural areas are probably superior proxies of poverty outreach than loan size, as we know indisputably that poverty is disproportionately 

concentrated among women and in rural areas. But even these are imprecise, with 

an unknown level of imprecision. Short of actually measuring poverty, a preferable 

approach is to use some combination of poverty proxies and perhaps combine them 

into a simple poverty scorecard in a way that compensates for the individual weaknesses of each proxy. 

One might also argue that savings constitute a better indicator of poverty outreach than loans. There are millions of poor persons who do not want enterprise 

loans but who want access to secure formal savings. In contrast, there are comparatively few who want enterprise loans but not savings. In almost every microfinance 

institution (MFI) that offers both loans and voluntary savings for non-borrowers, the 

number of savers far exceeds the number of borrowers, and I suspect that a nontrivial percentage of those savers come from the ranks of the poor. The industry’s 

emphasis on loans over savings does not reflect any higher truth per se but is the 

result of the idiosyncratic way in which the industry has developed. It is a development that I consider unfortunate. Not surprisingly, Congress has adopted the industry’s bias into its own thinking and policy approach, again unfortunately. I am not 

suggesting that the focus ought to shift disproportionately to savings over loans, but 

I am suggesting an approach that grants more emphasis to savings and which acknowledges its critically important role as a livelihood and coping tool among lowincome populations in developing countries. 

The figures for USAID support for enterprise development benefiting the very 

poor are even more imprecise, and substantially so, than those relying on the loan 

size proxy. The truth is that the vast majority of enterprise support programs have 

no clue whatsoever as to the poverty status of their clients. No one knows what criteria they are using, including sometimes the programs themselves, and the criteria 

used vary widely from program to program, often devolving down to a wild guess. 

If the loan size proxy represents a rough ballpark guess, the estimates of poverty 

outreach among USAID-supported enterprise support programs represent a complete stab in the dark. I would not recommend that anybody makes policy on the 

basis of these figures. 

Appropriateness of Requiring Information on Poverty Outreach of USAID-Supported 

Enterprise Development Programs 

That said, I also believe that requiring poverty outreach figures for USAID-supported microenterprise programs is probably inappropriate. The basis for this statement hinges on what we believe the purpose of enterprise support to be. To me, the 

purpose of enterprise support is ‘‘private sector development,’’ or in other words, facilitation of the emergence of a dynamic and growing private sector that provides, 

among other things, jobs, opportunities, and a decent standard of living for low-income persons. By and large, enterprises operated by very poor persons lack the dynamism and growth prospects that would create the types of jobs, opportunities, and 

standards of living implied here. (This is a very broad generalization to which there 

will be numerous exceptions.) In my experience, the vast majority of enterprises 

supported by the typical microfinance NGO targeting the very poor or poor operate 

in the petty trading or service sector and have on average 0–1 paid employees. 

These characteristics, moreover, will remain fairly consistent for a particular borrower during the lifetime of the enterprise. While I by no means intend to belittle 

the importance of financial services or enterprise development support to this group 

of enterprises (both are extremely important), they are important for reasons other 

than employment creation or creating a dynamic and growing private sector. 

41

The enterprises that possess the dynamism and growth potential to create jobs 

and economic activity and drive private sector development will tend more to be 

found among the larger of the microenterprises or among the small or medium enterprises operated by the not-so-poor and often even by the non-poor. To the extent 

we wish to monitor the outreach or impact of enterprise development support on 

poverty, I believe it is more appropriate and important to view it from the perspective of paid employment creation or creation of economic opportunities among the 

very poor rather than direct outreach to the very poor. Focusing on the latter purpose instead of the former purpose creates the risk of producing the wrong set of 

policies, policy incentives, and policy outcomes. Better yet, enterprise development 

support will target a wide variety of interventions to different levels of the value 

chain, including financial service providers, input providers, buyers, trade associations, etc., many of which serve multiple markets (including the not very poor) or 

are themselves large operations. 

Conceptual Problems with Measuring Outreach to the Very Poor 

I now turn to the legislative requirement that USAID implement and validate 

poverty assessment tools by October 2006. I initially supported this legislation. At 

the time (and continuing today), many microfinance institutions (MFIs) were claiming to reach the very poor, but who were in fact not reaching the very or, most commonly, had no idea whether they were reaching the very poor. Out of the thousands 

of MFIs operating then, no more than a small handful of MFIs even attempted to 

assess the poverty status of their clients, and of those who did, a significant portion 

were collecting and reporting information lacking in both accuracy and credibility. 

(This trend continues today.) Consequently, I felt at the time that the legislation 

would serve to force the industry to be transparent about its poverty outreach, 

something which the industry apparently would not do on its own. So, I enthusiastically supported it. 

In hindsight, and with the benefit of experience, I now believe this legislation to 

have been misguided; well-intentioned, but misguided nonetheless. The reasons for 

this are both conceptual and practical. Conceptually, I think that the legislation’s 

focus on the ‘‘very poor’’ is inappropriate. The legislation’s focus on the very poor 

is no doubt a direct result of the industry’s, or certain members of the industry’s, 

insistence that microfinance be targeted to the very poor, or to take the more extreme rhetoric the ‘‘poorest of the poor.’’ I understand fully this insistence, and I 

share the commitment to pushing the frontiers of finance progressively down the 

socio-economic ladder. The vision of reaching the poorest of world with formal financial services is a vision worth striving for, but it is also an unduly limiting vision, 

if that is its primary focus. The fact is that there remain hundreds of millions of 

people throughout the world who still lack access to formal financial services, and 

a large percentage of these people are neither very poor nor even poor according to 

absolute or local poverty standards. Yet they are no less deserving and no less needful than the very poor. In many cases, moreover, they are also the very people who 

own and operate the dynamic, growth-oriented businesses capable of driving private 

sector development. 

Characteristics of Poverty in Developing Countries 

Poverty in developing countries is a dynamic, not a static, concept. People are continually moving in and out of poverty depending on a whole host of factors, some 

of which they control but many of which they do not, and among which access to 

financial services is rarely the most important. These include people clustering 

around the poverty line and people further from the poverty line. Many people who 

are not officially poor today are but one shock away from falling below the poverty 

line or perhaps even further. Vulnerability is one of the distinguishing characteristics of the masses in the developing world, both poor and non-poor. (Notably also 

financial services are one of the primary tools the masses use to manage their vulnerability.) A poverty assessment tool provides no more than a snapshot in time 

that does not capture the dynamism of poverty or the vulnerability of the masses. 

Unfortunately, there are no practical tools to measure vulnerability. If there were, 

I am not sure they would not be preferable to a poverty assessment tool. 

It is common parlance in the industry today to refer to groups such as the ‘‘very 

poor,’’ ‘‘poor,’’ ‘‘marginally poor,’’ ‘‘vulnerable non-poor,’’ and ‘‘non-poor.’’ Tens of millions of people belong in each of these groups, all deserving and potentially benefiting from access to formal financial services. It should be remembered also that 

absolute poverty standards (such as the dollar a day standard) do not capture the 

fact that someone living on $1.40 a day, or even on $2 a day, still enjoy living standards far below what we in the developed world would consider acceptable. I would 

bet that if members of this sub-committee were to travel to a rural community or 

42

urban slum in a poor developing country and were asked to identify those living on 

less than $1 a day and those living on more than $1 a day, they would be very hard 

pressed to tell the difference. In short, a focus on the very poor is an arbitrary 

standard that excludes millions of deserving and needful persons who enjoy relatively low standards of living by virtually any other standard and who are highly 

vulnerable to shocks that can quickly and easily send them spiraling downward. 

Creating Social Transparency Preferred to Measuring Poverty Outreach 

Rather than attempt to push MFIs to serve a particular clientele, I think that the 

true underlying goal ought to be transparency; transparency about an MFI’s social 

performance. Let the MFI choose which market segment it wants to serve, but then 

hold it accountable for demonstrating that it is reaching this market and that it is 

doing good job in the process. Armed with this information, donors and investors 

can then make informed choices about which MFIs, and by extension which types 

of clientele, they want to support. Transparency leads to accountability and accountability and to an informed and efficient market and to informed and effective policymaking. 

If social transparency is the goal, and I think it should be, then poverty assessment is an ineffective way to reach the goal. True social transparency requires scale; 

that is widespread disclosure of credible information about social performance. Regardless of which poverty assessment tools are developed, no more than a relatively 

small handful of MFIs will bother to use the tools, including those MFIs seeking 

USAID funding support and those MFIs with a powerfully motivating commitment 

to poverty outreach. This does not include the large numbers of commercially-oriented MFIs serving diverse market segments and the large universe of MFIs residing outside the influence of USAID. There are better approaches to creating social 

transparency and ways that have potential to achieve scale, such that they hold potential for transforming the entire industry, including those MFIs otherwise not interested in adopting USAID-certified poverty tools. USAID is currently playing a 

role in helping to develop these approaches, and its involvement in this effort should 

be encouraged by this Subcommittee. 

Practical Problems with Measuring Outreach to the Very Poor 

The practical issues involved in developing USAID-certified poverty tools have 

come to light in the years since the legislation was passed. The IRIS Center has, 

in my opinion, done a heroic job in developing credible poverty assessment tools, but 

I remain unconvinced that they will prove practical across a wide spectrum of institutions and contexts. There is not enough money currently budgeted to develop poverty assessment tools for every country that receives USAID funding support for enterprise development. We know that the nature and determinants of poverty can 

vary widely from country to country, even within regions. Yet, we are facing the 

prospect of using a poverty tool developed in one country to assess poverty in another country without knowing how accurately it does so. There will thus always 

be legitimate doubts as to the credibility of these tools, despite the tremendous cost 

and effort that has gone into ensuring their accuracy and credibility. Can one really 

conclude with confidence that a poverty assessment tool developed using data from 

Uganda accurately and credibly measures poverty in Malawi? In the end, we are 

back to using ballpark estimates, which is precisely where we started, and we do 

not know, although we might suspect, that the new ballpark estimate is better than 

the old one. 

Another practical issue is the difficulty in making meaningful distinctions between the very poor and the not very poor. The IRIS Center appears to have found 

a way to deal with this using some sophisticated econometric modeling, but this 

does not answer the question as to whether someone living on $0.98 a day is materially worse off, and thus more needful or deserving, than someone living on $1.08 

a day. If you look at the data, I think you will find a very tight clustering of people 

around the very poor cutoff line, which helps explain the econometric difficulties 

IRIS faced in making the distinction. I am not sure what legitimate policy objective 

is serves to determine that those clustering below this line are deserving of USAID 

support and those clustering above it are not. 

Yet another issue in the legislation is that it requires only that distinctions be 

made between the very poor and not very poor. What about the poor? If I am an 

MFI, knowing whether someone is very poor is helpful, but knowing also whether 

someone is poor is more helpful yet. The practical usefulness of a tool that measured 

poverty would be significantly greater and would be more likely to be adopted by 

a large number of institutions than a tool that only determines whether someone 

is very poor. Many MFIs are not interested in the very poor as a target market, 

but they are, or would be, interested in the poor as a target market. The legislaVerDate Mar 21 2002 17:02 Sep 19, 2006 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6621 F:\WORK\AGI\072706\28970.000 HINTREL1 PsN: SHIRL
43

tion’s focus on the very poor was in hindsight a significant error that will limit is 

usefulness and scope to the industry as well as to USAID. To be honest, I do not 

know how the IRIS Center is dealing with this issue. It may be adjusting its tools 

to allow them to identify the poor as well as the very poor, but if at the end of the 

day all we have a set of tools that allow us only to identify the very poor, I think 

that will be a great tragedy. 

NGOs and PVOs vs. For-Profit Consulting Firms 

Allow me to comment briefly also on the provisions in the Microenterprise Results 

and Accountability Act of 2004 related to the relative distribution of USAID funding 

to NGOs and PVOs and to for-profit consulting firms. I understand the basis for this 

provision, and I agree in principle with certain aspects of its underlying premise. 

The 2004 figures reported by the Microenterprise Development Office suggest that 

this provision has had some impact, or at the very least that it is being fulfilled. 

I would caution, however, against taking the arguments too far. The technical and 

other capacities of NGOs and PVOs differ broadly from those of consulting firms. 

At the moment, NGOs and PVOs may enjoy some cost advantages in certain situations, but as they are asked to take on more and more technical tasks formerly performed by consulting firms, their cost structures are likely to change as they acquire 

the resources and expertise necessary to perform the tasks. They draw largely from 

the same resource pool as the consulting firms, particularly in terms of upper tier 

skills and experience. 

Consulting firms are good at what they do, and what they do at times differs from 

NGOs and PVOs. The converse is also true. Rather than attempt to force the two 

to become more like each other, I believe a preferable approach (broadly applied) 

is to identify their relative comparative advantages and to direct USAID funding in 

a way that takes optimal advantage of them. 

Conclusion 

More broadly, I would advise the Subcommittee against any temptation to force 

the development of the industry down any one path or another or to use its legislative and budgetary powers to favor one set of models over another. The industry 

is dynamic, and it is evolving. And it is evolving differently in different countries. 

The NGO model dominates in countries as diverse as Bangladesh and Nicaragua, 

while other countries such as Indonesia, Bolivia, or Ecuador have largely gone the 

commercial route. India has its own unique approach in the self-help group model 

grated onto its dense network of rural financial institutions. We find that some 

‘‘poverty focused’’ NGOs reach few very poor or poor persons, and we find that some 

highly commercialized financial institutions reach large numbers of poor persons. 

While there may be some general trends, there also appear to be sufficient exceptions that we should be wary about relying too heavily on generalizations. 

I believe that this Subcommittee is sincere in its support of microenterprise development. The Microenterprise Results and Accountability Act of 2004 is evidence of 

this. The Act itself does some good things to advance the agenda of microenterprise 

development, although I question the appropriateness and efficacy of the poverty 

tools requirement), but it is, nonetheless only chipping away at the margin. If I were 

asked to advise the Subcommittee on what it, and by extension USAID, could do 

to exert an even greater impact on the industry, here is what I would recommend:

• Encourage and support continued innovation and experimentation. The industry has successfully pushed the production possibility frontiers, but they can 

still be pushed further, and possibly much further. But to push the frontiers 

to their limits will require innovation and experimentation in addition to the 

will and resources to support it.

• Encourage and support innovation and experimentation in product development. This includes develop of loan and other financial products but most importantly of savings products. The industry’s emphasis on credit over savings 

is an unfortunate remnant of its development patterns even though the demand for savings among low-income populations far exceeds the demand for 

credit.

• Much more can still be done to extend outreach to poor and marginalized populations, particularly in rural areas. Rural enterprise development and rural 

finance are perhaps the keys to breaking through existing barriers to achieving truly deep outreach. If reaching the very poor remains a policy objective, 

this can best be done by encouraging innovation and experimentation in expanding outreach to rural areas.

• Encourage and support commercialization where it makes sense. The longrun policy objectives in microenterprise development are most likely to be 

44

achieved at significant scale via a large network of commercially oriented 

(often although not necessarily for-profit) institutions. This does not mean, 

however, that support should focus solely on commercialized institutions. 

There will still be an ongoing and important role for the NGO and PVO sector, particularly in terms of innovation, experimentation, and in serving hardto-reach populations.

• Encourage and support commercialization in part via transitioning institutions to private market funding. Penetrating even a tiny faction of the world 

capital markets offers funding far in excess of anything available through 

USAID and the rest of the donor community. As USAID helps institutions 

make the transition to private market funding, its own funding should increasingly go to supporting innovation and experimentation. The public goods 

aspect of innovation and experimentation in microenterprise development 

make it likely that private markets will grossly underinvest in the types of 

innovation and experimentation necessary to extend outreach to hard-to-reach 

populations.

• Encourage and support initiatives aimed at creating wide-scale social transparency and accountability in the industry. Were the industry able to achieve 

this outcome, the total impact would surpass by large multiples the impact 

of the poverty tools legislation.

• Encourage and support development of enterprises with greater potential to 

create jobs and opportunities for low-income persons. Support should be targeted to all levels of the value chain as appropriate. Many of the very poor 

or poor do not want to own or operate enterprises, but they do want paid employment, and the best way to help these people is to facilitate the development and growth of the private sector and its job creation capacity.

• Assist supported institutions to develop functioning and effective monitoring 

systems. The general quality of monitoring systems among USAID-supported 

institutions is weak to moderate, which likely has significant adverse impacts 

on institutional, and thus policy, effectiveness.

• Fund selective, high-quality, and credible impact assessments of USAID-supported programs. It is unnecessary to perform impact assessments of every, 

or even several, USAID-supported programs. But there is real advantage to 

be gained by performing a relatively small number of selective impact assessments of programs that offer high potential for yielding important learnings 

for future policymaking and funding allocation decisions. This includes in particular programs taking innovative approaches to achieving important policy 

objectives.

Thank you for the opportunity to address the Subcommittee on these important 

issues.

Mr. SMITH. Dr. Woller, thank you very much for your testimony. 

I look forward to asking some questions. 

Ms. Cheston, please proceed. 

STATEMENT OF MS. SUSY CHESTON, SENIOR VICE PRESIDENT, 

OPPORTUNITY INTERNATIONAL 

Ms. CHESTON. Mr. Chairman, I would like to thank you for your 

leadership in so many ways over so many years in remembering 

‘‘the least of these’’ around the world through your support for 

microfinance, microenterprise programs, human rights programs, 

sex trafficking. Truly it is an honor to be asked to testify. 

I would also like to thank Ranking Member Payne, who I know 

is so committed to microfinance and microenterprise and yet is currently en route to Africa. So I know of his intense interest in the 

subject, and I am grateful that he has asked me to testify. 

On the Ides of March in 1992, I arrived in El Salvador, having 

just come from Costa Rica, with seven suitcases and boxes and a 

dream of serving the poor through microfinance. It was the single 

most transforming experience of my life. I had the opportunity to 

sit in dirt floor shacks made of corrugated metal with very poor 

45

women and learn about their dreams and learn about their hopes 

for the future and for their children. And in the context of that, I 

saw tremendous changes happening right in front of my eyes on a 

week-by-week basis. I would walk into a community and see that 

electricity had been strung up for the first time or that children 

were now going to school for the first time. I would see that people 

had moved from these dirt floor shacks into concrete block homes, 

and most of all, I saw women standing tall. With that experience, 

witnessing the power of a loan as small as $50, I learned the power 

of daring to think small. 

And now as senior vice president for Opportunity International, 

my view is a bit broader and a bit bigger, but I hope not too big 

to forget that important lesson of thinking small. And as chair of 

the Microenterprise Coalition, I have learned a great deal about 

the explosive potential of microfinance that has been made possible 

through so many leading microenterprise organizations, networks 

such as ACCION, FINCA, Grameen, Save the Children, World 

Council of Credit Unions, MEDA, World Relief, World Vision and 

many others. 

So based on this experience, I have a few key points to make, in 

fact four points. 

First, public funds matter. USAID matters greatly in bringing 

about a financial services revolution for the poor. Ms. Schafer 

spoke wonderfully about the capital from private sources that has 

been attracted to microfinance, largely as a result of USAID’s initial investments in this field and its global leadership in the industry over many years. And many of us in the industry are aggressively and successfully seeking private capital donations as well as 

investment capital, but still, there is an extraordinary opportunity 

right now for the U.S. Government through any number of entities, 

USAID, the State Department, Millennium Challenge Corporation, 

to play a leadership role in making this revolution a reality. 

I will give my own organization as one example, I believe, of a 

cost-effective investment that has been made by USAID over the 

years. Over the past 12 years, USAID has contributed over $75 

million in grant funding to 19 of Opportunity’s partner institutions 

around the world. Those USAID-funded institutions alone now 

serve 275,000 clients, loan clients, as well as 60,000 voluntary savings clients. And they have financed 466,000 micro and small businesses. I did a little math and just counting the businesses financed and without taking into account the savings clients, that 

means an average cost per business financed of $161. What is remarkable is that funding is no longer needed for most of these institutions, but the work is continuing on. Today, these institutions 

operate at an average sustainability of 104 percent, which is what 

enables them to continue this growth without further funding, and 

they revolve a loan portfolio of $141 million. Over the years, the 

total loans made only for those of Opportunity’s institutions that 

have received USAID funds is conservatively over $270 million. 

That seems to me an excellent return on USAID’s investment of 

$75 million. 

Public funds can play a significant role in building retail microfinance institutions that directly provide services to the poor and 

in promoting the kind of R&D that leads to groundbreaking innoVerDate Mar 21 2002 17:02 Sep 19, 2006 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6601 F:\WORK\AGI\072706\28970.000 HINTREL1 PsN: SHIRL
46

vation. For instance, Ms. Schafer mentioned our program in Malawi, which is one of the poorest countries in the world, as I am 

sure you know. There, USAID’s investment in Opportunity International Bank Malawi has led to the development of smart cards. 

These are ATM cards with clients’ biometric identification embedded on a chip. These cards allow illiterate people with no official 

government identification to participate in the banking system and 

in fact to open savings accounts as small as a $5 initial deposit. 

Other innovations again funded by USAID focus on bringing banking services for the first time to the rural poor in the most isolated 

parts of Malawi, innovations such as satellite branches, point-ofsale devices, ATMs, mobile banks and cell phone banking. Imagine 

that potential tapped on behalf of the poor. With this kind of track 

record of cost effectiveness, innovation and outreach, microfinance 

should not be a niche program. It should be thoughtfully considered 

as a key strategy crossing many objectives in the foreign assistance 

framework. Public funds matter. 

Shall I continue? 

Mr. SMITH. Yes, absolutely. 

Ms. CHESTON. My second point is that microfinance is a key 

strategy for ensuring that the poor both contribute to and benefit 

from economic growth. A month ago, I attended a superb learning 

conference hosted by USAID’s Office of Microenterprise Development, and during that conference, I learned about a study carried 

out by Erik Gartzke of Columbia University. Professor Gartzke 

found that economic freedom is about 50 times more effective than 

democracy in diminishing violent conflict. To be more exact, he said 

economic freedom is 54 times more effective than democracy in diminishing violent conflict. So, in other words, free markets appear 

to encourage peace, and the best foreign policy is one that enhances 

and extends capitalism. If you want peace and prosperity, you need 

economic freedom. But the question remains, how to ensure that 

poor people are included in economic growth. 

Microfinance matters because it is a way for poor people to participate in growing the pie and then participate in the benefits of 

the bigger pie. How are USAID, the State Department and the Millennium Challenge Corporation ensuring that microfinance is part 

of their plans? 

Third, microfinance and microenterprise can be powerful tools to 

achieve a range of foreign assistance objectives, and I was delighted by your question earlier about integrating these services 

into programs such as natural resource management, HIV/AIDS, 

malaria and the avian flu. I will just mention one of Opportunity’s 

clients in Uganda who is affected, in fact infected, by HIV/AIDS. 

Evas Kalemeera had a thriving business raising chickens. AIDS 

struck her family with a vengeance; killed her sisters, her brother, 

four uncles, three of her husband’s siblings and her husband and, 

most devastatingly, her 6-year-old daughter Margaret. HIV-positive, sick and bedridden, Evas lost her farm and her chicken-raising business. Yet as a mother, she realized she could not afford to 

give up on life, and with nowhere else to turn, she contacted Opportunity for a loan to start a new business. She was glad, she 

said, that Opportunity saw her as a living person and not as a 

walking corpse. Today, Evas operates a thriving maize flour busiVerDate Mar 21 2002 17:02 Sep 19, 2006 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6601 F:\WORK\AGI\072706\28970.000 HINTREL1 PsN: SHIRL
47

ness. She is able to pay school fees for her two remaining children 

and her orphaned niece as well as to feed them, and she is even 

able to cover the costs of ARVs from the income of her own business. Now, this is just one example of thousands of our clients who 

are helped to move forward with their lives living positively with 

HIV/AIDS. 

Also through our Trust Bank Lending Groups, we are providing 

HIV/AIDS prevention and awareness training to our clients, mostly 

women who are hard to reach through more formal channels. We 

are adapting our financial services to meet the needs of those who 

are affected by HIV/AIDS. One example, in Zambia, we have a very 

popular funeral benefits product, an insurance product. The cost of 

funerals was completely wiping out our clients’ livelihoods, and this 

funeral benefits insurance product has become the most popular 

product we have in that country. And of course, throughout sub-Saharan Africa, our microbusiness loans provide our clients with the 

means to care for AIDS orphans and those who are infected by 

HIV. 

Is our foreign assistance strategy flexible enough to allow for 

microfinance and microenterprise programs to be integrated into 

objectives such as the ones you have identified earlier in your remarks? 

Fourth and finally, USAID has created powerful incentives in the 

past that have led the microfinance industry to achieve large-scale 

outreach and financial sustainability. Now, thanks to the legislation that you sponsor, USAID has the opportunity to create incentives to ensure that the very poor and other unserved populations 

are included in the financial services revolution. 

Now, I have perhaps a different take on this situation from my 

very esteemed colleague Gary Woller. My belief is that the investment to date in the development of poverty assessment tools will 

truly pay off when the focus becomes innovation in products and 

services to reach the very poor and all those who are still excluded 

from the world’s financial systems. With the increasing sophistication and capacity of the microfinance industry and greater access, 

as we discussed, to private and social investment capital, the poor 

and the less poor are just more easily reached, and as you well 

know, the legislation does not require that 100 percent of funds go 

to the very poor but rather that 50 percent of the funds go to the 

very poor, leaving plenty of room for other poor and non-poor clients to be reached. It does seem to me that this is an appropriate 

use of public funds therefore to support innovation and product development, technology and institutional capacity building that will 

lead to reaching hard-to-reach populations. In other words, as we 

look at the role of public funds and private funds, since private 

funds are coming into the microfinance industry at such an extraordinary rate, it frees us up to use public funds to reach the 

very poor, those in rural areas, women who are among the most 

marginalized and who are an invisible market still in many developing countries, and the disabled. 

For me, one of the most useful aspects of the poverty assessment 

tools currently under development is in fact what they can teach 

us about our clients so that we can figure out how best to serve 

the full range of clients from very poor to poor to the vulnerable 

48

non-poor. The other useful aspect is how these tools can spur us 

to innovate and encourage USAID to create incentives for innovation in reaching the unserved and underserved. Incentives can 

work wonders, as you well know. 

Five years ago, USAID strongly encouraged its long-time microfinance grantees in Egypt to add a new poverty targeted group 

lending program targeted to women. Resources and incentives increased the percentage of women reached from 17 percent to 54 

percent in just 2 years along with fueling spectacular growth in 

outreach. 

So my question is, will USAID put its technical expertise and resources behind the cause of downreach and outreach to hard-toreach populations through these kinds of incentives and through 

strategic guidance for its missions? 

In closing, here is why I think microfinance has such potential. 

In 1991, after 20 years in business, Opportunity International had 

6,000 clients. Today, only 15 years later, Opportunity has 850,000 

clients, just loan clients, along with 3 million poor people who now 

have basic micro-insurance to protect them in the event of disaster 

or disease as well as many savings and remittance clients. That 

kind of exponential growth in numbers and range in services is 

found throughout our industry. Some would argue that microfinance is not enough, and it is certainly true that we need a range 

of services that reach all who are excluded from financial systems 

and markets and not only the very poor and poor. But that said, 

it is also true that there is not enough microfinance. Today, 30–50 

million people, mostly women, have access to microfinance services, 

according to rough estimates. Yet 300–500 million people, again 

rough estimates but mostly women, are still excluded from basic financial services and yet could benefit from them. What it took to 

get us from zero to 50 million clients in just three and a half decades was the hard part. Expansion to reach 500 million has its 

challenges, but they can be overcome. This is a job we can finish 

in our lifetime. And once we have done it, it is done. With sufficient 

initial investment, a microfinance program can reach sustainability 

and, from then on, can continue to provide life-changing opportunities for the poor without further grant funding. 

So my question is, will USAID, the State Department and the 

Millennium Challenge Corporation keep up with this revolution? 

Will they provide global leadership to ensure that microfinance 

achieves its potential? This is a job we can finish. With your help, 

Mr. Chairman, we can finish the job. Thank you very much. 

[The prepared statement of Ms. Cheston follows:]

PREPARED STATEMENT OF MS. SUSY CHESTON, SENIOR VICE PRESIDENT, 

OPPORTUNITY INTERNATIONAL

Mr. Chairman, I would like to thank you for your leadership over the years in 

ensuring that ‘‘the least of these’’ thoughout the world can receive new hope and 

opportunity through microfinance and microenterprise programs. Thank you for 

your passion, commitment, and powerful concern for the world’s most vulnerable. 

I would also like to thank Ranking Member Payne for inviting me to testify, and 

express my gratitude that he is so committed to microfinance and microenterprise 

that he is leaving straight from the hearing for the airport en route to Africa. 

On the Ides of March in 1992, I arrived in El Salvador with 7 suitcases and a 

dream of serving the poor through microfinance. As director of the Women’s Opportunity Fund of Opportunity International, I was given the most phenomenal opporVerDate Mar 21 2002 17:02 Sep 19, 2006 Jkt 000000 PO 00000 Frm 00052 Fmt 6633 Sfmt 6621 F:\WORK\AGI\072706\28970.000 HINTREL1 PsN: SHIRL
49

tunity of my life: to help make a difference in one small corner of the world. I say 

I was ‘‘director’’—but I was also the secretary, messenger, and, most of all, loan officer. It was my privilege to spend my days meeting with very poor women, providing 

them with micro loans so they could invest in very small businesses, and then 

watching as week after week they began to take charge of their lives. Living and 

working among very poor women whose lives changed dramatically thanks to loans 

as small as $50, I learned the power of daring to think small. 

Now, as Senior Vice President for Policy for Opportunity International, my view 

is a bit broader. And as Chair of the Microenterprise Coalition, I have learned a 

great deal about the explosive potential of microfinance that has been made possible 

through such leading organizations as ACCION International, CARE, FINCA International, Grameen Foundation, MEDA, ProMujer, Save the Children, World Council 

of Credit Unions, World Relief, and World Vision, among others. 

Based on this experience, I have several key points I would like to make today:

1. Public funds matter. While many of us in the industry are aggressively seeking private donations and investment capital, there is an extraordinary opportunity for the U.S. Government to make an impact on economic growth 

and poverty if USAID, the State Department, the Millennium Challenge Corporation, and other entities play a leadership role in investing in microfinance.

2. Microfinance is a key strategy for ensuring that the poor both contribute to 

and benefit from economic growth.

3. Microfinance and microenterprise can be powerful tools to achieve a range 

of foreign assistance objectives, and can make a difference when integrated 

not only into economic growth objectives, but also into programs such as 

HIV/AIDS, natural resource management, malaria, and avian flu.

4. USAID has created powerful incentives in the past that have led the microfinance industry to achieve large-scale outreach and financial sustainability. 

Now, USAID has the opportunity to create incentives to ensure that the very 

poor and other unserved populations are included in the financial services 

revolution. The investment to date in the development of poverty assessment 

tools will truly pay off when the focus becomes innovation in products and 

services to reach the very poor and others who are still excluded from the 

world’s financial systems. 

A BIG VISION FOR THE FUTURE OF MICROFINANCE

Here’s why I think microfinance has such potential. In 1991, after 20 years in 

business, Opportunity International had 6,000 clients. Today, only 15 years later, 

Opportunity has 850,000 loan clients, along with 3 million poor people who now 

have basic micro insurance to protect them in the event of disaster or disease, plus 

a growing number of savings and remittance clients. That kind of exponential 

growth in numbers and in range of services is found throughout our industry. 

Some would argue that microfinance is not enough—and it’s certainly true that 

we need a range of services that reach all who are excluded from financial systems 

and markets, and not only the very poor and poor. But that said, it’s also true that 

there is not enough microfinance. 

Thirty to fifty million people today—mostly women—have access to microfinance 

services—yet 300 to 500 million people—mostly women—are still excluded from 

basic financial services and yet could benefit from them. What it took to get us from 

0 to 50 million clients in just 3 and a half decades was the hard part. Expansion 

to reach 500 million has its challenges, but they can be overcome. This is a job we 

can finish in our lifetime. And once we’ve done it, it’s done. With sufficient initial 

investment, a microfinance program can reach sustainability, and from then on can 

continue to provide life-changing opportunities for the poor without further grant 

funding. 

Will USAID, the State Department and the Millennium Challenge Corporation 

keep up with this revolution? Will they provide global leadership to ensure that 

microfinance achieves its potential? 

THE IMPACT OF PUBLIC FUNDS: THE CASE OF OPPORTUNITY INTERNATIONAL

Much of what we’ve accomplished as an industry has been made possible through 

appropriate use of public funds—which, in Opportunity’s case, have been leveraged 

through significant private support. Over the last 12 years, USAID has contributed 

over $75 million in grant funding to 19 Opportunity International institutions 

around the world. These USAID-funded institutions now serve 275,000 loan and 

60,000 voluntary savings clients and have financed approximately 466,000 micro 

50

and small businesses. Just counting the businesses financed and without taking into 

account savings clients, that means an average cost per business financed of $161. 

What’s remarkable is that USAID funding is no longer needed for most of these institutions, but the work goes on. Today, these institutions operate at an average 

sustainability of 104% and revolve a loan portfolio of $141 million. Over the years, 

the total loans made, only for those of Opportunity’s institutions that have received 

USAID funds, is conservatively over $270 million. That seems to me an excellent 

return on USAID’s $75 million investment. 

Further, Opportunity continues to leverage private funds with public funds and vice versa. In 2005, Opportunity International received $7 million in USAID funds 

and $23 million in support from private donors. In addition, we placed $50 million 

in debt, primarily from social investment funds. As a global network, we are leveraged one to one, and our leverage is growing. 

USAID’S IMPACT: OPPORTUNITY INTERNATIONAL BANK MALAWI

Here’s a specific example of the impact of USAID funds on Opportunity’s work 

in Africa. In Malawi, one of the world’s poorest countries, Opportunity’s bank is a 

beacon for the poor. With USAID’s help, Opportunity International Bank Malawi 

(OIBM), or ‘‘My Bank’’ as it’s called by customers, is aggressively expanding 

throughout the country, including reaching the most remote rural areas with financial services using innovative products and technology. As of March 2006, OIBM 

was serving 5,443 loan and 39,323 savings clients with an arrears rate (>30 days) 

of just 1.58%. In 2003, USAID awarded Opportunity International $2,160,918 to build the institutional capacity and outreach of its newly created microfinance bank in Malawi—

OIBM—which obtained its banking license from the Central Bank in March 2002. 

In partnership with USAID, Opportunity has pioneered a scalable, technology-driven, low-cost approach to providing a full range of financial services to poor families 

living in rural Malawi. 

OIBM’s innovative approach includes Smart cards—ATM cards with clients’ biometric identification embedded on a chip. These cards allow illiterate people with 

no official government identification to participate in the banking system. Other innovations include satellite branches, Point-of-Sale devices, ATMs and mobile banks 

that bring banking services for the first time to the rural poor in Malawi. 

Opportunity has also innovated in the products it offers. Small groundnut farmers 

were unable to get credit from the local banks because of the high risk of drought. 

The World Bank contracted with Opportunity to develop a drought insurance product, and now all farmers who have purchased drought insurance are eligible for 

loans that are enabling them to buy higher quality seeds that have higher yields 

and greater disease resistance. 

Building on USAID’s investment, since 2003, Opportunity OIBM has secured debt and equity financing totaling $4,244,645 and has mobilized deposits of more than 

$3 million. 

For poor people in Malawi, USAID’s investment has been life-changing. Under the 

State Department’s new foreign assistance framework, will this kind of investment 

continue? 

THE STATE DEPARTMENT’S STRATEGY

Many of us in the microfinance community have been impressed by Ambassador 

Tobias’s focus on measurable results and on developing coherent country strategies 

that do not duplicate efforts but rather ensure that all the entities of the U.S. government work together effectively on diplomatic and development goals. Yet we 

have questions about where economic growth and poverty alleviation will fit into the 

mix. 

A month ago, I attended a superb Learning Conference hosted by USAID’s Office 

of Microenterprise Development. During that conference, I learned some fascinating 

things about both economic growth and poverty alleviation. 

ECONOMIC FREEDOM AND PEACE

In 2005, a professor from Columbia University, Erik Gartzke, did a statistical 

study to determine what variables lead to conflict between countries. He looked at 

military action correlated with such factors as economic freedom, population, democracy, total land area, arable land, and status as a major power. Professor Gartzke 

found that ‘‘economic freedom is about 50 times more effective than democracy in 

diminishing violent conflict.’’ To be more exact, he said ‘‘economic freedom is 54 

times more effective than democracy in diminishing violent conflict.’’ In other words, 

‘‘free markets appear to encourage peace’’ and ‘‘the best foreign policy is one that 

51

enhances and extends capitalism.’’ If you want peace and prosperity, you need economic freedom. 

ECONOMIC GROWTH AND POVERTY ALLEVIATION

There’s been a raging debate at the World Bank and within the U.S. Government 

about economic growth versus poverty reduction strategies—basically, which comes 

first. After a rigorous statistical analysis of different countries’ poverty and economic 

growth trends, two leading economists at the World Bank, Humberto Lopez and 

William F. Maloney, released a report this year called ‘‘Poverty Reduction and 

Growth: Virtuous and Vicious Circles.’’ They confirm what many have concluded, 

which is that you can have economic growth without poverty reduction, but you 

can’t reduce poverty without economic growth. The idea is that a country can grow 

economically without reducing poverty—in fact, in such a way that the rich get richer and the poor get poorer. But if you’re trying to reduce poverty, so-called poverty 

alleviation programs are simply not enough. If the pie is too small, even if you divide it equitably, you still won’t have enough pie to go around. You have to grow 

the pie. 

Microfinance matters because it is a way to grow the pie in a way that poor people can benefit. Actually, that’s not quite right. Microfinance matters because it is 

a way for poor people to participate in growing the pie—and then participate in the 

benefits of the bigger pie. 

How are USAID, the State Department and the Millennium Challenge Corporation 

ensuring that microfinance is part of their plans? 

SMALL LOANS, BIG IMPACT: THE STORY OF EVAS

One poor woman who is doing her part is Evas Kalemeera. One of Opportunity’s 

clients in Uganda, Evas had a thriving business raising chickens. But then, in 1999, 

her six-year-old daughter Margaret died of AIDS, and Evas and her husband 

learned they were HIV positive. 

Soon, Evas became too sick and depressed to work and was bed ridden. The farm 

was lost. In August of 2000, her husband died as a result of AIDS. Evas struggled 

to care for her two remaining children and an orphan who had belonged to her sister who died of AIDS. AIDS had also taken the life of her brother, four uncles, and 

three siblings from her husband’s side. 

Yet as a mother she realized she could not afford to give up on life. With nowhere 

else to turn, Evas contacted Opportunity for a loan to start a new business. She was 

glad that Opportunity saw her as a living person and not a walking corpse like so 

many others did. Today, on her third loan cycle since her illness, Evas operates a 

thriving maize flour business with many customers. 

Evas says, ‘‘These loans have . . . boosted my business and I am able to fend for 

my children and myself . . . paying school fees, feeding and attending to my medical requirements.’’ She has even been able to pay for antiretroviral drug therapy 

to extend her life. Evas refers to her Trust Bank as her parents, her husband, and 

her support. 

MICROFINANCE AND HIV/AIDS

The story of Evas highlights the importance of recognizing the potential for microfinance and microenterprise programs to interact with other programs such as natural resource management, AIDS, avian flu and malaria. In the case of AIDS, Opportunity is proud to have received an award in the first tranche of PEPFAR. We 

are not a health or AIDS organization and we are not trying to be. However, we 

have found that, as a microfinance organization, we can use our infrastructure to 

provide prevention and awareness training to our clients—mostly women who are 

hard to reach through other more formal channels. We have also found that people 

who are affected by HIV/AIDS can benefit tremendously when we adapt our financial services to meet their needs. In Zambia, our clients’ livelihoods were wiped out 

whenever there was a death in the family due to the high cost of funerals. We developed a funeral benefits insurance product called Ntula that has become perhaps the 

most valued service we provide there. And throughout sub-Saharan Africa, our 

micro business loans provide our clients with the means to care for AIDS orphans 

and to care for those who are infected. 

Is our foreign assistance strategy flexible enough to allow for microfinance and 

microenterprise programs to be integrated into objectives such as the fight against 

AIDS? 

52

TARGETING THE POOR AND VERY POOR: THE ROLE OF POVERTY ASSESSMENT TOOLS

In 2003, Congress gave USAID a strong directive to focus at least half of its 

microfinance and microenterprise funds on reaching the very poor. PL108–31, the 

2003 amendment to the Foreign Assistance Act, required the development of poverty 

assessment tools in order to measure USAID’s success in achieving that mandate. 

In my view, USAID has sought to carry out the congressional directive with energy 

and intelligence, modeling a positive collaborative approach with the practitioner 

community. As expected, there have been glitches in the development and certification of poverty assessment tools, despite best efforts on all sides. My concern is 

that in the midst of the technical challenges of developing and now implementing 

the tools, the basic principle behind their development will be lost. Quite simply, 

we want to make sure that those who are excluded from financial services are not 

left out going forward. 

It is naturally easiest to provide services to those who are better off in any society. Likewise, it is easier to provide services to those who are ‘‘poor’’ than to those 

who are ‘‘very poor’’. The beauty of financially sustainable institutions is that, once 

costs are fully covered by interest rates and loan fees, we no longer have to choose 

from among deserving clients. In the early days, we were often faced with a choice 

of giving a $1000 loan to one client or $100 loans to 10 clients—or, for that matter, 

$50 loans to 20 clients. Under those circumstances, I would always argue for reaching the poorest clients we possibly could. Now, however, once a microfinance institution is fully sustainable, it can fund its growth through borrowed funds. Assuming 

we develop the human and technological capacity—which is a great challenge for 

us all and one I don’t mean to treat lightly—we can then provide a loan both to 

the $1000 client and to ten $100 clients, without needing to make draconian choices. 

An organization that sets itself up with a poverty focus and intentionally tries to 

push the envelope to reach a lower level of poverty is likely to be able to grow with 

its clients and meet their growing capital needs over time, as well as to expand into 

easier-to-reach markets. Conversely, an organization that targets the poor and notso-poor, as opposed to the very poor, is less likely to discover the market of the very 

poor and figure out how to serve it without some kind of specific intervention. Look 

at the history of banking around the world over time: there are not a lot of examples 

of downreach to reach the poor and very poor among mainstream banks, which is 

why the microfinance field developed in the first place. 

PUBLIC FUNDS TO PROMOTE DOWNREACH AND INNOVATION

This brings me back to the question of the appropriate use of public funds for 

microfinance. With the increasing sophistication and capacity of the microfinance industry and greater access to private and social investment capital, the poor and less 

poor are more easily being served. It seems to me that it is an appropriate use of 

public funds, therefore, to support innovation in product development, technology, 

and institutional capacity-building that will lead to reaching hard-to-reach populations. This includes the very poor, those in rural areas, marginalized women, the 

disabled, and other unserved populations. For me one of the most useful aspects of 

the poverty assessment tools currently under development is what they can teach 

us about our clients so that we can figure out how best to serve the full range of 

clients, from very poor to poor to the vulnerable non-poor. The other useful aspect 

is how these tools can spur us to innovate—and encourage USAID to create incentives for innovation—in reaching the unserved and underserved. 

Incentives can work wonders. Let me give one example of USAID providing incentives in a way that successfully encouraged downreach, including a greater focus on 

unserved women. According to a USAID report in fiscal year (FY) 2000, six Egyptian microfinance institutions reported a total of 72,634 clients, with an average 

loan size of $506. Only 17 percent of these clients were women. In FY 2002, these 

same institutions reported 115,345 clients (a growth of 59 percent) with an average 

loan size of $372 and that 54 percent of these clients were women. The secret? The 

USAID Mission strongly encouraged its long-time grantees to add a new group-lending product specifically designed for women, which now accounts for virtually all of 

their growth. 

Will USAID put its technical expertise and resources behind the cause of 

downreach and outreach to hard-to-reach populations through these kinds of incentives and through strategic guidance for its missions? 

PRESERVING THE SOCIAL MISSION

In closing, I agree with my colleague Gary Woller that the development of tools 

to measure and manage social performance and the encouragement of greater transVerDate Mar 21 2002 17:02 Sep 19, 2006 Jkt 000000 PO 00000 Frm 00056 Fmt 6633 Sfmt 6621 F:\WORK\AGI\072706\28970.000 HINTREL1 PsN: SHIRL
53

parency are keys to ensuring that the social mission of microfinance is not lost in 

the increasing trends toward commercialization and large-scale growth. I commend 

USAID for its efforts to fund the research and development of these tools. This is 

the kind of innovation that will ensure that microfinance achieves its promise on 

behalf of the world’s poor. With this kind of leadership, together with a healthy, collaborative relationship with the practitioner organizations that provide direct services to the poor, this very small idea—this micro idea—turns out to be a very big 

idea after all.

Mr. SMITH. Ms. Cheston, thank you very much, and thank you 

for your extraordinary leadership which has been noted not only by 

me, but by Members on both sides of the aisle. It has been extraordinary. 

Regrettably, we have another vote underway on the Floor followed by a whole series of votes, and I do not want to keep you 

here until 5 o’clock or 6 o’clock. So I will ask some questions, keep 

the record open, and we will submit some questions for the record 

as well. I apologize again for having to run off, but there is a whole 

series of votes; it isn’t just one vote. 

I would ask, first of all, about the idea of targeting the poorest 

of the poor, the very poor, I should say. The USAID report points 

out that only 23 percent of the funding reached those individuals. 

Any suggestions you might have on how we can beef that up? 

I know, Dr. Woller, that you take—while you are not against it, 

obviously, reaching the poor, you have some different thoughts. I 

thought you might want to speak to that. What studies—and, Dr. 

Woller, this could be a question to you—have been conducted, and 

what were their findings regarding how and to what extent microfinance has led to sustainability? What have been the intermediate 

and longer-term consequences of microfinance, particularly the 

loans to start a business? Has that been tracked? 

The issue of conflict and national disasters, I know because I met 

with a lot of the Kosovar refugees during the Kosovo crisis. I went 

to the refugee camps, and I know GAO cited in its report that the 

USAID microfinance assistance isn’t necessarily helpful in that 

kind of disaster, yet we saw with the tsunami that it was. Now, 

does that have to do with refugee flows in populations or is it—you 

know, how can we do a better job? Should we be doing a better job 

with regard to conflict and natural disasters? The whole issue of 

central bureau versus mission assistance, where best is that money 

allocated? Do we have the right balance currently? 

I do have a lot of questions. I have only 2 minutes, regrettably. 

If you could speak to those issues, I would appreciate it. And then 

we will submit some written requests for the record. Without objection, when you are concluded with your answers, the hearing will 

be adjourned. Thank you. 

And again, I apologize. 

Ms. CHESTON. With respect to the question of USAID reaching 

the very poor and the 23 percent figure in their report, I would say 

that one of the benefits of the Microenterprise Results and Accountability Act of 2004 is pushing for more information, more 

transparency in those kinds of figures, and USAID has very wonderfully complied through its most recent report. With the development of poverty assessment tools, we will now be able to get much 

better information about what is, in fact, going on in terms of 

reaching the very poor and with incentives such as the ImpleVerDate Mar 21 2002 17:02 Sep 19, 2006 Jkt 000000 PO 00000 Frm 00057 Fmt 6633 Sfmt 6601 F:\WORK\AGI\072706\28970.000 HINTREL1 PsN: SHIRL
54

menting Grant Program (IGP) that Ms. Schafer referred to. We will 

now have a much better idea of how we can start transforming our 

understanding of what level of poverty we are reaching, in order 

to encourage innovation in downreach. So I would say that that 23 

percent figure is an important one to acknowledge and understand, 

and that by the next fiscal year and the fiscal year beyond that, 

we should be showing improvement in that percentage, and that 

the law is doing its part in ensuring that that will happen. And I 

would like to acknowledge that USAID’s work on poverty assessment tool development has occurred with great energy and intelligence and has made a great contribution to that issue. 

Mr. WOLLER. Right. I would just like to briefly address something she just addressed on the 23 percent. First of all, the 23 percent, if I remember—I don’t know the 2005 figures—but, in 2004, 

was a similarly overall low figure, and it was driven by a very low 

figure of very poor outreach among enterprise support programs, 

not lending programs but enterprise support programs. So I am assuming it is a similar thing in the most recent report, what is 

going on, and I would just reiterate that I think that figures are 

virtually worthless because the enterprise support programs have 

absolutely no clue what the poverty status of their clients are. As 

I said, a complete stab in the dark. I consider that figure to have 

very little value. 

But let’s assume for a second it has some value. I think what we 

might be observing among the enterprise support programs is that 

these programs again are trying to, I think, I am guessing, support 

private sector development, and my guess is, and having worked 

with a few of them, their thinking on that is, the best way to promote growth is not necessarily to target your innovations down at 

the very poorest but target perhaps somewhere further up the 

value chain, and they are thinking in terms of creating dynamic 

growth businesses sometimes, not necessarily funding the small 

trading, petty trading and service-type enterprises which commonly 

benefit from lending programs. So in a way, you are comparing apples and oranges, and frankly, I wouldn’t mix the two. I would look 

at them separately because they are separate things sometimes 

with very separate and distinct objectives, and I think you need to 

take that into account. 

Now, in terms of the impact assessment, what is the impact in 

microfinance, I mean there have been literally over a hundred impact studies that have been done in microfinance, and I myself in 

one study for the OECD looked at almost 90 of them. And there 

are others. And now the thing to keep in mind when looking at 

these studies, they are of a wide variety of quality, and I wouldn’t 

recommend the results as being valid in every case. And yet you 

see some patterns, and one of the patterns that you see is the impact in microfinance is very specific to the context. It is very hard 

to generalize that microfinance has this impact or that impact. I 

think the best you can say is, depending on the context, it may or 

may not have this impact. But I mean, the quality of the program, 

the types of products and services it is offering, whether it is meeting the needs of the marketplace, the external economic and political environment, there is a whole host of factors which vary significantly from country to country, region to region, will determine 

55

what those impacts are, and there is a whole host of other things 

down at the microlevel including what is going on in the local society, power relationships within society, access to markets. I mean, 

any number of things which will determine what impact a program 

has. So it is really hard to generalize. I think that if you talk to 

people who look at these studies, what they will conclude, and 

maybe Susy has some other insight than I do, is that, yes, overall 

there is a positive impact. 

Yes. There is overall positive impact out of the studies, and one 

of the positive impacts that is very important in lending to a lot 

of these women and others is, it gives them another means by 

which to sort of manage risk and cash flows that become part of 

household overall livelihood and coping strategy and become a very 

effective tool in helping households manage in their risky lives 

where they are necessarily growing their businesses. 

My guess is, they are not. This is not budding Bill Gates. These 

are women who are trying to build a little extra income into their 

households. And so the impacts are varied, but they are there, and 

I think they are significant. And I think in my own mind the information—the preponderance of evidence is such that we can conclude with a high level of confidence that microfinance does have 

a significant impact on improving the well-being of those who benefit from it. 

Now, whether it is lifting them en masse out of poverty, I don’t 

know. I am a bit skeptical about that claim, but I am willing to 

be convinced. 

Mr. MWANGI-KIOI. I wanted to add just a word on the impact. We 

have a progress-out-of-poverty index that we have developed which 

is being actually tested in some of our partners’ institutions. This 

is a 10-point measurement, too, and it measures 10 indicators; and 

when the 10 indicators are satisfied as the client progresses from 

loan after loan within the program, it is possible to measure that 

they have crossed the poverty line. And this is under test and we 

are hoping that it will be available generally for microfinance institutions as a tool, as a measurement to assess the progress out of 

poverty for their poor clients. 

Ms. NAGY [presiding]. Any comments? 

Ms. CHESTON. In response to the Chairman’s other questions 

about central versus mission assistance, for instance, the Microenterprise Accountability Act in 2004 specified at least $25 million 

appropriated should go to the central office of Microenterprise Development. For, I believe, 3 years in a row the appropriations process has resulted in a recommendation that at least $30 million of 

the funds appropriate for microenterprise and microfinance would 

go to that central office for central funding. 

And, in particular, although the appropriations report noted the 

importance of preserving the viability of the leading microfinance 

networks, what I understand from the report that has just been relayed by USAID is that $17 million was allocated to that central 

office of Microfinance Development and then another $5 million 

was available through the private voluntary corporation office, 

which has had an invaluable matching grant program that has 

been much appreciated and important in growing the capacity of 

microfinance institutions around the world. 

56

So, to our view, USAID has not been able to meet its commitment according to the law to fund the budget of that office. The 

issue is that microfinance and microenterprise are very highly technical fields. 

There is a really superb technical team at the office of Microenterprise Development, but it would be unreasonable to expect 

that every single USAID mission around the world would have that 

level of technical expertise in such a specialized subject area, especially one that has been evolving so rapidly and in which global 

best practices are constantly being ratcheted up so that what was 

considered global best practice 2 years ago is now considered pro 

forma and we are constantly trying to raise the bar higher on performance on behalf of the poor. 

So in that light, it is important for there to be a level of technical 

expertise. As well, there is an issue of making global and regional 

funding vehicles available. One of the reasons USAID has been so 

successful over the years in developing microfinance to the level it 

has achieved is that it has invested heavily in market leaders who 

have been developed by the leading microfinance networks. Those 

are global networks that have economies of scale that they can 

achieve and that have the potential for sharing best practices 

across their organizations as well as technology advances, et cetera. 

And in order to allow those kinds of economies of scale and market 

leadership to continue as the networks have done in the past, it is 

important to have funding vehicles that are global and regional 

and not strictly country by country. 

I would also say that it is important in the state restructuring 

and in the new assistance framework to make sure that microfinance and microenterprise are fully understood and taken advantage of as an important strategy that can cut across a number of 

different goals and objectives. And part of my concern is that with 

a country-by-country strategy, again there may not be sufficient expertise to look at something that is essentially banking and finance 

within each country and that, because this is seen as often a niche 

market or niche program, it may not be given the attention that 

it deserves in order to have the benefit that it can provide to the 

world’s poor. 

And I guess the other comment I would like to make about that 

issue of central versus mission assistance is that there is not one 

entity globally that is providing leadership to look at the demand 

for microfinance services around the world, where we are as an industry and how we can fully achieve this revolution so that all the 

world’s poor can receive services, including those who are currently 

excluded. 

In other words, we have achieved a drop in the bucket up until 

now with our microfinance programs if we are reaching 30–50 million, but we have tremendous capacity to reach so many more. 

I think it would be very exciting for USAID and the State Department to take on the challenge of establishing that vision and 

drawing on the significant players within the industry, within the 

practitioner community, within the funding community, within the 

private donor and social investment community and to rally forces 

to see how we can remove the constraints to achieving microfinance 

57

potential not just with funding, but also other kinds of regulatory 

issues, et cetera. 

So a central office that is thriving and healthy and able to make 

its mark on the USAID mission and is able to make its mark on 

the State Department would be of great use in that kind of visionsetting activity. 

Mr. WOLLER. I just—I have been making notes here and want to 

back up here a bit because I have some thoughts on the first question of how to reach, or how to increase this figure, other than my 

criticism of the metric that is used to measure it. 

Go back to the recommendation I made earlier: How do we increase this? Well, over time, I think the way you increase it is by 

providing some kind of incentives for organizations to target rural 

areas. And when I say ‘‘rural areas,’’ I don’t mean setting up a village banking group in a rural area and funding women to trade in 

underwear and shops. I am talking about farming and agribusiness 

and the types of activities that are usually in rural communities. 

Microfinance has made significant, I think, steps in reaching lowincome people or those who didn’t have access to financial services 

before. It has done very well in impaired urban areas, and it has 

not figured out how to do it in rural areas. 

Let me give you an example. I was just in Bolivia a couple of 

months ago working with an organization there, and it is one of the 

poster children of microfinance success. If you look at it, there are 

two or three institutions that make any kind of effort to serve rural 

areas. We were working with one of them and, of those, it was actually trying to make loans to farmers and to fund agribusinesses, 

but it was coming under pressure because its financial performance 

was lagging behind even though it has relied solely on donor funding. It wasn’t accessing private funding. 

So they came up with a strategy as they were going to move into 

the urban areas, and they had—part of their industry was to provide higher rapid business turnovers, the kind that are funded by 

microfinance programs. There were external pressures on them to 

move out of ag lending, not because it is bad, but to say you have 

got to be substantially financially self-sufficient. It was driving 

them out of this market to a certain extent. 

So I think not only do we need to come up with sort of innovative 

approaches to do rural lending, but we also need to create incentives so that institutions can go in there and feel confident that 

they can experience and innovate, and do so and not be under pressure to yield a financial self-sufficiency in a 4- to 5-year period. 

And there can’t be obstacles; there have to be carrots. 

The other thing, as well—I skipped over this part in my written 

testimony, so I can come back to get that. Why the focus on the 

very poor? Why not the poor? Why are we not interested in the 

tens of millions of people who don’t fall under the poor line, but 

who are nonetheless poor? Someone who makes $1.10 a day by 

international standards is not terribly different from someone making 98 cents a day. 

And so, I hear—like, I just listened to Susy; she was saying that 

she was referring to all the world’s poor. You know, does she mean 

‘‘poor’’ or ‘‘very poor,’’ or what does she mean when she says ‘‘poor’’? 

58

I think that—in my mind, it is unfortunate the focus is on the 

‘‘very poor.’’ I think it ought to be broadened to the poor. 

If, in fact, we are going to be talking about targets and encouraging institutions to reach down, I understand why you say ‘‘very 

poor.’’ You want to incentivize them to go down. But there are 

trade-offs. A trade-off is that by pushing the very poor, you are 

going to be cutting a lot of institutions out of the loop, institutions 

that would be interested in targeting a poor market are maybe the 

more commercial institutions, or maybe others, but who do not find 

the very poor market attractive, not because they don’t care about 

poverty but because of their business model; it doesn’t work for 

their business model, but who would be highly capable of receiving 

large numbers of poor people either those below the poverty line or 

clustering above it. 

I think that you know the industry would be better off to sort 

of let go of—I don’t want to call it an ‘‘obsession,’’ but let go of the 

insistence on the poorest of the poor. I think that rhetoric has got 

us to the point where I believe it is leading—you know, I don’t believe it is productive. 

I think we need to recognize that there are tens of millions of 

people out there who, by our standards, have very poor standards 

of living, who are very deserving, who could use financial services, 

but may not be below that very poor line. And I am not sure that 

by saying, Well, you know, we are not going to worry so much 

about you; not that we are saying, we are not going to serve you. 

I just think that if you sort of change the definitions and expand 

your reach to the poor, I think, quite frankly, not only will your figures improve, but I think you will bring more people into your net, 

more institutions that will be willing to work with you to achieve 

that goal. 

Mr. MWANGI-KIOI. I would like to touch on the issue of conflict. 

The Chairman mentioned 8 years, transitioning out of conflict. I 

would think that microfinance does have a place in those institutions, in those countries, because people who are coming out of conflict usually do not have jobs. But if microfinance comes in, it gives 

them an opportunity of borrowing a little money and being able to 

utilize that in setting up some income-generating activity. So I believe there is room for microfinancing in conflict areas. 

As for natural disasters, we saw in the—with the tsunami in December 2004 in Asia many institutions did go into that region and 

set up small microfinance enterprises and institutions that were 

able to help the people restore their livelihood. 

And we at Grameen Foundation do have a program, in fact, that 

is currently operating in the tsunami region; and the people there 

are very grateful for the opportunity to be able to get that opportunity of setting up and being able to generate some income and 

restore some form of acceptable livelihood. 

Ms. CHESTON. I would also like to respond to the question on 

conflict and natural disaster; and primarily to thank the Chairman 

for bringing that question to the table, particularly because it is an 

example of the kind of thinking that we need to be doing across the 

board about microfinance. And I would just suggest that microfinance and microenterprise need to be part of any checklist in addressing particular country issues, whether it is post-conflict or a 

59

disaster situation, or as we have already discussed, natural resources management, AIDS, malaria, avian flu. 

The avian flu example is obviously a pending one, rather than 

an active one, but in speaking with officials who are very engaged 

in that whole issue, they have recognized that it is going to be impossible to manage that crisis. If we are asking people to destroy 

their livelihoods, particularly for those who are raising chickens, 

perhaps 10 chickens and that is their whole means of economic income, how can we ask them to wipe out their livelihoods because 

of health concerns? 

It simply is not a reasonable expectation, and that is going to 

lead to people protecting their assets and going into black markets, 

et cetera, and causing a hiddenness in this situation that—or lack 

of transparency that would be further damaging to the public 

health concerns. 

So that is one example of something that might not have been 

anticipated, and yet bringing up that question, as Joe has done 

about livelihoods, points to microfinance as one way that people 

can be assisted to get back on their feet if they are required to destroy their chickens, for instance. 

I would also like to point out that there has been evidence in the 

context of drought conditions in Ethiopia, as the result of a very 

rigorous study Gary has talked about—a number of studies are not 

so rigorous, but this was a very well done study with control 

groups, et cetera. 

So in a World Vision program in Ethiopia, they found a significant difference between the nutritional quality of households where 

people were microfinance clients as opposed to those who were not. 

They found better diets among those children, and interesting to 

me, they found a significantly reduced need for food aid. That finding particularly, I should mention, was among female clients and 

did not hold true for male clients, which was one interesting side 

finding of this research. 

But it does bring to mind the question, if we could implement 

sustainable microfinance programs which, by their very definition, 

are cost effective in situations of natural disaster, and at the same 

time, reduce the need for food aid, why would we not be much more 

aggressive about considering that as a significant strategy when 

faced with these kinds of situations? 

I can’t resist making one final comment before we are done. 

The whole question about ‘‘poor’’ and ‘‘very poor’’ does get to be 

a question of language often. But I think the question of how are 

we able to reach those who are excluded, is perhaps another way 

to look at it, because there are a number of people who are vulnerable non-poor, who are excluded from the world’s financial systems, 

and they should not be excluded. 

Likewise, the emphasis that I thought Gary very helpfully 

brought up earlier in his remarks about focusing more on women 

and more attention on rural areas is very much to the point. And 

certainly more incentives from USAID in reaching women and the 

rural poor would be very helpful in encouraging the industry to 

move toward more innovation in that direction. 

And then finally I would just like to say that it is a lot easier 

to go up than down. I remember—well, once a client has entered 

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the door and is a poor client, a very poor client, it is easier to work 

with that client over time and help them grow their business and 

grow in their use of financial services, grow in income and to develop more sophisticated products and services than it is to start 

with a business model that requires reaching a higher level, when 

the challenge is to even recognize what is usually an invisible market of the poor and the very poor around the world. 

And so it is not a question of either/or. I would say one of the 

great things about the sustainability of microfinance is, it does enable us to reach many people and not to have to choose. We are 

no longer in the situation we were in when I started in the business, which is, you had to choose between one $1,000 loan or $100 

loans to 10 people or $50 loans to 20 people. We were forced to 

make those choices then. Under those circumstances, I would always say choose reaching the very poor, choose the $50 loans. 

But fortunately, because of sustainability, we don’t have to 

choose; and we find that a strong institution is often one that has 

a range of services across the board at many levels. 

So the question is, to my mind, more specifically, what is an appropriate use of public funds given that so much private capital 

and investment capital is coming into the market? That funding, 

I think, can best be reserved for the easier-to-reach populations 

where financial sustainability and cost effectiveness are more easily achieved. 

And so public funds, I think, are very appropriately used to 

incentivize organizations to reach farther down. I found that within 

my own organization, USAID funding of our programs to reach 

rural populations has been very important in encouraging our innovations. 

So those are my closing comments on that area. 

Mr. WOLLER. Not to make this go any longer, even though that 

is precisely what I am going to do, just for a second. 

I just want to say, I agree with her that, in my mind, as we move 

forward in microfinance, we begin to tap into commercial markets. 

Increasingly, the role of public funding should be to fund experimentation, and the frontier of experimentation—sort of the ‘‘final 

frontier,’’ if you want to use that cliche—is going down further, particularly in rural areas and maintaining the commitment to 

women, of course, finding ways to reach people who haven’t been 

reached. 

I wouldn’t argue that you should use all public funding for that. 

I think there is a big role in public funding to help transition people into the capital markets. And in my mind, as well, you hear a 

lot about institutions tapping into capital markets. There is, for example, a big hullabaloo about Compartamos in Mexico, who did a 

bond issue. Hurray. 

Well, that is a commercial bank. They have been doing that for 

hundreds of years. I didn’t see that as a huge event. 

In my mind, what would be really interesting is if you could figure out a way—most of the private funding is going to sort of a 

very small cadre of high-profile, highly financially self-sufficient institutions. But underneath that there is a layer of MFIs that are 

flying under the radar boats. They are very good candidates for private funding. 

61

Another use of public funding would be to get this core—and a 

lot of these won’t be commercial banks; some of them will be other 

types of institutional models to get this group into the capital markets, as well, that don’t have the same publicity, that are kind of 

flying under the radar. 

In my mind, that would be a really good use of public funds, as 

well, to try to transition those further up; and maybe continue that 

process as we continue to bring more up. But continue to have a 

very strong commitment to those institutions that are working with 

the more marginal, hard-to-reach populations. 

Mr. MWANGI-KIOI. As a concluding remark, I support what Susy 

is saying about public funds being used for reaching and enabling 

institutions that do not have—cannot borrow commercial funds. I 

would say that those institutions that need that kind of funding 

abound in Africa. There are many institutions that are not yet sustainable in Africa, and they are trying to serve the population that 

we are saying need support. 

So I think there is a lot of scope for USAID funds to be allocated 

for institutions like that, that are reaching the poor, that do not 

have access to any kind of funding, to enable them to at least improve their standards. 

Ms. NAGY. Thank you, everyone. The comments here will be 

made part of the record, and the Subcommittee will also be submitting additional questions that Members have for you. We thank you 

very much for the good discussion. 

The hearing is adjourned. 

[Whereupon, at 4:40 p.m., the Subcommittee was adjourned.] 

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RESPONSES FROM MR. JOE MWANGI-KIOI, DIRECTOR OF MONITORING AND EVALUA- TION, GRAMEEN FOUNDATION USA, TO QUESTIONS SUBMITTED FOR THE RECORD BY

THE HONORABLE CHRISTOPHER H. SMITH, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF NEW JERSEY AND CHAIRMAN, SUBCOMMITTEE ON AFRICA, GLOBAL

HUMAN RIGHTS AND INTERNATIONAL OPERATIONS

Question: 

You stated in your testimony that reporting requirements to Congress connected 

with the Microenterprise Results and Accountability Act of 2004 ‘‘can perhaps be consolidated.’’ In what ways do you believe that such requirements could be improved 

to balance the need of Congress to stay aware of USAID’s microenterprise activities 

with its desire not to unduly burden or distract USAID staff? 

Response: 

We feel that it is crucial for USAID to report to Congress in a timely manner, 

especially as it relates to overall performance and implementation of the Microenterprise Results and Accountability Act of 2004, and the appropriate emphasis on poverty reduction reflected therein. However, our impression from USAID staff is that 

some of the reporting requirements that have accumulated over the years are perceived as duplicative and do not necessarily advance the goal of maximizing positive 

impact on the very poor. 

Given the limited funding available for USAID’s operating expenses and the current staffing level, we suspect that the array of reporting requirements confronting 

USAID’s Office of Microenterprise Development, not just those established by the 

Act, could possibly be streamlined to reduce the administrative burden of reporting, 

without diminishing the quantity or quality of data reported. At this juncture, without knowing specifics, we would be open to entering a discussion with USAID and 

other stakeholders regarding aspects of the reporting mechanisms that could potentially be ‘‘consolidated’’. Perhaps USAID can be asked to suggest areas where reporting may be simplified to allow them to have greater impact within the context of 

accountability for poverty reduction outcomes while also reporting to Congress on 

the implementation of the act. Such suggestions could then be reviewed in a process 

of dialogue between Congress, practitioners, and USAID to ensure a smooth and 

mutually acceptable solution. 

Question: 

You stated in your testimony that ‘‘USAID staff should be given latitude’’ in terms 

of ‘‘being held accountable for reaching the poorest and achieving results.’’ Do you 

believe that the provision of the 2004 Act which mandates that at least half of all 

microenterprise funding go to the very poor is too restrictive? 

Response: 

No, I do not believe that the referenced provision of the Act is too restrictive. In 

fact, we welcome the provision of the Act that mandates that at least half of the 

funding is targeted to programs to benefit the very poor. We feel that mandating 

that 50% of the funds be allocated toward the poorest is not too restrictive but is 

in fact essential. 

Within the context of being held accountable for maximizing reaching the poorest 

and of achieving results, we also feel that efforts could be made to ensure that 

USAID technical and administrative staff has the flexibility—within the confines of 

USAID’s regulations and the Law—to fully use their talents and resources to maximize the anti-poverty impact of microfinance and microenterprise development. 

Based on our experience, it is our perception that sometimes USAID staff are constrained in their ability to adapt to often fluid on-the-ground context, in part by the 

requirements of their own regulations and other factors, such as various well-intentioned Congressional reporting requirements that have evolved over the years. 

For example, during implementation of our highly successful program collaborating with the LAPO NGO in Nigeria, under USAID’s IGP program, USAID staff 

were able to focus on results and impact and support our efforts to expand access 

to microfinance services for the poor and very poor. We commend this flexibility and 

hope that USAID staff could be encouraged to be flexible and supportive of NGO 

partners in similar situations. 

Question: 

Some are concerned that increasing amounts of U.S. microenterprise funding are 

being funneled through for-profit firms and decreasing amounts are going through 

non-profit NGOs and PVOs. As a result, the 2004 microenterprise legislation recommends that USAID emphasize the latter. What can for-profits do that non-profits 

cannot do? How do the overhead costs differ between for-profits and non-profits? 

71

Response: 

As detailed in recent USAID reports, a very significant percentage of USAID support for microfinance and microenterprise programs is allocated toward for-profits, 

especially when the umbrella project(s) are taken into account, the award of the 

FIELD LWA to a consortium of non-profits notwithstanding. Generally speaking, 

the non-profit member organizations of the Microenterprise Coalition are concerned 

that a disproportionate share of USAID support is targeted toward for-profit organizations, and more importantly, that the playing field is not level. All of the Coalition 

members strongly support the Act’s appropriate emphasis on funding non-profit organizations that promote expanding access to services for the poor and very poor, 

within the context of a level playing field that has the interests of the poorest people 

in developing countries and the organizations that serve them at its center. 

However, this concern should not be construed as concern that for-profits are not 

providing quality service. Rather, it is a reflection of the different focus of the type 

of projects implemented by for-profit and non-profit organizations. While both forand non-profit type organizations are advancing goals related to poverty alleviation 

and development, generally speaking the non-profits are focused on providing services directly to the poor and the poorest. The core competencies of the two types of 

organization are typically different, although they may occasionally overlap. Working through contracts and task orders, the for-profits are typically providing targeted, short-term interventions that focus on fostering ‘‘enabling environments’’ including training, advocacy/policy analysis, and research. By definition, the scope of 

their work is limited and payment is based on completion of documented milestones. 

In our experience, most for-profits have focused on small and medium sized enterprises which do not include retail services for poor and disadvantaged individuals 

and their families. In contrast, the non-profits are fulfilling a mission to expand access to microfinance and microenterprise services (direct service provision) that 

interacts directly with the poor and the very poor. Working in collaboration with 

other international organizations through mechanisms such as SEEP or the Coalition, the non-profits directly impact the poor by providing targeted technical assistance, capacity building, loan capital, and knowledge management services within 

and outside their networks of MFI partners and affiliates. At the most general level, 

the non-profits are focused on producing outcomes such as community empowerment 

while the for-profits are focused on producing and documenting project level inputs 

as an element of contract performance. The key difference is a matter of organizational focus, not of quality of output or performance. 

While individual organizations may possess one or more comparative advantage 

reflecting the firm’s experience, the true strength of the non-profit is the focus on 

providing services directly to the poor, generating quantifiable impacts on poverty 

alleviation. An additional strength is that many non-profit organizations are able to 

marshal considerable matching resources (cash, in-kind, and volunteers) to offset 

the costs of their interventions. These matching funds not only leverage taxpayer 

monies but they also promote sustainability. 

While it is true that overhead or indirect costs among for-profit and non-profit 

firms can appear to differ greatly, in practice there is far less variation than one 

might think. However, as USAID found when carrying out its umbrella projects 

study, it is almost impossible to do a rigorous analysis of differences in costs because it involves ‘‘comparing apples to oranges.’’ For-profits and non-profits simply 

do not generally implement the same kinds of projects in the same contexts, making 

comparison difficult. That said, we assert that the mission or objective is the main 

thing, not price or cost-effectiveness per se, that differentiate between for- and nonprofit type organizations. The important point for Congress is to ensure that taxpayer funds should go to support direct services for the poor and very poor. 

Question: 

One of the most pressing issues in Africa today is HIV/AIDS, especially its impact 

on children (AIDS orphans). How can microfinance programs address the HIV/AIDS 

crisis including prevention and also providing support for PLWA and AIDS orphans? 

As a practitioner, do you see effective programmatic integration strategies on the 

ground in African countries? 

Response: 

Alongside clinical/medical interventions and programs to promote abstinence, encourage prevention, and reduce stigma, microfinance programs can be an important 

element of a comprehensive strategy to address the HIV/AIDS crisis in Africa (and 

elsewhere). Today, many organizations are integrating livelihood components into 

ongoing HIV/AIDS programs and also many microfinance and mircoenterprise programs include components that address health and education. To an extent, such 

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1The Microcredit Summit’s Declaration and Plan of Action estimated that it costs $200 per 

poor client: $150 in loan capital and an additional $50 in technical assistance and institutional 

development costs. (www.microcreditsummit.org)

programmatic interventions exist in the African context today. However, given the 

urgency of the HIV/AIDS crisis and the need to reach the very poor, it would appear 

that there is room to enhance integration. Some examples of how microfinance and 

microenterprise programs complement mitigation programs and also support for 

PLWA and OVC are listed below.

• The microfinance worldwide infrastructure is extensive and already provides 

an effective, far-reaching, non-government mechanism to efficiently reach 

those affected by HIV/AIDS, including PLWA and OVC, particularly in very 

poor countries. Over 3,000 microfinance institutions are currently serving 

over 90 million clients worldwide. Of these, over 6 million clients are served 

by microfinance institutions in sub-Saharan Africa, with an additional 6 million clients served by credit unions. The vast majority of these clients are 

women, who are most vulnerable to HIV/AIDS for a variety of reasons.

• The lending methodologies of many—but not all—leading microfinance institutions are structured in a manner where members meet as a group every 

week to repay loans and are taught to develop the business and social skills 

needed to transform their lives. These structures are also suitable for incorporating HIV/AIDS education and counseling in a peer setting, and then for 

reinforcing those messages weekly. Members are also taught how to share 

this life-saving information with their children, their spouses and their communities, creating a powerful multiplier effect.

• Microfinance strengthens the link between HIV/AIDS education and awareness and behavior change. By creating economic empowerment for those most 

susceptible to high risk sexual behavior (vulnerable women), it mitigates such 

behavior by ending their dependence on undesirable partners or on bartering 

or selling their bodies for income. In short, it gives them the power to say, 

‘‘NO.’’

• Microfinance contributes to the fight against HIV/AIDS by providing incomegenerating opportunities for people who are caring for infected family members or orphaned children, especially poor women. It affords AIDS widows 

and other AIDS victims the necessary support structure and economic means 

to begin new lives. Innovative savings, insurance and training programs have 

been developed to address their needs.

• Microfinance can be scaled to address the massive need in the fight against 

HIV/AIDS. The already successful, existing programs have a track record of 

measurable results and can be quickly scaled up to serve even more families 

and communities impacted by the HIV/AIDS pandemic.

• Microfinance is sustainable and generates ongoing returns. Every dollar committed to microenterprise development is multiplied several times over as 

loans are repaid and recycled into more loans (the loan repayment rate is 

98%). Incorporating a sustainable, income-generation and empowerment program as a part of a strategic response to HIV/AIDS will ensure that millions 

of people are relieved from some of the worst economic consequences of the 

pandemic.

• The potential for expanding microfinance activities in Africa is vast, as are 

the opportunities to adapt microfinance instruments for AIDS-affected communities. To show the potential impact of microfinance in this respect it is 

worth noting that if current activities could be expanded to reach just an additional 500,000 very poor women in Africa, 2.5 million lives could be impacted. The estimated cost of reaching these half a million women is just $100 

million and the benefits will be spread to their communities and families, 

playing a critical role in the fight against AIDS and extreme poverty1. 

As is evident from the above points, it is clear that effective programmatic integration strategies on the ground in African countries are possible and as a practitioner I have witnessed several programs that are successfully applying these methodologies to change the lives of PLWA and AIDS orphans.

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Question: 

What is your opinion of the level of technical quality of microfinance programs 

funded and implemented by USAID? 

Response: 

The member organizations of the Mircoenterprise Coalition appreciate the support 

and leadership provided by USAID in the past and currently. Broadly speaking, the 

technical quality of microfinance and microenterprise programs supported by 

USAID (to the best of our knowledge, USAID does not directly implement programs) 

varies, depending on the technical expertise housed in the respective USAID Mission(s). Some USAID missions that lack specific expertise in microfinance have approved projects that do not meet global best practices, for example: allowing subsidized rather than sustainable interest rates, supporting projects that are weak in 

their outreach to women; and focusing on SME (Small and Medium Enterprise) to 

the exclusion of microenterprise. Other missions with greater technical capacity or 

that have accepted technical assistance from the Office of Microenterprise Development (OMD) have done better. For example, USAID/Cairo has developed an innovative program to reduce poverty among poor women. Additionally, we would again 

cite the excellent support for the Grameen Foundation IGP implementation of the 

LAPO project in Nigeria. We applaud these efforts and call on other Missions and 

Bureaus to emulate their success. The practitioner community particularly encourages USAID to support programs that emphasize enhancing access to microfinance 

services among the poorest and most disadvantaged, especially women, and also 

programs that integrate interventions that promote health, education, local governance, and women’s empowerment. 

To ensure technical quality of microfinance and microenterprise programs, it is essential to ensure ongoing support for a robust Office of Microenterprise Development within USAID/Washington that can provide expert technical leadership and 

also central funding to support innovation and knowledge management. Despite the 

Act and congressional recommendations given in appropriations reports, these kinds 

of central funding mechanisms are still not up to the level mandated by Congress. 

In our opinion and experience, USAID’s support for microfinance and microenterprise is most effective when USAID invests in microfinance institutions that are affiliated with international networks, including Coalition member organizations such 

as Opportunity International, FINCA, and the Grameen Foundation. These networks provide strong technical assistance and capacity building that support sustainable expansion of access, introduce innovative products and services, and share 

learnings and best practices across the entire industry. This is illustrated by the 

fact that of the twenty largest microfinance institutions (in terms of total assets) 

14 or 70% are affiliated with international networks (The Mix, August 2006). Clearly, USAID’s past and continuing support for technically strong, innovative, sustainable programs will be critical if microfinance and microenterprise are to realize the 

goals of lifting millions more out of poverty permanently. 

RESPONSES FROM GARY M. WOLLER, PH.D., PRESIDENT, WOLLER & ASSOCIATES, TO

QUESTIONS SUBMITTED FOR THE RECORD BY THE HONORABLE CHRISTOPHER H. 

SMITH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW JERSEY AND

CHAIRMAN, SUBCOMMITTEE ON AFRICA, GLOBAL HUMAN RIGHTS AND INTERNATIONAL OPERATIONS

Question: 

One of the key goals of microfinance is to alleviate poverty. What studies have been 

conducted, and what were their findings, regarding whether microfinance and microenterprise programs are actually increasing income levels of individuals to raise 

them out of poverty? 

Response: 

There have been well over 100 impact assessments of microfinance programs conducted since 1990. Two relatively recent studies by Goldberg (2005), ‘‘Measuring the 

Impact of Microfinance: Taking Stock of What we Know,’’ and by Morduch and 

Haley (2002), ‘‘Analysis of the Effects of Microfinance on Poverty Reduction,’’ have 

summarized many of findings of these impact assessments. Both generally concluded that microfinance does have a positive and significant impact on poverty reduction. Morduch and Haley write (p. 2):

• Evidence shows the positive impact of microfinance on poverty reduction as 

it relates to the first six out of seven Millennium Goals.

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• While the quality of many studies could be improved, there is an overwhelming amount of evidence substantiating a beneficial effect on: 

— Increases in income 

— Reductions in vulnerability

• There are fewer studies with evidence on health, nutritional status and primary schooling attendance, but the existing evidence is largely conclusive and 

positive.

Goldberg (p. 46) similarly concludes: ‘‘This review of the literature provides a wide 

range of evidence that microfinance programs can increase incomes and lift families 

out of poverty. Access to microfinance can improve children’s nutrition and increase 

their school enrollment rates, among many other outcomes.’’

This is the same basic conclusion I have reached through my own experience and 

research. The preponderance of evidence strongly suggests that microfinance can be 

a catalyst to help lift people out of poverty. More commonly, however, it is a critically important tool (among many tools) to help poor and vulnerable households 

manage risk, smooth household cash flows, and cope with shocks. 

This said, impact of any particular microfinance program cannot necessarily be 

assumed. Impact is a function of several factors, including the microfinance program 

itself (and its programs, policies, products, service quality, etc.), the economic environment, the political environment, power relationships within communities, entrepreneurial talents and drives of clients, and so forth. These factors will combine in 

an endless array of combinations to affect the ultimate impact, whether for better 

or for worse. 

Question: 

You suggest in your written testimony ‘‘an approach that grants more emphasis to 

savings.’’ Is it your view that the Microenterprise Results and Accountability Act of 

2004 focuses too strongly on loans? How would you change the legislation? 

Response: 

To begin with, it is important to note that the Microenterprise Results and Accountability Act does not refer solely to lending. The language also refers to savings, 

training, technical assistance, business development services, and other financial 

services. In language, therefore, the Act covers a gamut of services, both financial 

and non-financial. 

My frame of reference in my written testimony was principally poverty outreach. 

Savings are rarely mentioned in the context of poverty outreach, or more broadly 

in the context of social impact. This outcome reflects a distinct lending bias in the 

microfinance industry, which is both a cause and a result of the idiosyncratic way 

in which the industry has developed. My impression is that this bias is replicated 

in the practical application of the Act, if not in its actual language. A clear example 

of this is that the poverty tools requirement is being applied solely to loans, and 

there is nothing in this context to acknowledge the importance of savings to the very 

poor or the necessity to reach down the socio-economic ladder with voluntary savings services. 

Given that the language of the Act already refers to savings, I do not see that 

a revision of the Act is required. I believe a better route would be for the appropriate industry stakeholders (of which USAID is a major one) to do more to encourage and facilitate savings via a set of positive incentives. Congress can help this 

process along by providing the appropriate incentives, primarily through its funding 

mechanism (preferably without reducing other funding for microfinance) and by 

working with USAID and other industry stakeholders to create guidelines for disbursing the funds. A pot of money, for example, could be established to support research, to provide technical assistance, to encourage innovation, or to support field 

experiments in savings. This might, I suppose, require some amendment to the Act, 

but again preferably this would come about as a result of ‘‘moral suasion’’ and productive collaboration between USAID and other industry stakeholders. (USAID has 

supported a substantial amount of action research through its AMAP funding mechanism. So, much of this kind of research and experimentation may already be going 

on. It might be useful for Congress to apprise itself of the work done under AMAP 

and how this might be useful in helping Congress achieve its policy objectives.) 

Question: 

Why do you believe that the legislation’s focus on the very poor is inappropriate? 

In what ways does it take away from USAID’s ability to ensure microfinance programs that truly benefit their clients in the most meaningful way? 

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Response: 

Let me be clear at the outset that I do not oppose an emphasis on the very poor 

nor do I oppose developing tools to measure outreach to the very poor. In fact, I believe that both are vitally important if microenterprise development/microfinance is 

going to reach very poor persons in large numbers and on a reasonably sustainable 

basis. I support the efforts of dedicated activists who work tirelessly to help keep 

our eyes focused on this goal, and I applaud Congress’ evident interest in this outcome. I suspect that absent constant vigilance in this area, the forces pulling microenterprise development/microfinance providers up-market over time may prove irresistible. 

My primary concern (and it is more of a concern than an objection) is that the 

narrow focus on the ‘‘very poor’’ creates the potential situation in which large 

swaths of the poor and vulnerable non-poor remain outside the reach of USAID support. To the extent that Congress intervenes to channel resources to particular market segments, I believe it would have been more appropriate, and with a much larger impact, to broaden the focus to include the poor and the vulnerable non-poor as 

well. 

As I mentioned in my testimony, I believe that the distinction between very poor 

and poor is arbitrary and often lacks meaning in practice. The extent of absolute 

deprivation in the developing world is staggering across wide cross-sections of the 

population living below, at, or above the very poor cutoff line. By any standard, tens 

of millions of persons living above the very poor cutoff line live in a state of significant material, social, and political deprivation. I see nothing to suggest to me that 

they are any less needful or deserving of either formal financial services or enterprise development support, nor that the corresponding benefits would be any less. 

I understand fully that the current legislation only requires that 50 percent of 

funding go to support the very poor. In theory, this leaves plenty of funds left over 

to channel to the poor, vulnerable non-poor, and the non-poor. There are a number 

of alternative scenarios regarding the relative distribution of the remaining 50 percent to different market segments. In one plausible scenario, the poor and vulnerable non-poor receive a proportionate share of remaining resources. In another plausible scenario, however, the poor and vulnerable non-poor receive a disproportionately smaller share of remaining resources. I believe that the second scenario is 

more likely than the first scenario. 

We must keep in mind that USAID has a number of objectives in allocating scarce 

funds to microenterprise development/microfinance. In addition to poverty alleviation, USAID seeks to promote private sector development and employment creation. As I mentioned in my testimony, the growth oriented firms that best promote 

private sector growth and employment creation tend (very broadly) not to be the 

petty trading and service enterprises that constitute the vast majority of clients 

reached by poverty-focused institutions. With one-half of its funding earmarked for 

poverty alleviation purposes, USAID must now use the remaining one-half to meet 

its other objectives, including private sector development and employment creation. 

It is natural and expected in this case that USAID will tend to prioritize these other 

objectives. The danger is that in doing so, a large segment of the poor and vulnerable non-poor get bypassed by commercially-oriented financial institutions targeting 

more up-scale clientele (among them the dynamic, growth-oriented micro, small, and 

medium enterprises). There is, therefore, a risk that a sole focus on the very poor 

will result in large-scale exclusion of the poor and vulnerable non-poor from USAID 

support, creating, in effect, a bifurcated market in which the poverty focused institutions are concentrating below or around the very poor line, while more commercially 

oriented institutions targeting more growth-oriented markets are concentrating 

above and around the poverty line, leaving large numbers poor and very poor persons outside the orbit of USAID support. 

I should add here that employment creation is another indirect way to benefit the 

very poor. To the extent USAID helps promote private sector development and create private sector jobs in micro, small, and medium firms, it will create paid employment opportunities for very poor persons. It should be noted that a non-trivial, 

though unknown, share of ‘‘microentrepreneurs’’ are not entrepreneurs in the normal sense of the word, in that they are ‘‘reluctant’’ business owners. In other words, 

they start a business not because they want to run and grow a business, but because it is the only or best alternative they have. Many of these very poor ‘‘microentrepreneurs’’ would prefer paid-employment were it available. The key point here 

is that targeting larger growth-oriented businesses, many of which are owned and 

operated by the non-poor, can be an important part of a package of policies that benefit very poor persons. The problem is that at the moment, we do not have the 

means to measure the extent and quality of job creation nor the poverty status of 

persons hired. 

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I have other concerns as well. One is that in my experience, there is often a lack 

of meaningful distinctions between the very poor and poor, particularly among those 

clustering around the relevant very poor cutoff lines. Given inherent inaccuracies 

in any tool that attempts to create a very fine a measure of complex socio-economic 

phenomenon, I do not think we can say with a high degree of confidence that persons living on, say, $1.15 a day are consistently better off in a materially significant 

way than persons living on, say, $0.96 a day. I realize that a cutoff line needs to 

be drawn somewhere, but I am uncomfortable cutting the line so finely and at such 

a low level, particularly when I have my doubts that the tools we use to make the 

fine distinctions are up to the task. (I believe that the poverty assessment tools can 

do a very good job at making ball-park estimates, but based on my experience, I 

am skeptical they can make the very fine distinctions required of them. Thus, I prefer they be used more as ballpark estimates as opposed to finely tuned, precision 

tools.) 

Another concern has to do with vulnerability. As several impact assessments have 

shown, financial services provide vulnerable households another tool to manage risk 

and to cope with shocks. Tens of millions of people living above the very poor line 

or the poverty line are vulnerable to falling below them. Often, all it takes is one 

setback, even sometimes a minor one, to send a poor or non-poor but vulnerable 

household spiraling down into poverty or extreme poverty. In this sense, microenterprise development/microfinance serve both to lift people out of extreme poverty and 

to keep them from falling into extreme poverty. The Act, unfortunately, only concerns itself with the people in extreme poverty today, not the people who may find 

themselves in extreme poverty tomorrow. 

A final concern has to do with the issue of scale. The number of institutions interested in the very poor as a primary market is a relatively small sub-set of the industry. By focusing the Act on the very poor, the much larger number of institutions 

interested in reaching poor or vulnerable non-poor markets do not benefit from a 

tool that would help them target their services more effectively to this market, while 

USAID and the Congress are denied a means by which they can monitor outreach 

to these very large and very important market segments (and market segments with 

substantial significance for social impact). 

In keeping with the language of the Act, IRIS is not calibrating its tools to identify the poor and vulnerable non-poor in addition to the very poor. This is highly 

unfortunate. It might easily have done so, and at relatively little marginal cost, 

thereby providing a set of tools of interest to a much wider market than those interested in serving the very poor. There are a large number of institutions targeting 

those below or clustering around the poverty line or those among the vulnerable 

non-poor. Many would potentially have found useful a tool that allowed them to 

measure poverty more broadly whether for social (e.g., creating social impact) or 

commercial (e.g., market segmentation) reasons. These same institutions, however, 

have little or no interest in a tool measuring extreme poverty, as they do not target 

this market. 

Tools allowing institutions to measure poverty outreach more generally would also 

be of potentially significant interest to agencies and organizations outside of the 

microenterprise development/microfinance sectors. While some of the same agencies 

and organizations will be interested in a tool identifying the very poor, many more 

would likely be interested in a tool identifying poverty more generally. 

Thus, the inevitable result of the very poor focus is limited scale in terms of tool 

adoption and usage and in terms of creating social transparency in the industry. I 

see this as a tremendous lost opportunity to achieve potential wide-spread scale in 

social transparency. 

(To reiterate a reference in my testimony, I believe that there are alternative 

ways to create wide-spread social transparency in the industry. USAID is at the 

forefront of this effort in its support of the social audit/social rating method, which 

I believe holds the most promise for achieving scale in social transparency across 

all types of institutions in all contexts and targeting all markets. Generally, USAID 

efforts to promote social transparency should be applauded and, more importantly, 

actively supported by Congress.) 

I think that the idea of developing poverty assessment tools is a good one. I applaud the Congress’ role in facilitating this process. In hindsight, however, there are 

five changes to the current Act I would recommend:

• Calibrate the tools to measure both extreme poverty and poverty.

• Build in an explicit fudge factor into the tools that takes in the ‘‘vulnerable 

non-poor,’’ such as extending the tools to include those within a set number 

of deviations above the poverty line.

77

• Streamline the process significantly so that each tool for each country could 

be produced at a lower cost, allowing tools to be developed for more countries 

within a given budget.

• Disseminate each tool immediately on completion and place the impetus on 

the institutions to adopt and adapt them as meets their needs, while offering 

technical guidance as requested or needed.

• Create a pot or pots of money—including loan funds, administrative overhead 

funds, and technical assistance funds—for institutions exhibiting ability or 

commitment to reach very poor, poor, or other priority markets. This would 

take the place of the current 50 percent earmark for the very poor. The distinction between ‘‘pots of money’’ and percentage earmarks is subtle but 

meaningful. The latter ties the hands of the implementing agency (USAID in 

this case) setting in motion a unique set of behavioral incentives for both implementing agency and grant seeking institution, while the former creates, I 

think, greater flexibility to target and prioritize resources; potentially allows 

for greater collaboration and planning; and does not necessarily tie the hands 

of the implementing agency, thereby allowing it to act with wider discretion 

in meeting policy objectives as opposed to resource allocation targets. (Whether these distinctions play out in practice is uncertain.)

Outreach to the very poor, poor, or vulnerable non-poor could also be promoted 

via a variety of other means. For example, incentives for institutions to go down 

market further, not necessarily to the very poor, would be appropriate. Say an MFI 

or BDS provider is currently serving largely non-poor clientele but seeks to extend 

its outreach further down the socio-economic ladder, albeit not necessarily to the 

very poor. This institution might qualify for support under a particular funding/support program. The point here is less to reach a specific market segment but to promote downreach in general, which is a very laudable end and which is fully consistent with Congress’ poverty mandate. I would argue that it is important to demonstrate that downreach is possible and that commercially-oriented institutions can 

successfully move down market and provide them models for doing so. Currently, 

however, there is nothing in USAID programming I am aware of to support this 

kind of activity. 

Another possible mechanism to support deeper outreach might be through the 

matching requirement, which I believe is currently written into legislation. For example, institutions demonstrating outreach to a certain priority market might be relieved of certain matching requirements. The extent of the relief could correspond 

to some sliding scale depending on the depth of outreach sought or achieved. 

In other words, there are other ways, and potentially more effective ones from a 

broader policy perspective, to achieve the sought-after policy objectives than the 

very blunt instrument of specific percentage funding earmarks. 

In general, I think it more productive to think of program funding in terms of a 

suite of policy objectives, of which poverty alleviation (deep outreach) is but one of 

them, albeit an important one,. Funding allocations would in turn reflect the multiple policy objectives and incorporate explicit strategies to achieve them. The current Act, however, does not encourage this approach from what I can see. Instead, 

it uses a blunt instrument to promote a single policy objective, while giving comparatively little consideration to other important policy objectives. Thus while I 

think that the focus on the very poor is critically important, I also believe that disproportional focus on it risks producing unintended and unbalanced policy outcomes. 

Question: 

You suggest in your written testimony that more should be done to reach out specifically to rural populations in need of financial services. Do you believe that we 

would get better results if such an emphasis on rural areas replaced the current emphasis on the very poor? 

Response: 

If I had to choose between an emphasis on the very poor or an emphasis on rural 

areas, I would choose an emphasis on rural areas. I think what we will find is that 

the majority of very poor clients currently reached by poverty-focused MFIs live in 

either peri-urban or urban areas. One might argue that requiring lending to the 

very poor will incentivize MFIs to move increasingly into rural areas, but I am skeptical about this. Working in rural areas is very different than peri-urban and urban 

areas, such that it requires often a different approach, different program design, and 

a different product suite. 

I should be clear also that when I talk about serving rural areas, I am referring 

specifically to supporting traditional rural-based activities, such as agriculture, 

78

agro-processing, and livestock rearing. My impression is that most of the MFIs 

working in rural areas today tend to focus on petty traders or service providers and 

not on traditional rural-based activities. These activities may support rural households, but they do comparatively little to build up rural economies. 

That said, I do not believe it is necessary to choose between the very poor or rural 

areas. One can do both. Nor am I am not recommending that Congress require that 

a certain percent of microenterprise funds go to rural areas (such as it has for the 

very poor). Instead, I would recommend that it create a set of incentives (such as 

a ‘‘pot of money’’ for loan funding, administrative overhead, technical assistance, 

etc.) to encourage and facilitate expansion of outreach, and experimentation, in 

rural financial services that target traditional rural economic activities. 

Just to make sure I am not misunderstood, I do not advocate shifting funding priority solely, or even predominantly, to rural areas. Promoting private sector development and poverty alleviation in periurban and urban areas remains critically important. I do, however, advocate placing greater emphasis on rural areas and on supporting significantly higher levels of funding, innovation, and experimentation in 

rural financial service provision and outreach. (Again, AMAP has funded research 

into rural lending and outreach, the results of which will undoubtedly be of significant help to Congress and USAID in addressing this issue.) 

Question: 

You write in your testimony that ‘‘outreach to women or to rural areas are probably 

superior proxies of poverty outreach than loan size, as we know indisputably that 

poverty is disproportionately concentrated among women and in rural areas.’’ Can 

you elaborate on how USAID can most effectively promote outreach to women and 

those in rural areas? 

Response: 

I have already discussed how I believe USAID can most effectively promote outreach to rural areas. In terms of promoting outreach to women, available statistics 

suggest to me that USAID-funded institutions are doing a reasonably good job 

reaching women. 

The broader industry has been promoting outreach to women for years now, and 

the message appears to have gained significant legitimacy, as judged by the number 

of MFIs targeting women and the relative percentage of women reached industrywide. 

I do find it a bit worrisome, however, that the percentage of USAID funds going 

to women appears to be trending downward. This may signal a number of things, 

among them: (1) a reduction in industry-wide commitment to serving women, (2) the 

particular characteristics of USAID funding, which may or may not reflect broader 

industry trends, or (3) a reallocation of funding to more growth-oriented businesses, 

which will tend (though with many exceptions) to be owned and operated by men. 

This trend should be monitored closely, and I would recommend that someone undertake investigation to determine its causes. (This last statement dovetails with 

my recommendations below to utilize the MRR database more extensively and effectively than to date.) Just like our commitment to serving very poor and poor populations requires constant vigilance, so too does our commitment to serving women. 

As an aside, I would also add that if the policy objective is poverty outreach, a 

focus on women is highly appropriate. If, however, the policy objective is promotion 

of growth oriented microenterprises with capacity or potential for job creation, then 

a focus on women may be less appropriate. Very broadly speaking, my experience 

suggests that the women-owned enterprises served by poverty-focused MFIs are but 

one of several sources of household income and are operated with the purpose to 

diversify and smooth out household income flows. These enterprises are primarily 

involved in petty trading or small-scale services, tend not to create paid employment, and appear to have a natural and self-imposed growth ceiling. These enterprises are critically important in helping households smooth income and consumption flows, manage risk, deal with uncertainty, cope with shocks, and occasionally 

help lift households out of poverty. They play less a role, however, in terms of promoting private sector growth and job creation. 

Thus if policy seeks the dual objectives of poverty alleviation and private sector 

development, it needs to seek a balance with regards to targeting women. (Again, 

this is intended only as a very broad generalization.) That said, there will be numerous exceptions to these general trends. A legitimate use of public money (and one 

I would encourage) would be to target loans or other enterprise development support 

to female-owned growth-oriented micro, small, and medium enterprises (including 

corresponding market research, product innovation, and pilot-testing). 

79

In terms of targeting rural areas, and traditional economic activities in rural 

areas, I do not see any potential tradeoffs. If the policy objectives are private sector 

development and poverty alleviation, supporting farming, agro-processing, and other 

agro-based activities and enterprises is a highly complementary approach that 

serves both objectives. 

Question: 

What impact are the reporting requirements imposed in the 2004 microenterprise 

legislation having on microenterprise assistance implementing institutions? Do you 

expect the costs to these institutions of additional reporting to be high? 

Response: 

I cannot say what the impacts of the reporting requirements are. I can, however, 

state my opinion that this information is important and should be collected. I have 

no problem conceptually with requiring funding recipients to report as a condition 

for funding; the key is to keep the reporting requirements reasonable. As currently 

legislated, I think that the reporting requirements are generally reasonable. 

An exception to this generality is the poverty reporting requirement for business 

development service providers, particularly since many BDS providers are not direct 

service providers; that is, they work through intermediaries and do not interact directly with micro and small enterprise owners). They are not in a position to know 

or ask the poverty status of end clients, and to find this out requires them either 

to (1) survey persons who are not their clients or (2) require the direct service providers to collect and report the poverty information. The former is not reasonable, 

while the latter adds another layer of reporting requirements, which is, in my view, 

not reasonable to expect. 

I should add that I also believe that the information collected by USAID over all 

these years and currently stored in the MRR data base is being grossly underutilized. This is a potential treasure trove of information for the Congress, USAID, and 

the broader industry that remains almost completely untapped. I would encourage 

Congress and USAID to allocate funding specifically to develop this resource, fund 

research using it, and make it publicly accessible in usable formats. This, I think, 

would require a relatively small investment (although enough should be allocated 

to permit the job to be done well) that could pay off comparatively large dividends 

down the road in terms of informing Congressional and USAID policy. I know that 

Weidemann Associates (who manages the MRR data base) is both anxious and 

ready to take on this work, has the capacity to do so, and is willing to enter into 

consultation with USAID to find workable solution to make it happen. 

RESPONSES FROM MS. SUSY CHESTON, SENIOR VICE PRESIDENT, OPPORTUNITY INTER- NATIONAL, TO QUESTIONS SUBMITTED FOR THE RECORD BY THE HONORABLE CHRIS- TOPHER H. SMITH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW JER- SEY AND CHAIRMAN, SUBCOMMITTEE ON AFRICA, GLOBAL HUMAN RIGHTS AND

INTERNATIONAL OPERATIONS

Question: 

You state in your written testimony that ‘‘the investment to date in the development 

of poverty assessment tools will truly pay off’’ in the future. As we heard from Ms. 

Schafer in the first panel, USAID is now working on country-level poverty assessment 

tools in the wake of serious problems with the originally-mandated tools intended for 

regional and international use. What is your view of these country-level tools? Do you 

believe they will provide the necessary degree of accuracy? 

Response: 

I agree with the USAID assessment that country-level (or even more localized) 

poverty measurement tools for microenterprise practitioners likely will be more useful and accurate than a universal international tool. I also have been impressed 

with the work by University of Maryland IRIS Center hired by USAID to carry out 

its tool development and certification process. I believe the USAID concentration on 

IRIS-developed tools was a legitimate effort to address legislative mandates in the 

context of few poverty measurement tools available and uncertainty on how to certify them without further development of tools. 

However, the primary focus on creating a new USAID tool shifted away from the 

original intent of certification of existing or new tools developed by practitioners. 

A practitioner-led process has many benefits, including the understanding of clients and ability to develop and implement tools that best reflect their missions and 

enhance internal program delivery capacity. More than 10 years ago, AIMS, a 

USAID-led impact measurement project, clarified that client assessment can serve 

80

not only to prove impact but, more importantly, to improve performance. In other 

words, a great strength of effective client assessment is not only to prove impact 

for use in donor decision-making, but even more so to allow practitioner organizations to improve their services to the poor. 

For example, within Opportunity International, we made a significant investment 

in the development of a pioneering Client Insight Information Management System 

(CIIMS) which helps us to understand the kind of impact we are having on our clients and to develop products, services and procedures that better meet their needs. 

Despite that significant investment in a tool that reflects our mission, values and 

field realities, Opportunity is now at risk of needing to divert our resources toward 

multiple one-size-fits-all poverty assessment tools developed by USAID for each 

country. While Opportunity is committed to poverty assessment, it is not clear that 

the USAID country-specific tools will give us better information to encourage our 

downreach efforts than our own in-house tool. 

Therefore, going forward, USAID efforts should put greater emphasis on the certification of practitioner-led tools that enable comparability of data but also serve 

internal needs. Now that USAID is developing tools on a country by country basis, 

USAID has wisely opened the door to analyzing what practitioners have developed 

and are using. To reduce the costs and difficulty of implementation, a balanced approach is needed that gives equal emphasis to certification standards that assure 

practitioner-preferred tools meet the poverty assessment needs, as well as providing 

practitioners and others with the resources to develop new tools for possible practitioner adoption. 

Question: 

You reiterated in your testimony your support for the provisions in the 2004 legislation which mandate that half of USAID’s microenterprise funds reach the very 

poor. We just heard from Dr. Woller that such an approach might actually be, as 

he states in his written testimony, ‘‘an unduly limiting vision.’’ What, if anything, 

would you say we lose by focusing on the very poor? 

Response: 

Dr. Woller is absolutely correct that there are other needs for funding for microfinance beyond a focus on the very poor. This would include such activities as bringing ‘‘second-tier microfinance institutions’’ to sustainability so they can tap into investment funds and no longer rely on subsidy from USAID or other donors. It also 

includes increasing our capacity to reach all those who are currently excluded from 

financial services, including clients who are ‘‘poor’’ (rather than ‘‘very poor’’). Currently, 50% of USAID funds are available for these purposes. That seems to me to 

be significant funding, particularly when combined with other funding sources available to the industry, including $2 billion in investment capital, funding from other 

donor organizations and from private sources, and savings deposits that can then 

be on-lent. 

The question then becomes what is the appropriate use of public funds. My belief 

is that USAID can be very strategic in taking risks that other funders are not able 

to take, and particularly by providing incentives for microfinance institutions to innovate in reaching lower levels of poverty. 

In my 15 years in microfinance, I have never seen examples of microfinance programs that unintentionally drifted downmarket to serve poorer clients. I have, however, seen many examples of microfinance programs that drifted upmarket. Years 

ago, one of Opportunity International’s partner microfinance institutions (MFIs) in 

the Philippines was very committed to reaching the very poor and thought it was 

doing so. But after a wrenching organizational review, it discovered that its loan officers were often choosing to work with the easier-to-reach clients—those closer to 

bus lines, with more visible businesses, those who were illiterate or easier to work 

with because they understood financial services and markets better. The discovery 

caused a total change of strategy. That’s why incentives are so important at every 

level—incentives by USAID to all of its partners; incentives by microfinance networks to their partners; incentives by MFIs to their own staff; etc. It’s simply harder 

to reach the poor and very poor—which is why commercial banks didn’t do it until 

microfinance programs came along to show the way. Upreach is easier and therefore 

requires less subsidy; it’s downreach that’s the challenge. 

I also agree with Dr. Woller’s point that USAID can have a much stronger impact 

by focusing more of its funding on women and those in rural areas—both groups 

known to be disproportionately affected by poverty. 

Finally, Dr. Woller makes an important point in his testimony that the requirement to target 50% of USAID funds to the very poor has faced difficulties in being 

applied to the enterprise development area. USAID reported that $93 million (44%) 

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of the $211 million in microfinance/microenterprise funds in 2005 went to microfinance and $94 million (45%) went to enterprise development projects. Another 

$23.9 million (11%) went to policy projects, the majority of which focused on enterprise development. USAID noted in its 2005 report that, based on the old reporting 

standard of loan size proxy, a far greater percentage of microfinance/financial services obligations went to the very poor (37%) than funds for enterprise development 

(18%). (The combined total for all FY 05 USAID obligations was 23%.) 

In the case of both enterprise development and policy work, it is unclear how the 

current poverty assessment tools can best be applied. Is it congressional intent to 

exempt those activities from a focus on the very poor (which comprised a total of 

56% of assistance), or to include those activities? 

Question: 

What track record has the Millennium Challenge Corporation had in incorporating 

microfinance and microenterprise into the compacts signed to date, and how do you 

think they could further be emphasized in those compacts moving forward? How 

could the MCA indicators more clearly ensure that microfinance is part of the mix? 

Response: 

Microfinance is a proven, cost-effective approach to economic growth, job creation, 

and personal self-sufficiency in developing countries, and given federal budget limitations, leveraging that value by integration into mainstream programs will yield 

a greater return on overall federal investment. 

The Millennium Challenge Corporation (MCC) focus on poverty reduction through 

economic growth, private sector development, and capacity-building is a natural fit 

for microfinance efforts to add value. The MCC is especially important as the primary vehicle to direct substantial funding through the new foreign assistance 

framework. 

As a stand-alone program in USAID without substantive integration into MCC 

and other programs, microfinance and microenterprise support can have a limited 

impact. The $200 million available to allocate worldwide, most of which USAID directs to activities other than direct financial services, is marginal compared with the 

billions invested in MCC. USAID reports that 69 countries received some kind of 

microfinance or microenterprise development funding in FY2005, including enabling 

environment, enterprise development, and microfinance projects. Of those countries, 

nearly three-fifths received less than $2 million. When Opportunity International 

has approached USAID missions in Africa with the commitment to bring significant 

private donor funding to match USAID funds, we have been told on several occasions that there is simply no discretionary funding available for retail microfinance 

to the poor. 

Unfortunately, measuring the extent of microfinance focus or support in MCC 

compacts is difficult to assess based on available measures. Public MCC reports 

show spending on activities classified as ‘‘microfinance / microenterprise related’’ totals:

Armenia 3.6% ($8.5 million out of total $235 million) 

Benin 6.4% ($19.7 million out of total $307 million) 

Cape Verde 1.9% ($2.1 million out of total $110 million) 

Honduras 4.5% ($9.8 million out of total $215 million) 

Madagascar 7.5% ($8.2 million out of total $110 million) 

Ghana 15% ($82.4 million out of total $547 million) 

However, most of that MCC ‘‘microfinance’’ activity does not focus on direct service provision or retail financial services to the poor. Rather, they encompass a broad 

range of other interests, such as credit for larger businesses (small and medium 

rather than micro); agri-business; technology to support the commercial financial 

services infrastructure; technical assistance to mainstream commercial banks and 

rural banks; and enabling environment activities such as policy and regulatory reform. Therefore, the integration of microfinance and microenterprise likely is overstated. 

Based on available information, it also is hard to very hard to determine whether 

the MCC compact development process, technical assistance, or monitoring / evaluation places adequate emphasis or incentives on microfinance as a central element 

of poverty reduction through economic growth. In part, this may be attributable to 

the principle that recipient countries, not the donor, have primary ownership in conceiving, developing, and implementing a program. 

Nevertheless, the high impact of microfinance programs and their importance in 

strengthening the informal / private sector is a critical consideration for MCC to be 

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effective. At a minimum, MCC should proactively promote linkages between countries that are developing compacts and the international microfinance provider networks that can provide insights, assistance, and additional resources. At best, MCC 

would incorporate factors of microfinance access and microenterprise development 

into its evaluation criteria. Opportunity International and the microfinance network 

are eager to pursue such a relationship with MCC in order to help achieve our 

shared goals. 

Question: 

Microfinance is a proven strategy to reach women and to unleash their participation in their own development as well as the development of their communities. What 

more could USAID do to ensure that microfinance and microenterprise programs 

benefit women? 

Response: 

USAID is to be commended for some significant successes in encouraging a greater focus on unserved women. For example, according to a USAID report, in fiscal 

year (FY) 2000, six Egyptian microfinance institutions reported a total of 72,634 clients, with an average loan size of $506. Only 17 percent of these clients were 

women. In FY 2002, these same institutions reported 115,345 clients (a growth of 

59 percent) with an average loan size of $372 and that 54 percent of these clients 

were women. This dramatic and positive change came about because the USAID 

Mission strongly encouraged its long-time grantees to add a new poverty-targeted 

group-lending product specifically designed for women, which now accounts for virtually all of their growth. This kind of awareness of both gender issues and microfinance best practices should continue and be expanded throughout USAID’s microfinance and microenterprise development programs. 

At the same time, microfinance programs can have a tremendous impact on women’s empowerment, but simply getting cash into the hands of women (in the form 

of loans) is not always enough. Programs that integrate intentional activities to encourage women’s empowerment, such as leadership development, domestic violence, 

women’s rights, political participation, literacy, and the like, can be much more effective in promoting empowerment. Yet USAID RFPs generally have been focused 

on the financial performance of microfinance institutions and have generally not encouraged these kinds of integrated activities nor specific efforts to target women. 

My recommendations are as follows: 

1) USAID should disaggregate all data by sex. This includes ensuring that client 

impact and poverty assessment tools funded, developed and/or certified by USAID 

are sex-disaggregated and take into account intrahousehold dynamics. It also includes reporting sex-disaggregated client outreach data in its Microenterprise Results Reporting (MRR). Interestingly, in the past, USAID’s Office of Microenterprise 

Development has been a stand-out in sex disaggregating much of its data in past 

MRR’s, responding to the provision in Public Law 106–309: Microenterprise for SelfReliance Act of 2000 to make ‘‘recommendations for adjustments to such assistance 

to enhance the sustainable development impact of such assistance, particularly the 

impact of such assistance on the very poor, particularly poor women.’’ With the new 

streamlined report for 2005, which was very well done, USAID unfortunately did 

not report on client data and therefore did not include information on women clients 

other than on the human trafficking issue. 

2) USAID should award points for microfinance and microenterprise development 

programs that address the specific needs, assets and obstacles of women. This would 

include programs that:

• intentionally integrate women’s empowerment activities

• demonstrate gender equality in their boards, management and field staff

• provide evidence of women’s involvement in the design and implementation 

of their programs

• develop alliances with women’s organizations

• demonstrate an awareness of the specific constraints faced by women within 

their context as well as strategies to address those constraints

• demonstrate specific outreach to women clients

• design products and services that are gender-sensitive and address 

intrahousehold dynamics

• mainstream gender perspectives throughout their organizations

• provide products to help women who are ready to graduate to more sophisticated financial products

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3) USAID should report on its efforts to address exploitation of and violence toward women through such programs as integration of client training into microfinance programs and development of linkages with other NGO’s. PL108–484 provided that USAID report on ‘‘the efforts of the Agency to ensure that recipients of 

the United States microenterprise and microfinance development assistance work 

closely with nongovernmental organizations and foreign governments to identify and 

assist victims or potential victims of severe forms of trafficking in persons and 

women who are victims of or susceptible to other forms of exploitation and violence.’’ 

USAID’s 2005 report to Congress included a response related to human trafficking 

but does not address ‘‘other forms of exploitation and violence.’’

4) Congress should request a report on USAID’s efforts to achieve the above.

USAID’s Office of Microenterprise Development (OMD) has much to share about its 

accomplishments. A document developed by OMD could be helpful in ensuring an 

agency-wide review of existing practices and in promoting best practices for the future. This is especially important in the context of declining trends in microfinance 

services as the microfinance industry commercializes and institutions become larger. 

Finally, I recommend support for the GROWTH Act for Women (the Global Resources and Global Resources and Opportunities for Women to Thrive Act, H.R. 

5858). The GROWTH Act would create important changes in U.S. international assistance and trade programs by prioritizing economic opportunity for women living 

in poverty worldwide. 

Question: 

There has been some concern that the Microenterprise Development Office has had 

insufficient levels of funding to use for its own programs and has not received the 

level of funding authorized in 2004. Should most funding for microenterprise assistance flow from Washington or from USAID missions? What are the advantages and 

disadvantages of each? What will be the impact on microenterprise assistance of the 

‘‘transformational development’’ reforms that reportedly aim to centralize much of 

project funding and decision-making? 

Response: 

I have some concerns about the overwhelming trend for funding to be directed 

through missions as opposed to central mechanisms. Administrator Natsios implemented a major restructuring to direct more USAID funding through missions and, 

as noted, Ambassador Tobias is expected to carry this trend much farther due to 

his ‘‘transformational development’’ reforms that emphasize country-level strategies 

and budgets. The benefits of funding through USAID missions are clear and include: 

a greater understanding of local contexts, decisions being made closer to the field, 

and greater potential for cohesive, synergistic, non-duplicative programs within a 

given country. 

However, there are some disadvantages to this approach for microfinance and 

microenterprise: 

a) Microfinance and microenterprise have evolved into highly technical, specialized fields requiring knowledge of banking, finance and the like. For instance, in 

many cases, microfinance institutions are converting to regulated financial intermediaries/commercial banks that are regulated by the Central Bank. Further, the 

industry is rapidly evolving, with best practices of yesterday being replaced by higher performance standards today. Mission staff rarely have the kind of specialized 

expertise necessary to ensure that these programs follow global best practices. 

b) The 2005 USAID Microenterprise Results Reporting notes that 20 missions 

benefited from Office of Microenterprise Development (OMD) input in developing 

their microfinance strategies, per PL 108–484’s mandate that OMD concur with 

mission strategies. However, that presumably leaves 49 missions that have not benefited from that kind of technical input. 

c) Much of the success and global leadership of USAID in microfinance has been 

its investment in the establishment of market leaders. In the 1990’s, USAID accomplished this by investing in not-for-profit global microfinance networks, which in 

turn created world class microfinance institutions in many parts of the world. These 

networks are able to match federal funds with other funding, create global economies of scale, share learnings within their networks and across networks, build capacity for direct provision of services to the poor and very poor, and encourage cultures of excellence that benefit countries across the globe. Most of all, they develop 

long-term relationships with their field partners that lead to higher capacity and 

better performance. Without central funding mechanisms designed for participation 

by not-for-profits, USAID loses the ability to tap into this significant resource for 

dramatically increasing the impact and outreach of microfinance. 

84

For example, in 1991, after 20 years in business, Opportunity International had 

6,000 clients. Today, only 15 years later, Opportunity has 850,000 loan clients, along 

with 3 million poor people who now have basic micro insurance to protect them in 

the event of disaster or disease, plus a growing number of savings and remittance 

clients. That kind of exponential growth in numbers and in range of services is 

found throughout our industry and was largely stimulated by strategic investment 

by USAID. Yet Opportunity is one of the majority of microfinance networks that 

have seen its USAID funding decline significantly despite a track record of results. 

d) Microfinance is currently at a crossroads when explosive growth is possible at 

a global level. Thirty to fifty million people today have access to microfinance services—yet 300 to 500 million people are still excluded from basic financial services 

and yet could benefit from them. A global strategy is called for—yet no international 

donor or investor has stepped up to the plate to help develop that strategy. USAID 

is well positioned to provide that kind of global leadership, as it has in the past—

but this requires a vital central office with strong technical skills that is well positioned to coordinate agency efforts and to work closely with the practitioner community and others. 

e) The trend to distribute funds through missions has led to a significant increase 

in the percentage of funds awarded through umbrella contracts and umbrella 

projects. From 1996–2005, there has been a general trend toward lower spending 

by USAID on microfinance/financial services and at the same time a greater reliance on umbrella mechanisms. Smoothing out year-by-year fluctuations, we see that 

at the start of the period, umbrellas accounted for approximately 9 percent of all 

microfinance funding ($10m/$115m), while in 2004, umbrellas accounted for over 38 

percent. In 2005, the amount obligated to umbrella programs was 51 percent 

($107m/$211m), and only 37 percent of the microfinance and microenterprise support was obligated directly to non-profits.

f) Funding for retail microfinance has declined and should be increased. It is hard 

to separate out the question of central versus mission mechanisms from the question of what kinds of programs those mechanisms support. A great deal of the increase in assistance in recent years has gone to support enterprise development and 

policy activities rather than retail microfinance/financial services for the poor. 

USAID’s data shows that retail microfinance funding has stagnated or decreased despite the increase in overall funding for microfinance/microenterprise development. 

The Microenterprise Coalition believes that USAID’s most important goal in the 

microfinance area should be expansion of financial services to the poor. That goal 

requires a focus on building the capabilities of direct service providers: retail MFIs 

(microfinance institutions). Projects that address ‘‘industry infrastructure’’ such as 

credit bureaus or regulatory reform can be important and can support direct service 

providers but should not be the primary focus of USAID’s microfinance-related assistance, including its umbrella programs. The Microenterprise Coalition further beVerDate Mar 21 2002 17:02 Sep 19, 2006 Jkt 000000 PO 00000 Frm 00088 Fmt 6601 Sfmt 6621 F:\WORK\AGI\072706\28970.000 HINTREL1 PsN: SHIRL

28970a.eps
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lieves that a significant majority of umbrella program funds should go to direct service providers that directly work with poor and very poor clients. 

With respect to the ‘‘transformational development’’ reforms currently underway, 

the microfinance community joins with the rest of the PVO community in expressing 

concern that the process to date has been closed to input from PVO’s and practitioners in general. We understand that the Director of Foreign Assistance is now 

beginning to open up to input from civil society and request that Congress encourage this new openness and responsiveness. An August 1, 2006 dialogue with members of InterAction was a good start. 

The lack of an open process to date makes it difficult to comment in any detail 

on the proposed ‘‘transformational development’’ reforms. That said, the concern expressed by many in the PVO community and at USAID is that a ‘‘niche’’ program 

such as microfinance will get lost in the context of country-level planning that may 

be carried out by people who lack specific microfinance expertise. Further, we wonder whether or not economic growth will be fully embraced as a key strategy, and 

whether microfinance/microenterprise will be recognized as a means for poor people 

to contribute to and benefit from economic growth. The Microenterprise Coalition 

would welcome the opportunity to meet with the Director of Foreign Assistance and 

his designates to further explore these issues. 

RESPONSES FROM THE HONORABLE JACQUELINE E. SCHAFER, ASSISTANT ADMINISTRATOR, BUREAU FOR ECONOMIC GROWTH, AGRICULTURE AND TRADE, U.S. AGENCY

FOR INTERNATIONAL DEVELOPMENT TO QUESTIONS SUBMITTED FOR THE RECORD BY

THE HONORABLE CHRISTOPHER H. SMITH, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF NEW JERSEY AND CHAIRMAN, SUBCOMMITTEE ON AFRICA, GLOBAL

HUMAN RIGHTS AND INTERNATIONAL OPERATIONS

MICROENTERPRISE

Question: 

What does USAID believe is the best way to create effective, sustainable microfinance programs? In your agency’s view, should there be a particular focus on any 

of the Office of Microenterprise Development’s three aid areas (financial services, enterprise development, and enabling environment)? 

Response: 

USAID believes that the best way to create effective, sustainable microfinance 

programs is to develop the microfinance industry as a whole and the market infrastructure it needs to thrive. National microfinance markets vary significantly in 

terms of their state of development and the constraints that must be addressed to 

produce a mature microfinance market. Effective, sustainable microfinance programs employ the most appropriate measures to reduce these constraints. 

These measures can include support for building sustainable retail microfinance 

institutions; for conducting market research and developing new products that will 

ensure that microfinance institutions provide the services that their clients demand; 

help for microfinance institutions so they can gain access to commercial capital; and 

support for technology solutions that can extend outreach and reduce transaction 

costs. 

Similarly, USAID believes that each of its three technical areas (financial services, enterprise development, and enabling environment) could be an area of particular focus, depending upon market conditions. This approach recognizes the multiple, complex needs that businesses have, their need for links with other firms, and 

the constraints that a poor policy environment might pose. This approach also recognizes that financial service, enterprise development, and enabling environment programs, when combined within a single country, often achieve synergistic effects. 

Low-income households and entrepreneurs need financial services to meet diverse 

business needs—savings, credit for working capital and investment, and payment 

services to carry out everyday commercial transactions. In addition, they and their 

families need access to diverse financial services (savings, credit, insurance, remittance and payment services, transaction accounts) for non-enterprise purposes—to 

invest in education and new skills; to build assets, such as homes; to smooth consumption when times are lean; to plan for weddings, funerals, births, old age, 

deaths, and other life cycle events; and to help cope with the emergencies and other 

crises that beset poor households, including death or disability of a breadwinner, illness of family members, natural disasters, or war and conflict. USAID supports different types of providers of retail services, including banks, credit unions, NGOs, 

and non-bank financial institutions, so that families and businesses benefit from 

86

choice and competition. USAID carries out a balanced mix of interventions to 

achieve the goal of more and better financial services. These measures can include 

support for capacity building to help retail microfinance institutions become sustainable; for conducting market research and developing new products that will ensure 

that microfinance institutions provide the services that their clients demand; help 

for microfinance institutions so they can gain access to commercial capital; and support for technology solutions that can extend outreach and reduce transaction costs. 

In some countries with more mature microfinance markets, USAID has shifted its 

strategy from supporting individual retail institutions to developing the microfinance industry as a whole and the market infrastructure it needs to thrive. This 

support may entail funding to help multiple providers with new product development, or investments in specialized institutions such as credit information bureaus 

and ratings agencies. The resulting competition can lead to product innovation, 

greater efficiencies, and better services and prices for clients. Measures to improve 

the macro level—financial-sector laws, regulations and policies to create an appropriate enabling environment for pro-poor financial services, and capacity of bank 

and credit union regulators to supervise microfinance activities and institutions—

are often critical at every stage of market development. 

Financial services are necessary but insufficient for many enterprises to survive 

and thrive. Where the poor are not linked into growth opportunities or lack the resources they need to take advantage of opportunities, economic growth translates 

into poverty reduction much less effectively. USAID has sought to create wealth in 

poor communities and promote economic growth by linking large numbers of lowincome entrepreneurs into better markets and increasing their productivity and 

competitiveness. This requires sustainable business services, market linkage and 

market information services, access to improved production technologies, and organization of poorer entrepreneurs to improve their efficiency and bargaining power 

in the market. It also requires strengthening value chains where the poor are concentrated—often within the agriculture or informal sector—and improving the competitiveness of industries in which significant numbers of micro-scale firms participate. 

In some cases, the Agency can accomplish more by changing a regulation or helping implement a law than it can by supporting a single institution to deliver direct 

services. A supportive enabling environment includes favorable business and investment climates and is critical to successful, sustainable microenterprise development. 

USAID supports reform of laws, regulations, and policies to facilitate the start-up 

and growth of microenterprises and to expand access to financial and other services 

by the underserved poor. Interventions can include helping countries streamline 

their business registration process, building the capacity of microentrepreneurs to 

work through independent business associations to advocate for policy reforms, promoting anti-corruption efforts and tax reform, and improving policies and regulations in sectors of particular importance to microenterprises and poorer households. 

Question: 

Within the FIELD Support LWA, there seems to be a strong emphasis on the enabling environment. Can you explain USAID’s rationale for this focus? 

Response: 

USAID’s FIELD Support LWA mobilizes the expertise that the non-profit community offers across all three technical approaches: financial services, enterprise development, and enabling environment; no one technical approach is emphasized over 

any other. USAID’s Office of Microenterprise Development assists missions in developing strategies and programs whose foci reduce the most binding constraints in 

order to achieve sustainability and maximum impact. 

Evidence from FY 2006, the first year that the FIELD Support LWA has been 

available, confirms that missions have not used this mechanism to focus predominantly on the enabling environment. By the end of this fiscal year, the Microenterprise Development office expects to have obligated nearly $3 million under the 

FIELD-Support LWA to implement nine pilot projects in Peru, Guatemala, Bangladesh, and throughout Africa. These projects, designed to improve livelihoods and 

entrepreneurship of the poor, will be implemented through the full range of 

USAID’s microenterprise technical approaches. These projects include integrating 

the poor into the formal banking sector through remittances, mapping social performance standards to help private social investors invest in microfinance, documenting sound practices for the provision of savings-led financial services, and conducting a health sector assessment. Furthermore, under the FIELD-Support LWA, 

training will be provided to practitioners to administer the poverty measurement 

tools. Of all of the projects under the FIELD-Support LWA, developing guidelines 

87

for sustainable microenterprise development in fragile states comes the closest to 

addressing enabling environment issues. The combination of these projects addresses the needs of the poor at all levels: service provision, institutional development, 

infrastructure development and the enabling environment. 

Question: 

In light of significant changes at the State Department that are resulting in a 

country-level focus for programs, there is a danger that global and regional programs 

requiring a high level of technical expertise may be lost. What is are USAID and the 

State Department doing to ensure that long-term economic development through the 

provision of retail microfinance services is maintained as an effective strategy to combat poverty? 

Response: 

Microfinance and microenterprise development are explicitly included in the new 

Strategic Framework for Foreign Assistance, appearing among the elements of two 

objectives: Economic Growth, under the Economic Opportunity area of the framework, and Investing in People, under the Social Services and Protection for Vulnerable People area. We anticipate that support for microfinance and microenterprise 

development will continue to play a role in long-term economic development programs. The specific form that these programs take will be worked out in Country 

Operational Plans put together by country teams. EGAT will assist country teams 

with the specifics of program design. 

The new Strategic Framework for Foreign Assistance recognizes the importance 

of alleviating poverty and making long-term investments in the people and institutions of developing countries. Doing so reflects not only the compassion of the American people, it also improves our security, since poverty, like unjust and oppressive 

rule, is an underlying condition for breeding terror and instability. 

USAID and the State Department agree that true development requires far-reaching, fundamental changes in governance and institutions, human capacity and economic structure, so that countries can sustain further economic and social progress 

without permanently depending on foreign aid. 

Work on the Foreign Assistance Framework is ongoing and moving along on 

schedule, with Agency and Department-wide staff input into defining the elements 

of the framework, developing indicators to measure program impact, and so forth. 

Updates to the Foreign Assistance Framework are posted on www.state.gov/f. 

Question: 

Half of U.S. assistance is supposed to be targeted at the ‘‘very poor,’’ defined as 

those in the lower half of people living below the poverty line. Are there difficulties 

in establishing the specific level of income of individuals living in poverty? What are 

the problems associated with applying visual indicators, such as type of house or 

clothing, to help distinguish between those poor people living in the upper half below 

the poverty line versus those living in the bottom half? In your view, what are the 

advantages and disadvantages of targeting U.S. assistance to help the ‘‘very poor’’ 

versus ‘‘the poor’’ or some other group? 

Response: 

Establishing income levels of poor people in developing countries is extremely 

challenging, particularly given the mix of cash income, barter and other forms of 

exchange that constitute their livelihoods. The Microenterprise for Self-Reliance Act 

defines ‘‘very poor’’ in terms of consumption (those people who are living on less 

than a dollar a day, or in the bottom half of the population that falls below the national poverty line) rather than income. The poverty measurement tools USAID has 

developed use a combination of proxy indicators (consumption of goods, household 

assets, education, head-of-household status and others) to determine the incidence 

of extreme poverty in a given group of clients. 

Even so, with people who are clustered around that cut-off line, it remains very 

difficult to locate them accurately on one side or the other. Where visual indicators 

such as housing or clothing type can help to locate people relative to one another, 

these indicators are incorporated into our poverty measurement tools. Taken alone, 

however, they do not allow us to determine the cut-off point between those who are 

just over a dollar a day, or the fifty percent mark, and those who are just under. 

Likewise, targeting U.S. assistance to the ‘‘very poor’’ suggests we can meaningfully distinguish between someone at ninety-eight cents a day and someone at a dollar and two cents a day. It is uncertain that this ‘‘bright line’’ distinction reflects 

a significant difference in the material well-being of potential clients. 

Moreover, it is frequently not sufficient to rely only on interventions that are tied 

to specific client data. USAID support for policy reforms that simplify and shorten 

88

the business registration process or render tax policy and enforcement more transparent and fair does help very poor clients, but because this is not measurable, such 

interventions aren’t counted toward the fifty percent target. 

The target has advantages, as well. Chief among them is the attention that it focuses on the need for the microenterprise development field as a whole to improve 

its ability to reach more very poor clients with the products and services they need. 

However, because the target is expressed in terms that require the tools to focus 

on distinguishing between those above and below the absolute cut-off point, a great 

deal of resources have been devoted to achieving that type and degree of accuracy. 

Those resources might be more effectively directed to supporting the development 

of new ways to better serve poor and very poor clients. 

Question: 

In recent years, some microcredit financial institutions which relied entirely on 

donor aid have been able to become financially self-sustaining by charging sufficient 

interest and working efficiently. What are the current trends for institutions to become self sufficient? How many are self-sufficient now? Are there regions or countries 

where this trend is more prominent? What is USAID doing to encourage the process 

of sustainability? 

Response: 

In FY 2005, fifty-eight percent of USAID-supported microfinance institutions were 

fully financially sustainable, compared with thirty-eight percent in FY 2001. USAID 

agreements with MFIs generally require that the institution have a clear business 

plan that will enable them to achieve full financial sustainability within seven years 

of initial funding. MFIs achieve this status through charging market interest rates 

and increasing their efficiency, but also through engaging in market research and 

appropriate product design to ensure that the products and services are those that 

their customers demand, and those that can secure and increase their market share. 

Outreach to new client groups is another key factor. 

USAID promotes sustainability by providing technical assistance for MFIs to increase their efficiency by developing staff capacity, upgrading management information systems and adopting technologies that can expand outreach and reduce transaction costs. We also support market research and product design and development 

that can increase MFIs’ competitiveness; and we link MFIs to sources of private capital so that they can establish themselves in local financial markets and reduce 

their reliance on donor funding to meet their capital needs. Moreover, by setting and 

upholding microfinance best practices, USAID ensures that MFIs will be able to attract private commercial capital in the form of equity investments. 

I can offer an example of our support for cost-saving technology from the Philippines. In that country, USAID supports a project called Microenterprise Access to 

Banking Services, which linked the Rural Bankers’ Association of the Philippines 

with Globe Telecom to implement the Text-a-Payment service. This service enables 

clients to make loan payments using mobile phones. The use of this technology 

saves clients the money they would otherwise have to spend on transportation to 

get to the bank to make their payments in person; and it saves them the time they 

would spend traveling and standing in line at the bank branch. The technology also 

saved the MFI money that it would have had to pay loan officers and collection 

agents to complete these transactions. 

In regional terms, sustainability figures vary both geographically and from year 

to year, as the universe of MFIs that receive USAID support shifts. In FY 2005, 

about sixty percent of USAID-supported MFIs in Latin America and the Caribbean, 

Asia and the Near East were financially sustainable; seventy percent of MFIs in Europe and Eurasia were financially sustainable; and about thirty percent in Africa 

were. African MFIs tend to work in more challenging markets where markets are 

less accessible and populations are poorer and more dispersed. 

An example of how MFIs progress toward sustainability can be found in Malawi, 

where USAID supports the Opportunity International Bank of Malawi (OIBM), 

which opened its doors to clients in 2003. Starting with 5,000 savings clients in 

2003, OIBM reported nearly 43,000 savings clients in 2005 with average savings of 

$107; more than half of these clients were women. As a microfinance institution, 

OIBM is building toward sustainability by channeling savings generated in the community into loans, rather than looking primarily to donors to provide loan capital. 

As loans are repaid, they are recycled into more loans. OIBM started by making approximately 100 loans in 2003; in 2005, the institution reported nearly 5,000 outstanding loans and was already 80 percent fully sustainable. 

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Question: 

What percentage of funding is being used to encourage policy reforms that might 

improve the enabling environment for microfinance and microentrepreneurs? Please 

give examples of policy reforms that help microenterprise and what USAID implementers did to bring about those reforms? 

Response: 

The donor community as a whole is devoting greater attention to the enabling environment, most visibly embodied in the World Bank’s Doing Business reports, and 

careful consideration of the enabling environment is becoming more standard practice in broader enterprise development programs. In FY 2005, USAID supported policy reform activities with eleven percent of its microenterprise funding. These activities are often integrated into broader microenterprise or credit development programs. 

East Timor (Timor-Leste) is the world’s newest nation and one of the poorest, 

with 41% of the population living below the national poverty line of fifty-five cents 

per person per day. With funding from USAID, a group of international and Timorese microfinance organizations formed a powerful alliance to address one of the 

country’s most urgent needs: access to credit for the poor. The Working Group focused on the drafting of a Code of Conduct to set clear standards by which microfinance clients, donors and the Government of Timor-Leste can hold practitioners 

accountable. 

In signing the Code, the Working Group became one of the few microfinance associations in the world to do so. Along with the Code, the Working Group, led by a 

USAID-funded team, established a Joint Reporting Format, which they used as a 

basis for selecting key indicators for a Performance Monitoring System. The Performance Monitoring System that the team developed will enable practitioners to 

measure the performance of the sector over time and to benchmark their performance against others in their category, providing valuable information for public consumption. 

The Code of Conduct, Joint Reporting Format, and Performance Monitoring System enhance transparency and promote accountability for the nascent microfinance 

industry in Timor-Leste. They enable practitioners to work together to build a 

strong microfinance industry to alleviate poverty and promote sustainable economic 

growth.

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