Report to the Chairman, Committee on 

International Relations, House of 

Representatives 

United States General Accounting Office 

GAO 

November 2003 MICROENTERPRISE 

DEVELOPMENT 

USAID’s Program Has 

Met Some Goals; 

Annual Reporting Has 

Limitations 

GAO-04-171 
USAID’s microfinance activities have met some, but not all, of the agency’s 

microenterprise program objectives. These objectives are to (1) reduce poverty 

among participants; (2) target the poor and very poor; (3) encourage women’s 

participation; and (4) develop sustainable microfinance institutions (MFI). First, 

regarding reducing poverty—defined as alleviating its impacts or lifting and 

keeping a large number of people above the poverty line—GAO found that 

microfinance can help alleviate some impacts of poverty, incrementally 

improving borrowers’ income levels and quality of life and offering an important 

coping mechanism to poor workers and their families. However, there is little 

evidence that it can lift and keep many over the poverty line. Second, 

microfinance generally has served the poor clustered around the poverty line but 

not the very poor. Third, USAID has successfully encouraged the participation of 

women, who have comprised about two-thirds of micro loan clients since 1997. 

Fourth, USAID has emphasized the importance of MFI sustainability. In fiscal 

2001, of 294 USAID-supported MFIs that reported on sustainability, 38 percent 

reported achieving full sustainability—a percentage consistent since 1999. 

The basic data in USAID’s Microenterprise Results Reporting (MRR) system are 

reliable, but certain methodological problems may affect the accuracy of some 

of the agency’s reporting on key program objectives. Specifically, USAID may 

not be reporting accurately (1) the amounts it has obligated to microenterprise 

activities; (2) whether 50 percent of its resources went to the very poor, as 

required by Congress; and (3) the sustainability of USAID-supported institutions. 

Further, although the agency reports annually on the activities of institutions it 

supports, it does not show the percentage of those institutions’ total funding that 

its contribution represents. 

USAID has identified and disseminated microenterprise best practices, providing 

information to its missions and implementing partners through policy guidance, 

training, and technical assistance. In addition, USAID has collaborated with 

microenterprise development provider networks and others to publish 

information about these practices. 

Microentrepreneur from a USAID-Supported Project in Egypt 

Microenterprises—small 

businesses owned and operated by 

poor entrepreneurs—have 

potential to help the world’s poorer 

populations. For this reason, the 

U.S. Agency for International 

Development (USAID) included 

microenterprise development in its 

programming. In 2001, the agency 

reported that its was conducting 

microenterprise projects in 52 

countries and had obligated almost 

$2 billion since 1988 to support its 

program. The program supports 

micro loans, among other services, 

to assist poor entrepreneurs. Since 

1996, USAID has annually reported 

the program’s results. 

To help Congress oversee USAID’s 

management of its microenterprise 

development program, GAO was 

asked to (1) determine the extent 

to which the agency’s microfinance 

activities are meeting the program’s 

key objectives, (2) assess the 

reliability of USAID’s reporting on 

its overall microenterprise 

activities, and (3) examine the 

agency’s role in identifying and 

disseminating microenterprise best 

practices. 

GAO recommends that the 

Administrator of USAID review the 

agency’s MRR system to ensure 

that (1) it measures the program’s 

performance and (2) all data are 

collected, analyzed, and reported 

USAID completely and accurately. 

USAID concurred with our 

recommendation. 

www.gao.gov/cgi-bin/getrpt?GAO-04-171.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact David 

Gootnick at (202) 512-3149 or 

GootnickD@GAO.gov. 

Highlights of GAO-04-171, a report to the 

Chairman, House Committee on 

International Relations 

November 2003 

MICROENTERPRISE DEVELOPMENT

USAID’s Program Has Met Some Goals; 

Annual Reporting Has Limitations 
Page i GAO-04-171 Microenterprise Development 

Letter 1

Results in Brief 2

Background 4

USAID Has Met Some Program Objectives 10

MRR Data Generally Reliable but May Not Accurately Reflect 

USAID’s Microenterprise Activities 26

USAID Has Identified and Disseminated Best Practices 30

Conclusion 33

Recommendation to USAID 33

Agency Comments and Our Evaluation 33

Appendix I Scope and Methodology 36 

Appendix II Microenterprise Best Practices 38 

Appendix III Review of Microenterprise Studies 43 

Appendix IV USAID’s Microenterprise Results Reporting 52 

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

Development 54 

GAO Comments 65

Appendix VI GAO Contact and Staff Acknowledgements 69 

GAO Contact 69

Staff Acknowledgements 69

Tables 

Table 1: Findings and Recommendations from 22 Selected Studies 

on Microfinance and Microenterprise Development 44

Contents 
Page ii GAO-04-171 Microenterprise Development 

Figures 

Figure 1: USAID’s Microenterprise Development Program, 

Highlighting Microfinance Activities 7

Figure 2: Conceptual Diagram of Populations along the Poverty 

Scale 9

Figure 3: Microentrepreneurs in Bulgaria 11

Figure 4: Microentrepreneurs with Loans from Various USAIDfunded MFIs 13

Figure 5: Financial Sustainability of Institutions, by Average Loan 

Size 18

Figure 6: Clients in USAID-funded Micro Loan Projects, by Gender, 

1997–2001 19

Figure 7: Women Entrepreneurs at USAID-funded MFIs in Peru 21

Figure 8: Financial Sustainability of MFIs, by Average Number of 

Borrowers 24

Figure 9: Available USAID Obligations Data for Poverty Lending, 

Fiscal Years 2000 and 2001 28

Abbreviations 

ACCION Americans for Community Cooperation in Other Nations 

AIMS Assessing the Impact of Microenterprise Services 

BDS Business Development Services 

CGAP Consultative Group to Assist the Poor 

CRS Catholic Relief Services 

GAO U.S. General Accounting Office 

GEMINI Growth and Equity through Microenterprise Investments 

 and Institutions 

MFI microfinance institution 

MRR Microenterprise Results Reporting 

NGO nongovernmental organization 

SEEP Small Enterprise Education and Promotion Network 

USAID U.S. Agency for International Development 

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 
Page 1 GAO-04-171 Microenterprise Development 

November 17, 2003 

The Honorable Henry Hyde 

Chairman 

Committee on International Relations 

House of Representatives 

Dear Mr. Chairman: 

Microenterprises—small businesses owned and operated by poor 

entrepreneurs—have potential to help the least advantaged populations in 

the developing world. Recognizing this potential, the U.S. Agency for 

International Development (USAID) has included microenterprise 

development in the agency’s strategy for economic development and 

poverty reduction. In 2001, the agency reported that it was conducting 

microenterprise projects in 52 countries and had obligated almost $2 

billion since 1988 to support its program. The Microenterprise for 

Self-Reliance and International Anti-Corruption Act of 2000,1

 enacted on 

October 17, 2000, expressed strong congressional support for 

microenterprise projects, stated policy preferences for implementing such 

projects, and authorized increased funding. 

The key objectives of USAID’s microenterprise development program are 

to reduce poverty among microenterprise owners, workers, and families; 2

target the poor and the very poor;3

 encourage participation by women; and 

 1

Title I of P.L. 106-309. In legislation enacted on June 17, 2003, Congress amended the act to 

increase assistance for the poor and provide changes in how assistance is targeted to the 

very poor (P.L. 108-31). 

2

USAID has not defined “poverty reduction.” For this report, we applied the definitions 

found in a 2002 USAID-funded report on microenterprise that defined poverty reduction in 

two ways: (1) alleviating the impacts of poverty (which can include raising income to 

permit increased expenditures on necessities such as food, education, and housing); and 

(2) lifting and keeping a large number of people above a nation’s poverty line. 

3

The act defines the very poor as “those living in the bottom 50 percent below the poverty 

line as established by the national government of the country.” The act requires that 50 

percent of all microenterprise resources be targeted to the very poor. 

United States General Accounting Office

Washington, DC 20548 
Page 2 GAO-04-171 Microenterprise Development 

develop sustainable microfinance institutions (MFI).4 The majority of 

USAID’s microenterprise funding supports microfinance services, 

particularly micro loans. Since 1996, USAID has annually surveyed 

missions and implementing institutions regarding their microenterprise 

activities and issued a report to Congress. To assist your committee in 

overseeing the agency’s management of its microenterprise development 

program, you asked that we (1) determine the extent to which USAID’s 

microfinance activities are meeting the program’s key objectives, (2) 

assess the reliability of the agency’s reporting on its overall 

microenterprise activities, and (3) examine the agency’s role in identifying 

and disseminating microenterprise best practices. 

To identify key program objectives, we reviewed USAID’s policy guidance 

and the Microenterprise for Self-Reliance and International AntiCorruption Act of 2000. To determine whether USAID is meeting these 

objectives, we interviewed officials from USAID, USAID’s implementing 

partners, and experts; conducted fieldwork in Peru, Egypt, and Bulgaria, 

three countries with established USAID microenterprise programs; and 

reviewed academic and applied studies of microenterprise projects and 

outcomes. Because most available USAID data and research literature are 

focused on microfinance, particularly on micro loans, we primarily 

analyzed this aspect of the agency’s microenterprise program. To assess 

USAID’s microenterprise reporting, we evaluated the efforts of the 

contractor responsible for the reporting, analyzed the electronic files 

containing program data, and checked the reliability of data in the 

contractor’s system and in the countries we visited. To determine USAID’s 

role in identifying and disseminating information on best practices, we 

reviewed a wide body of literature on the subject; interviewed USAID 

officials, implementing partners, and a panel of experts; and reviewed 

relevant documents in Washington, D.C., and the countries where we 

conducted fieldwork. (See app. I for a discussion of our methodology.) 

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

program’s key objectives. First, regarding the reduction of poverty, 

microfinance can help alleviate some impacts of poverty, incrementally 

improving borrowers’ income levels and quality of life and providing poor 

 4

MFIs supply micro loans, savings, and other financial services. To be considered fully 

sustainable, the MFI must generate sufficient revenues to cover both its operational costs 

(e.g., salaries) and its financial costs (e.g., the cost of borrowing funds from commercial 

sources). 

Results in Brief 
Page 3 GAO-04-171 Microenterprise Development 

individuals, workers, and their families with an important coping 

mechanism. However, there is little evidence in the research literature or 

consensus among experts that microfinance alone can lift and keep large 

numbers of people above the poverty line. Second, although USAIDfunded studies and academic analyses have found that microfinance 

activities generally serve the poor clustered around the poverty line, few 

loans appear to be reaching the very poor. At the same time, some 

research suggests that loans to the very poor may be ineffective, creating 

unmanageable debt, unless combined with other services. Third, the 

program has encouraged women’s participation in microfinance projects: 

Women have comprised two-thirds or more of the micro loan clients in 

USAID-funded microfinance projects since 1997, according to USAID data. 

Finally, the agency has emphasized the importance of developing fully 

sustainable MFIs, and some of the MFIs it funds report having made 

progress toward this goal. 

Most of the program data in USAID’s Microenterprise Results Reporting 

(MRR) system were generally reliable, but certain methodological 

problems may prevent the agency from accurately reporting its progress in 

meeting key objectives. Because of the way the MRR obligations data are 

collected, USAID cannot report microenterprise funding levels with 

certainty. In addition, its method of estimating the percentage of loans to 

the very poor prevents the agency from stating with certainty that it has 

met the requirement that 50 percent of its microenterprise resources go to 

the very poor. Finally, because differing definitions are used to calculate 

sustainability, the sustainability data that USAID-supported MFIs provide 

may not be reliable. Moreover, although the agency’s annual reports 

describe the overall activities of institutions that receive USAID support, 

the reports do not provide sufficient data on USAID’s contribution to MFIs 

and other service providers. 

USAID has identified and disseminated best practices for microenterprise 

development. The agency has funded initiatives to identify best practices 

and has provided information on these practices to its missions and 

implementing partners through policy guidance, training, and technical 

assistance. USAID also has collaborated with networks of microenterprise 

implementing partners and other organizations to publish information on 

best practices. (App. II contains a list of key best practices.) 

We are recommending that the Administrator of USAID review the 

agency’s MRR system with the goal of ensuring that its annual reporting is 

complete and accurate. Specifically, the Administrator should review and 

reconsider the methodologies used for the collection, analysis, and 
Page 4 GAO-04-171 Microenterprise Development 

reporting of data on annual spending targets, outreach to the very poor, 

MFI sustainability, and the contribution of USAID’s funding to the 

institutions it supports. 

USAID provided written comments on a draft of this report (see app. V for 

the agency’s comments and our detailed response). USAID concurred with 

our recommendation that it make improvements in its microenterprise 

reporting, but it took issue with three points: (1) USAID stated that its 

microfinance efforts have reached the very poor, as statutorily defined, 

based on the number of micro loans made by institutions that it supports. 

This report recognizes that loan size is considered by USAID and the 

microenterprise industry as an inadequate indicator of whether micro 

loans are reaching the very poor, and Congress has directed the agency to 

develop more precise poverty measurement tools. Our report reflects 

current research and consensus on the extent to which the very poor are 

being served by the program; (2) USAID also stated that it uses a single 

definition of sustainability and that the sustainability data reported in the 

MRR are reliable. However, we documented differing definitions and 

interpretations that affect the reliability of reported sustainability data; 

and (3) USAID stated that it would be difficult to allocate the 

microenterprise accomplishments reported in the MRR between USAID 

and other donors, but it agreed to make other improvements to the MRR, 

including providing more explicit instructions on activities to include in 

reporting and taking other steps to improve data accuracy. If USAID 

implements these improvements, which we believe are responsive to our 

recommendation, it could help improve the reliability of the information in 

the MRR. 

Microenterprise development and its primary component, microfinance, 

emerged in the 1980s. Microfinance—the supply of micro loans,5

 savings, 

and other financial services to the poor—has operated on the premise that 

the poor will invest loans in microenterprises, repaying the loans out of 

profits, and the enterprises will grow, potentially lifting large numbers of 

people out of poverty. Microfinance practitioners have demonstrated that 

the poor will repay loans on time and that, despite high transaction costs, 

micro loans can support financially viable lending institutions. Through 

 5

Micro loans—small loans with frequent repayment schedules and commercial interest 

rates—are administered by a range of institutions, including nongovernmental 

organizations and private financial institutions. 

Background 
Page 5 GAO-04-171 Microenterprise Development 

the 1990s, a wide variety of institutions operating in many countries have 

used this model, adapting it to local conditions. 

By USAID’s definition, a microenterprise consists of a poor owneroperator and nine or fewer workers. Microentrepreneurs—typically small 

shopkeepers, craftspeople, and vendors—face a range of impediments to 

improving their standard of living. Most rarely have sufficient collateral to 

meet loan requirements at traditional banks; according to one report, only 

2.5 percent of potential microenterprise operators have access to financial 

services other than moneylenders.6

USAID’s microenterprise development program focuses on three key 

areas: 

• helping establish and fund MFIs to provide loans and other financial 

services to the poor and very poor, 

• funding business development services (BDS) to help improve the 

business skills of microentrepreneurs and develop markets for 

microenterprises, and 

• advocating for host government policy reforms to enhance 

microenterprise development. 

USAID has been the leading bilateral donor of funds and technical 

assistance to microenterprise development projects since 1988, when it 

began formally tracking funding. USAID provides funding through 

nongovernmental organizations, contractors, and, occasionally, 

government organizations that implement the client-level activities. USAID 

reported that it committed $158.7 million to microenterprise development 

activities in fiscal year 2001, compared with $164.3 million in fiscal year 

2000. Almost two-thirds of USAID’s microenterprise development 

obligations in fiscal year 2001 were directed to providing financial 

services, principally for creating and strengthening existing credit and 

savings institutions; the other third went to BDS and policy activities. 

Figure 1 shows an overview of USAID’s microenterprise program, 

highlighting its microfinance component. In fiscal year 2001, 

USAID-assisted institutions served more than 2.8 million loan clients and 

 6

World Bank, CGAP Report 2000, Consultative Group to Assist the Poorest (Washington, 

D.C.: 2000). 
Page 6 GAO-04-171 Microenterprise Development 

more than 3.5 million savings clients. USAID-assisted institutions also 

provided BDS to more than 800,000 microenterprise clients, including 

market research, new product development and testing, technology 

development, business counseling, and marketing assistance. 
Page 7 GAO-04-171 Microenterprise Development 

Figure 1: USAID’s Microenterprise Development Program, Highlighting Microfinance Activities 

Sources: GAO analysis and MapArt.

Microenterpreneurs/

borrowers

Implementing organizations

(e.g., contractors, nongovernmental organizations)

USAID

(Microenterprise Development Division)

Group

lending

Individual

lending

Types of 

activities

Business development

services

Savings Other financial

services

Financial 

services

Miocrofinance

services

Policy

reform

Loans

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

Countries where USAID had microenterprise development programs as of fiscal year 2001.
Page 8 GAO-04-171 Microenterprise Development 

USAID’s microenterprise development program, which is highly 

decentralized, funded projects in 52 countries in 2001. USAID’s missions 

design, implement, and monitor the microenterprise projects, obligating 

about 80 percent of the program’s funding. In Washington, D.C., the 

Microenterprise Development Division provides policy guidance and 

manages a number of grants and, along with other USAID offices, provides 

about 20 percent of the agency’s microenterprise funding. The division 

also provides technical support for the missions and conducts research on 

microenterprise issues. 

USAID takes a collaborative approach in its microenterprise development 

program. For example, USAID policy is to identify, support, and 

strengthen existing MFIs with established performance records to help 

meet its microenterprise objectives. It also funds studies of the MFIs it has 

supported, to assess impacts and to identify best practices for both USAID 

and the entire microenterprise industry. One major USAID research 

project, Assessing the Impact of Microenterprise Services (AIMS), was 

initiated in 1995. Most of the AIMS studies focused on a single country or 

activity. However, two recent AIMS studies examined USAID- and nonUSAID-funded microenterprise activities in seven countries7

 and 

synthesized key findings from a number of other studies,8

 respectively. 

USAID’s microenterprise development program has targeted the poor and 

the very poor (see fig. 2). The poor are those whose annual income is at or 

below the poverty line as defined by the host country. The very poor are 

those with an annual income 50 percent or more below the poverty line as 

established by the government of the country. In addition, the vulnerable 

nonpoor, who also receive microenterprise assistance, are those whose 

annual income is just above the poverty line. 

 7

Donald Snodgrass and Jennifer Sebstad, Clients in Context: The Impact of The 

Microfinance in Three Countries—Synthesis Report (Washington, D.C.: Management 

Systems International, 2002). 

8

Jennifer Sebstad and Monique Cohen, Microfinance, Risk Management, and Poverty 

(Washington, D.C.: Management Systems International, 2000). 
Page 9 GAO-04-171 Microenterprise Development 

Figure 2: Conceptual Diagram of Populations along the Poverty Scale 

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

is defined by each country. 

Since 1994, USAID’s policy has been to devote half of its microenterprise 

development resources to activities targeting the very poor. In 2000, this 

policy was established as law by the Microenterprise for Self-Reliance and 

International Anti-Corruption Act of 2000, which required that 50 percent 

of all microenterprise resources be targeted to very poor entrepreneurs. 

From 1994 until the implementation of the 2000 legislation, USAID defined 

loans to the very poor, or “poverty loans,” as those with an average 

balance of $300 or less per borrower (in 1994 dollars). The 2000 legislation 

established the loan level at $1,000 or less for Europe and Eurasia, $400 or 

less for Latin America, and $300 or less in the rest of the world. 

USAID annually collects data on its microenterprise program through the 

MRR. (See app. IV for a discussion of the MRR methodology.) Data are 

collected through surveys of USAID staff in headquarters, overseas 

missions, and institutions that receive USAID funding. USAID staff provide 

the data on funding obligations, and implementing institutions provide 

programmatic data on number and gender of clients, number of loans, 

Income level

National Poverty Line

50 percent below 

the poverty line

Source: GAO.

Vulnerable nonpoor

Poor

Very poor
Page 10 GAO-04-171 Microenterprise Development 

amount of lending to the very poor, MFI sustainability self-assessments, 

BDS services provided, and policy initiatives. 

In addition to the USAID-supported studies, a large body of published and 

unpublished work has been generated by what is commonly referred to as 

the microfinance industry. This research includes empirical studies, a 

broad array of theoretical analyses, and materials on best practices. 

However, because the industry is relatively new, large gaps exist in 

important research areas. For example, experts generally agree that 

reliable and valid impact assessments are lacking or limited in scope. (See 

app. III for a review of 22 microenterprise studies.) 

USAID’s microfinance activities have achieved some of the agency’s key 

program objectives but made limited progress toward others. First, 

microfinance can help to alleviate the effects of poverty among 

participants. However, there is less evidence that microfinance has lifted 

or kept large numbers above the poverty line as established by host 

countries. Second, USAID’s program has generally reached the poor but 

not the very poor. Third, the program appears to have succeeded in 

encouraging the participation of women through micro loans. Finally, 

USAID has emphasized the importance of developing sustainable MFIs 

and has made some progress toward this goal. 

Our fieldwork and review of USAID-funded studies and research literature 

showed that microfinance can alleviate some of the impacts of poverty 

among recipients.9

 USAID officials, implementing partners, and borrowers 

also concurred that it can help to mitigate some effects of poverty. Most 

borrowers said that the microfinance institutions were their only formal 

source of credit or savings and stated that the program helped improve 

their lives, incomes, businesses, and sense of self-worth. (See fig. 3.) The 

broader academic studies of microfinance we reviewed, as well as the 

experts we consulted, generally agreed that micro loans can help poor 

individuals, workers, and their families cope with personal and economic 

shocks, such as illness or death of family members, and manage risks 

associated with living in poverty. In addition, USAID officials noted that 

 9

USAID generally supports and invests in MFIs and ongoing projects started by NGOs or 

other groups. The research literature on microfinance and USAID’s own studies do not 

distinguish between USAID-funded projects and projects funded by the World Bank, 

private foundations, or other donors. 

USAID Has Met Some 

Program Objectives 

Microfinance Can Help 

Alleviate Some of Poverty’s 

Impacts 
Page 11 GAO-04-171 Microenterprise Development 

microfinance projects are demand driven, put money directly into the 

hands of the borrowers, and generally have loan repayment rates close to 

100 percent. The experts with whom we spoke agreed that microfinance 

programs can have other benefits, such as helping to build a nation’s 

financial sector. 

Figure 3: Microentrepreneurs in Bulgaria 

The studies we reviewed and experts we consulted also posited that 

microfinance can help increase microentrepreneurs’ working capital, 

thereby enhancing their household income. However, positive impacts of 

specific microfinance projects have been limited in scope and have varied 

according to economic, social, and market conditions as well as the design 

and aims underlying particular programs. 

USAID-funded impact studies in two countries we visited, Peru and Egypt, 

found some positive effects from microfinance. For example, the study in 

Peru found that the program helped increase assets at the microenterprise 

level; it also noted some positive effects at the household and individual 

This husband-and-wife team manufactures and sells flavored popcorn with the help of three 

employees. The husband borrowed $2,300 from a USAID-funded MFI, which provides loans for 

individuals. The entrepreneurs said that they used the loan to buy additional machinery for their 

enterprise. (Stara Zagora, Bulgaria)

Source: GAO.
Page 12 GAO-04-171 Microenterprise Development 

levels. According to the study, economic recession in Peru during 1997 and 

1999 may have limited the effects of the small loans.10 A study in Egypt 

found that a microfinance program offering group lending to poor women 

helped its clients establish and expand their businesses.11 The loans also 

enabled them to improve their standard of living by contributing to the 

household budget, renovate their homes, and provide their children with a 

better education through private tutors. (See fig. 4.) 

 10Elizabeth Dunn and J. Gordon Arbuckle, Jr., The Impacts of Microcredit: A Case Study 

from Peru, (Washington, D.C.: USAID/AIMS, 2001). 

11Bashayer El Kheir: An Impact Tracking Study (Final Report) (Washington, D.C.: 

USAID, 2003). Another USAID study in Egypt was unable to draw firm conclusions about 

the impact on poverty alleviation, because, although it noted some positive findings, the 

study lacked baseline data as well as a control group (see USAID, Technical Assistance to 

Small and Emerging Business Development Organizations: Study on Old Clients 

[Washington, D.C.: 2001]). 
Page 13 GAO-04-171 Microenterprise Development 

Figure 4: Microentrepreneurs with Loans from Various USAID-funded MFIs 

This grocery store owner opened a new shop with 

the assistance of an $1,800 loan from a USAIDfunded MFI. (Nova Zagora, Bulgaria)

A tailor in a rented shop who reported receiving 

a $250 loan from the individual lending program 

operated by a USAID-funded MFI in northern 

Egypt. He said that the loan enabled him to buy 

his own cloth and sell ready-made clothes. 

(Rushid District, Egypt) 

Members of a group lending program for women, 

which began in 1999 in northern Egypt. These 

women, with loans ranging from $20 to $100, 

bought waste materials from a nearby garment 

factory; they sorted and cleaned this material and 

used it to weave rugs. (Fowa District, Egypt)

Source: GAO.
Page 14 GAO-04-171 Microenterprise Development 

Although microfinance can help alleviate some of the impacts of poverty, 

the research literature does not show conclusively that it has lifted large 

numbers of people above the poverty line. In our review, we identified two 

studies on this issue. The 2002 AIMS study—examining microfinance 

projects in three countries, two of which were USAID supported—found 

that “there was no dramatic movement of client households out of poverty 

over the two-year span of the study.”12 The second study analyzed the three 

major microfinance programs in Bangladesh—two of which received 

USAID funding in fiscal year 1998—and found that about 5 percent of 

program participants per year rose above the poverty line during the 

period covered by the study.13

The experts we consulted generally agreed that although microfinance can 

help to alleviate some of poverty’s impacts, too few long-term studies have 

been conducted to determine whether microfinance can lift, and keep, 

significant numbers of clients above the poverty line. These experts also 

emphasized that because the poverty line is a problematic and somewhat 

artificial measure, most impact studies have not focused on estimating the 

number of borrowers who cross and remain above it. The experts and 

practitioners we interviewed and whose work we reviewed now generally 

conclude that microfinance alone is not sufficient to lift large numbers of 

people out of poverty. The challenges the poor face—limited education, 

few opportunities, legal and cultural barriers—are difficult to overcome 

with micro loans. Moving out of poverty usually requires a combination of 

strategies by different household members, and, according to a USAID 

program official, “backsliding is possible and even frequent.” 

Although the agency’s microfinance activities serve the poor, they 

generally appear not to reach the very poor, according to our review of 

USAID studies and the research literature. In addition, as mandated by the 

Microenterprise for Self-Reliance and International Anti-Corruption Act of 

2000, the agency uses small loan size as an indicator of loans to the very 

poor; however, this is now generally considered an inadequate measure of 

success in reaching that population. Moreover, some evidence suggests 

 12Donald Snodgrass and Jennifer Sebstad, Clients in Context: The Impact of The 

Microfinance in Three Countries— Synthesis Report (Washington, D.C.: Management 

Systems International, 2002), p. 65. 

13Shahidur Khandker, Fighting Poverty with Microcredit: Experience in Bangladesh. 

(New York: Oxford University Press, Inc., 1998). 

Most USAID Funding Has 

Reached the Poor but Not 

the Very Poor 
Page 15 GAO-04-171 Microenterprise Development 

that micro loans can have unintended negative consequences among very 

poor borrowers. Finally, meeting the requirement of targeting 50 percent 

of microenterprise resources to the very poor could hamper MFI 

sustainability. 

USAID studies and other research literature on microfinance show that 

microfinance activities serve those clustered just above and below the 

poverty line but generally do not reach the very poor. According to the 

2002 USAID-funded AIMS study, based on work in three countries, both 

the vulnerable nonpoor and the poor participate in the program, with the 

very poor making limited use of USAID-supported microfinance services. 

The 2000 AIMS study14 reported that in the projects studied in four 

countries, the majority of clients were poor, followed by the vulnerable 

nonpoor. This study also found that approximately 40 percent of USAID 

microfinance clients in Bangladesh were very poor but that in Bolivia, the 

Philippines, and Uganda, the number of very poor ranged from “almost 

none” to “some,” although it did not quantify the precise numbers. In 

addition, the 2000 AIMS study noted that 20 other microfinance impact 

studies had found limited participation by the very poor. 

The broader literature on microfinance confirms that the microfinance 

industry has reached the poor and vulnerable nonpoor but relatively few 

of the very poor. For example, one widely cited study15 found that 

microfinance lenders in Bolivia tended to serve those near the poverty 

line, not the very poor. During our fieldwork, representatives from USAID 

and their implementing partners told us, based on their experience with 

the program, that few loans went to the very poor—a finding generally 

consistent with academic studies of projects in other countries. USAID 

officials in the countries we visited said that the very poor rarely take out 

loans because they may lack the economic opportunities to repay the 

loans and are reluctant to increase their debt levels. According to the 2000 

AIMS study, not enough information is available to determine whether (1) 

the very poor choose not to borrow to avoid additional debt; (2) MFI staff 

disqualify the very poor because of concern over their ability to repay the 

loans; or (3) other types of loans and services, such as savings or 

insurance, would better meet the needs of the very poor. 

 14Sebstad and Cohen, Microfinance, Risk Management, and Poverty. 

15Sergio Navajas et al., “Microcredit and the Poorest of the Poor: Theory and Evidence from 

Bolivia,” World Development 28, no. 2 (2000): 333-346. 

USAID’s Microfinance 

Activities Generally Have Not 

Reached the Very Poor 
Page 16 GAO-04-171 Microenterprise Development 

Although most MFIs use small loan size as an indicator of loans to the very 

poor (as mandated in the 2000 act), in practice this is an inadequate 

method. It is based on the assumption that small loans appeal only to the 

very poor, and it is widely used in part because it is easy to administer. 

However, many practitioners, including USAID, now generally consider 

loan size an inadequate indicator of clients’ level of poverty. 

In June 2003, legislation was enacted amending the Microenterprise for 

Self-Reliance and International Anti-Corruption Act of 2000 to ensure the 

development of more precise poverty measurement tools.16 The 

amendments required USAID to develop, test, and certify at least two lowcost methods for determining recipients’ poverty level by October 1, 2004, 

and begin using one of the methods by October 1, 2005. The amendments 

also expanded the definition of the very poor to specifically include those 

living on less than $1 per day. 

Although some evidence suggests that micro loans may help alleviate the 

impacts of poverty, evidence also suggests that in some cases these loans 

may affect very poor borrowers more negatively than positively and may 

be more effective in combination with complementary services. Within the 

microfinance industry, little consensus exists about the effectiveness of 

micro loans to the very poor. USAID officials in the countries we visited 

stated that economic and social impediments in those countries often 

make loan repayment difficult for the very poor. In Peru, a representative 

of a large U.S.-based implementing partner told us that her organization 

typically does not lend to the very poor, considering social services, not 

loans, more appropriate for that population. In Egypt, one of the largest 

USAID-supported MFIs said that it has started a separate grant program to 

reach the very poor. USAID officials in Bulgaria we visited said that the 

poor were more able than the very poor to expand their enterprises and, 

as a result, to hire the very poor. In addition, a USAID program official 

stated that microfinance might not always be an appropriate intervention 

for the very poor, since they often cannot use the loans productively. 

Some research also indicates that micro loans alone may not be an 

appropriate assistance mechanism for people below a certain level of 

poverty because they may increase their debt to unmanageable levels. 

Other research has attempted to show that with a strong commitment to 

 16PL 108-31, enacted June 17, 2003. 

Small Loan Size an Inadequate 

Measure of Whether Loans 

Reach the Very Poor 

Loans to Very Poor May Be 

Ineffective Unless Combined 

with Other Services 
Page 17 GAO-04-171 Microenterprise Development 

reaching the very poor, and with a well-targeted program attuned to the 

needs of very poor clients, microfinance can have positive impacts.17

At the same time, recent studies suggest that to reach the very poor, the 

microfinance industry needs to move beyond loans and offer the very poor 

other services, such as savings and insurance. 18 For example, a 2002 

strategic evaluation of the Consultative Group to Assist the Poorest 

(CGAP)19 stated that savings may be the most important financial service 

for the very poor, since it provides a way to accumulate money without 

risking debilitating indebtedness. In addition, the 2002 AIMS report and 

other research indicated that, because of difficulties in reaching the very 

poor with micro loans and the potential for indebtedness, there is a need 

to expand the type of products or assistance targeted to this group. These 

products can include savings, insurance, and money transfer services; 

nonfinancial business development services; and reforms of key policies, 

programs, institutions, and regulations that can affect the very poor. Last, 

a 2003 CGAP publication states that donor funding for microfinance 

should complement, not substitute, for investments in core services, like 

health, education, and infrastructure,20 a view that also reflects USAID’s 

policy, according to agency officials. 

USAID officials stated that implementing the requirement that 50 percent 

of funds be targeted to the very poor, based on the loan sizes set by the 

2000 act, could make individual MFI sustainability more difficult to 

achieve. Officials at the missions we visited said that their primary 

objective was to develop sustainable MFIs. In Bulgaria, officials with 

USAID and its implementing partners, Catholic Relief Services (CRS) and 

Opportunity International, said that imposing this requirement on 

individual MFIs could create unsustainable institutions, because managing 

a high percentage of small loans would increase costs associated with 

servicing these loans. The mission in Egypt, which began its microfinance 

 17Research that attempts to find a middle ground between sustainability- and povertyorientations is reflected in Morduch (2000), Woller, Dunford, and Woodworth (2000), and 

Cohen (2002). (See app. III.) 

18Evaluation and Strategic Review of the Consultative Group to Assist the Poor

(Washington, D.C.: The World Bank, 2002), p. 16. (See also Rutherford, 2000; Matin, Hulme, 

and Rutherford, 2002; Cohen, 2002, in app. III.) 

19CGAP, a consortium funded by 29 bilateral and multilateral donor agencies that support 

microfinance, is affiliated with the World Bank. 

20Donor Brief, No. 13, July 2003, CGAP. 

Poverty Lending Requirement 

May Hamper MFI Sustainability 
Page 18 GAO-04-171 Microenterprise Development 

program in 1988, did not offer poverty lending until 1999, when it judged 

that the institutions it supported were financially viable and stable enough 

to begin making such loans.21

The research literature we reviewed also indicates that MFIs that are 

considered financially sustainable generally do not reach the very poor in 

large numbers. Our analysis of data in the MicroBanking Bulletin, a 

publication in which MFIs report financial and programmatic information, 

indicate a direct correlation between larger average loan size and 

increased financial sustainability (see fig. 5). Further, according to a CGAP 

assessment, donor confidence during the mid-to-late 1990s that most MFIs 

could both reach the very poor and become sustainable has since 

declined. 

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

Note: MFIs are considered financially sustainable when they can cover 100 percent of their costs, as 

well as the cost of borrowing funds at commercial rates. 

A USAID program official said that the poverty lending requirement can 

work against the goal of developing sustainable MFIs, since it directs the 

agency to target half of its resources to those may be least able to repay 

 21USAID applies the poverty lending requirement on an agency wide basis. However, it does 

not ask that individual missions or MFIs meet this requirement. 

Source: GAO analysis of data from the MicroBanking Bulletin (November 2002).

Small

($135)

n=58

 Medium

($755)

n=77

Large

($1,420)

n=6

Institutions, by average loan size

0

20

40

60

80

100

120

Percentage of financial sustainability

Full financial 

sustainability
Page 19 GAO-04-171 Microenterprise Development 

the loans. The official added that by focusing its resources on the poor and 

the vulnerable nonpoor, who can use loans more productively, the agency 

could increase the likelihood of developing sustainable institutions. 

USAID data indicate that the agency succeeded in reaching large numbers 

of women clients through its microcredit activities in fiscal years 1997 to 

2001 (see fig. 6).22

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

The broader research literature we reviewed shows that micro credit 

activities have successfully targeted women. Generally, the literature 

suggests that female clients have had better loan repayment rates and 

lower default rates than male clients. Microcredit services are of 

considerable importance to poorer women, who tend to have more limited 

 22USAID also reaches a large number of savers through its microfinance program. 

According to USAID data for 2001, the program reached 3.5 million savers, compared with 

2.9 million borrowers. However, the proportion of women reached through micro savings 

services cannot be determined, because USAID does not collect savings data disaggregated 

by gender. 

USAID’s Microfinance 

Activities Have Reached 

Many Women 

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1997 1998 1999 2000 2001

Fiscal year

Number of clients in thousands

Male clients

Female clients

Source: GAO analysis of USAID data.
Page 20 GAO-04-171 Microenterprise Development 

access to other financial services than men. Research also shows that 

micro loans have generally improved female clients’ participation in 

decision making at the household and business levels.23

Our fieldwork indicated that USAID-supported MFIs’ focus on women 

varied by country and project type. In fiscal year 2001, more than twothirds of the USAID-funded MFI micro loan clients in Peru were women, 

and in Egypt and Bulgaria, just under half of those clients were women. 

Within these countries, we found that project design affected women’s 

participation rates. Projects employing group lending24 or offering 

nonfinancial incentives, such as health care, tended to have a higher 

percentage of female clients. For example, as a result of group lending 

projects that began in 1999 for women from poor communities, the overall 

percentage of women clients across USAID-funded microfinance activities 

in Egypt increased from 17 percent in fiscal year 2000 to about 45 percent 

in fiscal year 2001. In Peru, MFIs such as ProMujer, whose clients are 

nearly all women, offer borrowers group loans, day care, health education, 

and medical referral services. (See fig. 7.) 

 23Several studies indicate that in some cases, micro loans have not empowered women but 

instead have strengthened traditional gender and class power relations. However, this 

conclusion does not represent the general agreement among experts we consulted that, on 

the whole, micro loans have had a positive effect on women. 

24Under the group lending model, 5 to 30 members receive a loan and future loans to 

individual members are contingent on the entire group’s repayment record. 
Page 21 GAO-04-171 Microenterprise Development 

Figure 7: Women Entrepreneurs at USAID-funded MFIs in Peru 

Members of a village bank (a form of group 

lending), operated by a USAID-funded MFI, 

discuss self-esteem with an MFI employee prior 

to their loan repayment meeting. This MFI offers 

loans of $400 or less. In addition to providing 

micro loans, the MFI also offers services such as 

training, healthcare, and childcare to borrowers. 

(Puno, Peru)

Members of a village bank at a loan repayment 

meeting. This village bank, 1 of 65 in the district, 

was started by a USAID-funded MFI about 8 

months ago. Some borrowers at the meeting 

reported receiving loans of between $100 and 

$150. Almost 90 percent of the village bank 

members are women. (Juliaca District, Peru)

Source: GAO.
Page 22 GAO-04-171 Microenterprise Development 

USAID has emphasized developing sustainable MFIs, and available data 

suggest that some progress has been made toward this goal. In fiscal year 

2001, of the 294 USAID-funded MFIs that reported sustainability levels, 112 

stated that they had achieved full sustainability. USAID does not collect 

sustainability data from MFIs that no longer receive funding. As a result, it 

lacks the long-term data needed to determine whether MFIs it has 

supported have continued to provide services in a sustainable manner and 

if so, for how long. The research literature we reviewed indicates that 

achieving full sustainability has been difficult for the broader microfinance 

industry. Further, the literature indicates that fully sustainable MFIs tend 

to reach larger numbers of borrowers. Finally, MFI sustainability can be 

transient, subject to factors such as mismanagement and economic 

shocks. 

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

sustainability. Before receiving USAID funding, an MFI must provide a 

plan outlining the major steps it will take to achieve sustainability. USAID 

expects MFIs to attain full sustainability within 7 years of receiving USAID 

assistance. USAID and other donors consider sustainability to be an 

important goal because it requires that MFIs manage operations efficiently 

and meet clients’ needs consistently. Further, achieving sustainability 

allows institutions to continue providing services after donor funding 

ceases. According to one CGAP official, “Aiming for sustainability is 

paramount.” 

USAID determines an MFI’s progress in achieving full sustainability by 

using an interim measure it calls operational sustainability. An MFI is 

considered operationally sustainable if revenues from interest and fees 

cover all of its operational expenses, including salaries and other 

administrative expenses. To be considered fully sustainable, the 

organization must cover both its operational and financial costs, such as 

the cost of borrowing funds at commercial interest rates, while taking into 

account inflation and any subsidies. 

Available data suggest that USAID-supported MFIs have made some 

progress toward achieving full sustainability. In fiscal year 2001, 294 

USAID-supported MFIs reported sustainability levels;25 of these, 112, or 38 

percent, said that they were fully sustainable, a percentage that had 

 25USAID provided funding to 492 organizations in fiscal 2001. The agency does not 

disaggregate these data by MFIs, BDS providers, or policy advocacy organizations. 

Some Progress Made 

toward MFI Sustainability 

USAID Has Emphasized MFI 

Sustainability 

USAID-Funded MFIs Report 

Some Progress toward Full 

Sustainability 
Page 23 GAO-04-171 Microenterprise Development 

remained consistent since 1999.26 Because USAID does not monitor MFI 

sustainability once its funding stops, it lacks long-term data to determine 

whether the MFIs it has supported continue to be sustainable, and if so, 

for how long. 

To assess trends in MFI sustainability, we analyzed MRR data from 1995 to 

2001; 45 MFIs reported sustainability data for both 1995 and 2001. Of 

these, 15 (33 percent) reported reaching full sustainability at the time of 

the 2001 survey. These percentages are similar to the percentage reported 

for a 2002 MicroBanking Bulletin survey of established MFIs27 but higher 

than those reported for the overall microfinance industry. According to 

officials from CGAP, the Foundation for International Community 

Assistance, and Americans for Community Cooperation in Other Nations 

(ACCION), of the approximately 10,000 MFIs currently operating, the 

number that are sustainable or are expected to survive in the long term 

ranges from an estimated “few dozen”28 to 250. However, those MFIs that 

are currently reported as sustainable serve about 80 percent of the total 

microfinance clients worldwide, according to these officials. The experts 

we interviewed agreed that the majority of microfinance clients are served 

by a few large, sustainable MFIs. 

In some cases, USAID has continued to fund MFIs that reported achieving 

full sustainability and MFIs that did not achieve sustainability within 7 

years of receiving USAID funding. USAID officials said that the primary 

reason for continuing to fund these MFIs is to expand microfinance 

services to new areas. For example, in Egypt, one of the institutions listed 

as financially sustainable has received USAID funding for 14 years to 

support expansion, according to mission officials. In Bulgaria, an 

institution that had not attained operational sustainability received USAID 

funding for fiscal years 1995 to 2003 and is expected to continue receiving 

support until fiscal year 2006, when USAID is expected to end its 

microenterprise activities in that country. USAID officials in Bulgaria said 

 26To the extent that financially stable institutions are more likely to report sustainability 

data, this percentage may be biased upward. 

27In the 2002 survey of 147 MFIs, 42 percent reported full sustainability. The MFIs 

participated in the survey voluntarily. (See “Bulletin Tables” [data annex], MicroBanking 

Bulletin 8 (2002). 

28James W. Fox, Mark Havers, and Klaus Maurer, Evaluation and Strategic Review of The 

Consultative Group to Assist the Poorest (Washington, D.C., The World Bank: 2002), p.iv. 
Page 24 GAO-04-171 Microenterprise Development 

that the country’s macroeconomic and financial instability, along with 

regulatory and legal hurdles, has adversely affected MFIs. 

The research literature we reviewed indicates that a large majority of 

existing MFIs are not, and are not expected to become, fully sustainable. 

The literature further indicates that MFIs with a large number of clients 

have higher levels of financial self-sufficiency and profitability than 

smaller MFIs. For example, Bank Rakyat Indonesia’s Micro Division had 

about 2.8 million borrowers and 27 million savings depositors in fiscal year 

2001 and has reported full financial sustainability since the early 1990s. In 

addition, data reported in the MicroBanking Bulletin, based on financial 

and portfolio data of leading microfinance institutions worldwide, indicate 

that institutions with a large loan portfolio and number of clients have 

higher levels of financial sustainability than smaller institutions (see fig. 8). 

Figure 8: Financial Sustainability of MFIs, by Average Number of Borrowers 

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

Percentage of financial sustainability

0

20

40

60

80

100

120

Small

(4,519)

n=42

Medium

(14,650)

n=75

Large

(165,175)

n=30 

Microfinance institutions (average number of borrowers)

Source: GAO analysis of MicroBanking Bulletin data (November 2002).

Full financial 

sustainability
Page 25 GAO-04-171 Microenterprise Development 

MFIs are considered financially sustainable when they can cover 100 

percent of their operating costs, as well as the cost of borrowing funds at 

commercial rates. 

In analyzing the status of 81 USAID-funded MFIs that reported on financial 

sustainability over a 5- to 7-year period, we found that over one-fifth (18) 

reported achieving full sustainability but later reported that they were no 

longer fully sustainable. MFI sustainability can change rapidly because of 

various factors, as the following examples from Peru illustrate. 

• PRISMA, one of the largest USAID-funded MFIs, became unsustainable 

because of mismanagement and the theft of $2 million by employees. 

(USAID officials said that steps had been taken to recover the funds and 

that PRISMA will remain ineligible for future support until this situation is 

resolved.) 

• CARITAS, an MFI affiliated with Catholic Relief Services, experienced 

declines in full sustainability at five29 of its eight branches during a 19-

month period. Over the next 4 months, the sustainability of two branches 

improved, but during the subsequent 23-month period, lenient loan 

repayment practices at three branches resulted in a significant decline in 

sustainability and a consequent decline in portfolio quality at those 

branches. 

External factors such as hyperinflation, host country policy, and 

regulatory environment can also significantly affect MFI sustainability. For 

example, a 2002 USAID-funded study concluded that in Bulgaria, the 

effective ability of the three USAID-supported MFIs “to continue probably 

expires with the ending of their donor program unless their full [legal] . . . 

and regulatory status is resolved.”30 The study noted that for the most 

promising of the three MFIs, Bulgaria’s restriction on attracting savings 

from borrowers or others was a major barrier to sustainability. In addition, 

a USAID official stated that the devaluation of the U.S. dollar, among other 

factors, contributed to a 14 percent drop in operational sustainability at 

 29Two branches that had been fully sustainable experienced significant declines in 

sustainability (49 percent and 14 percent, respectively), but managed to remain sustainable, 

albeit at a lower level. 

30Bulgaria Microfinance Assessment (Arlington, VA: The Peoples’ Group, Ltd., 2002), p. 8. 

MFI Sustainability Can Be 

Transient 
Page 26 GAO-04-171 Microenterprise Development 

this MFI between fiscal year 2001 and fiscal year 2002, because loans were 

disbursed in dollars but collected in the local currency. 

Although the basic data collected for USAID’s MRR are generally reliable, 

certain methodological problems may impede accurate reporting on the 

agency’s progress in meeting key goals. Specifically, it may not be 

reporting accurately (1) the actual amounts obligated to microenterprise 

activities, (2) whether 50 percent of USAID’s resources went to the very 

poor, and (3) the sustainability of USAID-supported MFIs. Moreover, 

although the annual MRR reports on the overall activities of MFIs that 

receive any USAID monies, it does not provide sufficient data on USAID’s 

contribution to MFIs and other service providers. 

We assessed the reliability of basic MRR data in terms of accuracy, 

completeness, and consistency and found that they generally met these 

criteria (see app. I for our methodology and app. IV for a discussion of the 

MRR). These data include the number of clients, the percentage of women 

clients, and the dollar amounts of the institutions’ portfolios. USAID 

collects most of the data via surveys filled out by the institutions receiving 

USAID assistance. According to the contractor responsible for collecting 

and analyzing the MRR data, the survey questions for institutions were 

pretested and should be understood by respondents. (The survey is 

available in English, Spanish, and French.) 

The contractor and USAID officials stated that they review the data for 

completeness, accuracy, and consistency. MRR staff reported that they 

compared current and past year survey responses to identify inconsistent 

responses and investigated these responses as warranted. Although two of 

the three USAID missions we visited did not perform the checks 

recommended by USAID’s policy guidance, most of the data we examined 

were generally accurate. 

We observed several problems with the reporting of USAID’s obligations 

that may affect the reliability of the data in the MRR. First, the 2001 MRR 

publication includes obligations for many clients and institutions that do 

not meet the MRR’s definition of a microenterprise as “compris[ing] 10 or 

fewer employees, including unpaid family workers, in which the 

owner/operator of the enterprise . . . is considered poor.”31 For example, of 

 31USAID, Microenterprise Results Reporting for 2001 (Washington, DC: 2003) p.4. 

MRR Data Generally 

Reliable but May Not 

Accurately Reflect 

USAID’s 

Microenterprise 

Activities 

Basic MRR Data Are 

Generally Reliable 

Reliability of Obligations 

Data Is Uncertain 
Page 27 GAO-04-171 Microenterprise Development 

the roughly 120 institutions that reported BDS and policy development 

programs in the 2001 MRR publication, more than half reported serving 

some clients whose incomes were above the national poverty line or who 

owned businesses that were not microenterprises. In addition, at least onethird of all BDS clients included in the MRR in 2001 had estimated incomes 

above the poverty line. Furthermore, in Peru, an institution that had 

received an obligation of $1.2 million in 2001 reported all its clients to the 

MRR, even though only about one-third of its clients were 

microentrepreneurs. Finally, almost a quarter (12 of 42) of the USAIDsupported MFIs in Eastern Europe reported to the MRR loans exceeding 

$10,000, despite the regional loan size limit of $10,000. 

Second, underreporting of microenterprise obligations in the MRR may 

occur. According to the USAID contractor, some of the missions that 

report may not list all obligations for microenterprise activities. For 

example, in 2000, the contractor who collects the MRR data found $7 

million of underreported microenterprise obligations, which was 

subsequently included in the obligations totals. 

In addition, the MRR does not track expenditures for its microenterprise 

programs, and obligations reported to the MRR may not accurately reflect 

actual program expenditures. During our fieldwork, we found situations 

where obligations differed significantly from actual expenditures. For 

example, for fiscal years 1991 to 2000, the MRR reported obligations of 

about $160 million to microenterprise programs at the USAID mission in 

Egypt. However, mission officials told us that the program actually spent 

about 50 percent of this obligation. 

USAID reported that 53 percent of its obligated microenterprise funds 

went to the very poor in fiscal years 2000 and 2001. However, our analysis 

indicates that the MRR may not accurately estimate the percentage of 

microenterprise development funding that is targeted to the very poor. We 

found the following limitations: 

• The MRR lacks information on poverty lending for a significant portion of 

total microenterprise obligations. In fiscal year 2000, it had data for only 32 

percent of obligations, and for fiscal year 2001, it had data for only 41 

percent of obligations (see fig. 9). 

Estimate of Obligated 

Funds Going to the Very 

Poor May Be Inaccurate 
Page 28 GAO-04-171 Microenterprise Development 

Figure 9: Available USAID Obligations Data for Poverty Lending, Fiscal Years 2000 

and 2001 

Note: In fiscal year 2000, an estimated $28.5 million in loans went to the very poor, and in fiscal year 

2001, an estimated $34.2 million in loans went to the very poor. 

• USAID’s method for calculating overall poverty lending extrapolates from 

the available data and assumes that institutions that did not respond to the 

MFI survey provided the same amounts of poverty lending as those that 

did respond. However, unlike the respondents, many of the 

nonrespondents did not make loans or performed activities that were not 

directly involved with poverty lending. Nonrespondent activities, which 

totaled $94 million—roughly 60 percent of the total fiscal year 2001 

obligations—included a range of services. For example, in 2001, USAID 

obligated about $5 million to support its microenterprise staff and about 

$2 million for research and other support activities. 

• Many BDS programs that report on outreach to the very poor are likely to 

provide inaccurate data. While MFIs report the dollar value of poverty 

loans they have made, many BDS providers must estimate and report the 

number of their clients who have received poverty loans from any 

source—data that, according to a USAID program official, the BDS 

providers often lack. 

According to a USAID program official, the agency went to considerable 

effort to collect data from institutions that make poverty loans. USAID 

Source: GAO analysis of USAID data.

53

(32%)

65

(41%)

111

 (68%)

94

(59%)

0

20

40

60

80

100

120

140

160

180

2000

Obligations in millions of dollars

2001

Available data

No data

Fiscal year
Page 29 GAO-04-171 Microenterprise Development 

officials acknowledged that it is difficult to estimate future poverty lending 

for institutions that have not yet begun to make poverty loans and those 

that provide services rather than loans to clients. However, USAID’s 

annual MRR report does not inform the reader of the extent or impact of 

these limitations. 

Because USAID-supported MFIs use different definitions to calculate 

sustainability, the sustainability data reported in the MRR may not be 

reliable. USAID supplies differing definitions of sustainability, one for the 

MRR and one for its Implementation Grant Program awards. In addition, 

not all MFIs reporting to the MRR use the definition suggested there; for 

example, one MFI with affiliates in more than 20 countries requires its 

affiliates to report sustainability to the MRR using a more stringent 

definition. Further, MFIs can and do interpret the underlying MRR 

definition of sustainability differently; for example, some basic terms such 

as “financial costs” are not defined and are subject to various 

interpretations. As a result, the contractor responsible for collecting and 

analyzing these data stated that they should not be considered reliable. 

The MRR does not provide information on USAID’s level of contributions 

to MFIs and other service providers it supports, making it difficult to 

determine the scope of the agency’s microenterprise development funding. 

The MRR reports an MFI’s total number of clients and loans, regardless of 

the level of USAID’s contribution to that MFI. For example, in 2000, USAID 

obligated $400,000 to an MFI in Ecuador that reported loans of $80 million 

and $477,000 to an MFI in Senegal that reported loans of $336,000. As a 

result, the annual report lists a large number of clients, loans, and other 

activities that were not funded by USAID and in many cases were funded 

by other donors, foundations, and private individuals. 

In addition, USAID requires institutions that provide technical assistance 

to MFIs to complete the MFI survey. Because these technical assistance 

providers make no loans, reporting the number of loans and clients served 

by the MFIs they assist may provide an inaccurate impression of USAID’s 

micro lending activities. For example, we found that the institution listed 

as in the MRR as the largest lender in Peru in 2001 did not make any loans 

or serve any clients directly. Instead, it provided technical assistance to 

more than 20 MFIs. However, the MRR reported that this institution had a 

$37 million loan portfolio and 20,000 clients. According to the contractor 

responsible for the MRR, USAID is relying increasingly on technical 

assistance providers that serve lending institutions. 

MFI Sustainability Data 

May Not Be Reliable 

MRR Does Not Provide 

Sufficient Data on USAID’s 

Contributions 
Page 30 GAO-04-171 Microenterprise Development 

USAID has funded several studies and projects, such as the 

Microenterprise Best Practices project, to publish emerging best practices. 

In addition, the agency has provided information on best practices to 

missions and implementing partners through policy guidance, training, and 

technical assistance. USAID has also collaborated with implementing 

organizations, microenterprise networks, and donors in disseminating 

information on best practices. Several organizations have published such 

information, including USAID; the Committee of Donor Agencies for Small 

Enterprise Development, whose secretariat is hosted and staffed by the 

World Bank; the Donor’s Working Group on Financial Sector 

Development; Catholic Relief Services (CRS); and ACCION. (See app. II 

for a list of some key best practices.) 

According to officials from the World Bank and other organizations, 

USAID has recognized the importance of identifying and disseminating 

successful and unsuccessful attempts to design and implement 

microenterprise activities. USAID’s efforts include the following. 

• Growth and Equity through Microenterprise Investments and 

Institutions (GEMINI). Through its GEMINI project, which ended in 

1995, USAID supported more than 120 studies on microenterprise 

development to publicize the experiences of leading microenterprise 

practitioners and experts in analyzing and managing microenterprise 

activities. These studies focused on the growth and dynamics of 

microenterprise in general and new approaches to delivering financial and 

nonfinancial assistance. The studies included data collection strategies for 

surveys; strategies for MFIs in Indonesia to more profitably provide 

financial services to the poor, strategies for MFIs to help microenterprises 

grow into small enterprises, recommended options to improve support for 

microenterprise development in Ecuador, and analyses of the importance 

of providing needed equipment to MFIs. 

• Microenterprise Best Practices project. USAID funded the Microenterprise 

Best Practices project, a research-oriented effort to develop and 

disseminate best practices. The project, completed in 2001, resulted in 

more than 100 reports, including concept papers, case studies, and 

technical tools and manuals providing guidance for designing and 

managing microenterprise activities. These reports included a model for 

Internet-based information for microenterprises in the Philippines, a 

description of Opportunity International’s experience in Bulgaria and 

Russia in managing a microfinance program during a period of high 

inflation, a guide for reporting financial performance, and case studies of 

USAID Has Identified 

and Disseminated 

Best Practices 

USAID Has Made Efforts 

to Identify and 

Disseminate Best Practices 
Page 31 GAO-04-171 Microenterprise Development 

the difficulties encountered in converting nongovernmental institutions to 

commercial banks in Bolivia and Panama. 

• Guidance. USAID policy guidance for microenterprise development 

encourages missions to develop broad outreach activities to as many of 

the poor as possible, requires that MFIs charge unsubsidized interest rates 

to borrowers to cover the cost of operations, advises that missions 

consider and address host government policy constraints, and emphasizes 

the need for steady movement toward sustainability to achieve significant 

impact and institutional viability. Further, USAID policy states that 

missions providing assistance for microenterprise development should 

monitor and report on their outreach to the poor, including the 

distribution of its loan portfolio by loan amount. 

• Training. USAID supports training courses for its own and implementing 

organizations’ staff in designing and executing microenterprise activities. 

In addition, USAID provides funding to the Microenterprise Development 

Institute at Southern New Hampshire University and to Business 

Development Services Training Program at the Springfield Centre in 

Durham, United Kingdom, to support their microenterprise development 

training programs. USAID’s Accelerated Microenterprise Advancement 

Project provides scholarships to USAID staff for microenterprise 

development training and exchange programs. USAID also provides 

funding to the Small Enterprise Education and Promotion Network 

(SEEP), a network of nongovernmental organizations that implement 

microenterprise activities, for scholarships to enable USAID employees 

and practitioners to attend SEEP’s training courses. During our fieldwork, 

we found that several USAID officials working on microenterprise 

development had received training at these locations. 

• Technical assistance. USAID’s Prime Grant project provides direct 

technical assistance to missions in planning microenterprise activities. The 

project provides information on advances in microenterprise development 

and lessons learned from the missions’ counterparts throughout the 

agency. USAID’s Accelerated Microenterprise Advancement Project 

provides missions technical assistance from microenterprise experts and 

information on ongoing research and learning in microenterprise 

development. Missions may also receive technical assistance in developing 

scopes of work, including sample scopes, and ongoing support throughout 

the procurement process. 
Page 32 GAO-04-171 Microenterprise Development 

USAID has collaborated with implementing partners, networks of 

implementing organizations, and the World Bank in identifying and 

promoting best practices. These organizations have published handbooks, 

bulletins, and other documents on best practices; maintained Internet sites 

devoted to best practices; and sponsored seminars and workshops. For 

example: 

• CRS and ACCION International, two USAID-supported nongovernmental 

organizations, have published handbooks to assist in designing and 

implementing microenterprise activities. CRS also established the 

Microfinance Alliance for Global Impact project to help its implementing 

institutions strengthen their activities. The Foundation for International 

Community Assistance produced an evaluation of current practices used 

by microfinance institutions in assessing client poverty levels. 

Implementing partners such as ACCION International and Opportunity 

International also sponsor regional conferences, workshops, and seminars 

on best practices. 

• USAID has provided funding to SEEP to support its efforts to promote 

best practices. According to SEEP’s Executive Director, USAID has been 

one of its leading supporters, providing funding and technical assistance 

and participating in the network’s conferences and workshops. SEEP has 

published two studies on microenterprise best practices.32 The network 

also sponsors conferences and workshops on improving microenterprise 

activities. 

• USAID is a member of the World Bank’s Committee of Donor Agencies for 

Small Enterprise Development and Donor’s Working Group on Financial 

Sector Development, which have published guiding principles for 

designing and implementing microenterprise activities in 1995 and in 2001. 

The World Bank has also published reports to support the design and 

implementation of microenterprise activities, such as a handbook, to assist 

in operational planning and internal audits of activities.33 The group also 

provides information through MicroBanking Bulletin and the 

Microfinance Information Exchange. 

 32Candace Nelson, Barbara McNelly, Kathleen Stack and Lawrence Yanovitch, Village 

Banking: The State of the Practice (New York, NY: SEEP Network and the United Nations 

Development Fund for Women, 1996); Craig Churchill, Madeline Hirschland, and Judith 

Painter, New Directions in Poverty Finance: Village Banking Revisited (Washington, 

D.C.: SEEP Network, 2002). 

33Joann Ledgerwood, Microfinance Handbook: An Institutional and Financial 

Perspective (Washington, D.C.: World Bank, 1998). 

USAID Has Collaborated 

with Other Organizations 

in Identifying and 

Promoting Best Practices 
Page 33 GAO-04-171 Microenterprise Development 

We found that microenterprise projects—including those funded by 

USAID—can help alleviate some of the impacts of poverty on individuals, 

households, and families. However, evidence suggests that microfinance 

alone has not lifted large numbers of the poor over the poverty line. In 

addition, despite USAID’s use of micro loans to target the very poor, as 

mandated, few loans appear to be reaching this group, in part because 

loan size is an inadequate targeting method. Other evidence suggests that 

loans to the very poor can place some borrowers at risk of unmanageable 

debt and may be more beneficial when offered with other financial 

services such as savings and insurance and with development assistance 

such as grants, health services, education, and housing. Efforts to reach 

the very poor that do not recognize and address these key concerns may 

not be fully effective. 

Despite the general reliability of its data, certain methodological 

weaknesses in USAID’s MRR system may prevent the agency from 

reporting with precision its program expenditures, the percentage of its 

funds going to the very poor, the percentage of MFIs that are sustainable, 

and the extent of USAID’s contributions to the institutions it supports. 

We recommend that the Administrator of USAID review the agency’s MRR 

system with the goal of ensuring that its annual reporting is complete and 

accurate. Specifically, the Administrator should review and reconsider the 

methodologies used for collection, analysis, and reporting of data on 

annual spending targets, outreach to the very poor, MFI sustainability, and 

the contribution of USAID funding to the institutions it supports. 

USAID provided written comments on a draft of this report (see app. V). 

USAID concurred with the report’s recommendation that it make 

improvements in its MRR. The agency cited three points with which it took 

issue, related to reaching the very poor, the sustainability of MFIs it 

supports, and its reporting of contributions to institutions. 

USAID stated that the number of small loans it had issued indicated that it 

was reaching the very poor. As discussed in our report and acknowledged 

in USAID’s comments, loan size is now recognized as an inaccurate 

indicator of the extent to which this program is reaching the very poor. 

Given this limitation, we reviewed detailed impact studies that collected 

information on borrowers’ economic status (see app. III for a summary of 

key studies on this topic); further verified this information through 

detailed discussions with international experts, USAID officials, and their 

Conclusion 

Recommendation to 

USAID 

Agency Comments 

and Our Evaluation 
Page 34 GAO-04-171 Microenterprise Development 

implementing partners working with USAID-funded programs; and 

conducted detailed program reviews in three countries . The general 

consensus across the studies, experts, and program implementers is that 

microfinance projects serve those clustered around the poverty line but 

generally do not reach the very poor. 

USAID also stated that, contrary to our report, the agency uses a single 

definition of sustainability, and it inferred that the sustainability data 

reported in the MRR was accurate. We disagree with USAID on these 

points: We documented several definitions and interpretations that affect 

the reliability of the reported data, and we have added information to the 

report to clarify our concern regarding the agency’s method for measuring 

microfinance institutions’ sustainability. As noted in the report, 38 percent 

of MFIs that received USAID funding in fiscal year 2001 reported that they 

had achieved financial sustainability. The higher figure cited in USAID’s 

response combined data on operational and financial sustainability, 

despite the fact that operational sustainability is, by USAID’s definition, an 

interim measure toward the goal of achieving full financial sustainability. 

USAID stated that it would be difficult to allocate the microenterprise 

accomplishments reported in the MRR between USAID and other donors. 

However, it said that it plans to include more explicit language in the MRR 

to indicate that results are generally reported for entire institutions and 

that the resources of other donors and supporters contributed to the 

results. In its comments, USAID also agreed to (1) provide more explicit 

instructions on what activities to include in the MRR; (2) revise the 

formula for estimating the extent of funding that benefits the very poor 

and include in its annual report additional language concerning the 

formula; (3) improve the accuracy of data on obligations and poverty 

lending; and (4) adopt a new standardized definition of sustainability if 

one is adopted by the field. We believe that these improvements would be 

responsive to our recommendation and, if made, could improve the 

accuracy and balance of the MRR. 

We will send copies of this report to interested congressional committees 

as well as the USAID Administrator. We will also make copies available to 

others upon request. In addition, this report will be available at no charge 

on the GAO Web site at http://www.gao.gov. 
Page 35 GAO-04-171 Microenterprise Development 

If you or your staff have any questions about this report, please contact me 

at (202) 512-3149 or at gootnickd@gao.gov. Other contacts and staff 

acknowledgments are listed in appendix VI. 

Sincerely yours, 

David B. Gootnick 

Director, International Affairs 

 and Trade 
Appendix I: Scope and Methodology 

Page 36 GAO-04-171 Microenterprise Development 

To determine whether the U.S. Agency for International Development’s 

(USAID) microenterprise development program is meeting its key 

objectives, we first identified those objectives by reviewing the agency’s 

policy guidance and the pertinent legislation. We also held discussions 

with USAID officials in Washington, DC. To determine the results of the 

agency’s microenterprise assistance, we met with officials and reviewed 

documents from USAID and their implementing partners in Washington, 

Peru, Egypt, and Bulgaria, and we met with program beneficiaries in these 

three countries. We selected Peru and Egypt because they have mature 

programs that have existed since the late 1980s and received high levels of 

USAID obligations over the past 10 years. These countries also represent 

culturally different areas (e.g., the program in Peru serves a large 

indigenous population, and the primarily business-led program in Egypt 

serves a combination of urban and rural areas). We selected Bulgaria 

because the program was relatively new; per capita income and the gross 

domestic product were high; and participants were reported by USAID to 

have higher educational levels and to be operating different types of 

businesses than in Africa, Asia, or Latin America. In addition, we reviewed 

a broad range of program and academic studies on the issues and 

conducted interviews and round-table discussions with academics and 

practitioners who have expertise regarding the ability of microenterprise 

activities to meet USAID’s objectives. We also reviewed USAID studies 

that pertained to countries we visited, as well as studies that assessed 

project impact related to key program objectives. Because most available 

USAID data and most of the research literature focuses on microfinance, 

particularly micro loans, we concentrated our review primarily on this 

aspect of microenterprise development. 

To assess the reliability of the Microenterprise Results Reporting (MRR) 

data, we reviewed the survey questionnaires that are used to collect the 

data, noting strengths and weaknesses in the survey design. We also 

conducted a variety of analyses of the MRR database. Our analyses 

focused on the data on obligations supplied by the USAID missions and 

the data on microenterprise activities supplied by microfinance 

institutions (MFI), business development service (BDS) providers, and 

policy service providers from 1995 through 2002. We conducted interviews 

focused on data reliability with the contractor that manages the data 

collection and analysis and drafts the MRR reports. In these interviews, 

we asked how the survey data are collected, what quality checks are 

performed, and what other internal controls are in place. On our field trips 

to Peru, Egypt, and Bulgaria, we conducted data reliability interviews with 

officials at all three USAID missions and at six institutions that had 

received USAID funding. During our meetings with USAID missions and 

Appendix I: Scope and Methodology 
Appendix I: Scope and Methodology 

Page 37 GAO-04-171 Microenterprise Development 

the institutions, we conducted spot checks of key MRR data to assess their 

reliability. We found that the reliability of the lending and BDS institutions’ 

data on the percentage of women clients sufficed for our analysis, 

provided we noted that some BDS providers could not directly estimate 

these percentages. The data on lending institutions’ sustainability were of 

uncertain reliability because of inconsistencies in the way respondents 

interpreted the MRR survey question; however, these data were consistent 

with the testimonial and documentary evidence that we gathered. 

To examine USAID’s role in identifying and disseminating best practices, 

we reviewed (1) USAID policy guidance, (2) USAID country strategies and 

annual reports for the three countries we visited, and (3) other relevant 

USAID documents. We also reviewed a wide body of literature on the 

subject, including World Bank publications and the MicroBanking 

Bulletin; analyses of best practices produced by donor groups; 

handbooks, analyses, and other documents produced by USAID 

implementing organizations such as Catholic Relief Services and 

Opportunity International; and studies and analyses by recognized 

microenterprise experts. We interviewed USAID officials in the 

Microenterprise Development Division, the regional bureaus that oversee 

mission activities, and the countries we visited, including officers 

responsible for economic growth and microenterprise activities. We also 

interviewed officials of the World Bank and from implementing 

organizations in Washington, D.C.; Baltimore, Maryland; and the countries 

we visited. Finally, we attended a roundtable on best practices whose 

members included recognized experts on microenterprise development 

from the World Bank, implementing organizations, and academia. The 

World Bank also provided informal comments on a draft of this report. 

We conducted our review from December 2002 through September 2003 in 

accordance with generally accepted government auditing standards. 
Appendix II: Microenterprise Best Practices 

Page 38 GAO-04-171 Microenterprise Development 

Best practices are processes, practices, and systems that have been used 

by organizations and widely recognized as improving performance in 

achieving program goals. Although the research literature and our 

fieldwork indicate that no standard manual of best practices exists for 

microenterprise development, a core of preferable strategies (best 

practices) has emerged within the microenterprise industry comprising 

USAID, other donors, and their implementing partners. 

• Perform due diligence reviews. USAID officials require their 

implementing partners to carefully review all candidates and to pay 

particular attention to choosing institutions with strong management 

skills. Officials from Catholic Relief Services (CRS), a nongovernmental 

organization that manages a microenterprise activity in Bulgaria, chose 

their implementing partner based on the partner’s strong management 

experience. 

• Develop broad outreach. At USAID missions in Peru, Bulgaria, and Egypt, 

microenterprise activities included provisions for small loans to poor 

microentrepreneurs with no other affordable credit alternatives. A USAIDsupported MFI in Egypt recently initiated a lending program that 

specifically provides small loans to the poor and is instituting a grant 

program to help the very poor become eligible for micro loans. In Peru, to 

target the poor and very poor, USAID chose to implement microenterprise 

activities in several of the country’s poorest regions. USAID-supported 

institutions in Bulgaria and Egypt offered financial incentives to loan 

officers, based in part on the number of loans in their loan portfolio, to 

encourage them to attract clients. 

• Increase access to services. At implementing organizations in Peru, 

Bulgaria, and Egypt, loan officers assist poor and very poor clients in 

filling out the loan applications and attempt to review and approve loan 

requests within a few days. In addition, because the poor usually lack the 

collateral needed to qualify for loans, USAID supports collateral 

substitution activities to attract the poor and very poor who would have 

no other access to credit. USAID missions in Bulgaria, Egypt, and Peru 

conduct microenterprise activities that used group lending as a collateral 

substitute. For individual loans, an implementing organization in Bulgaria 

require that clients obtain written loan guarantees from acquaintances as a 

collateral substitute. 

Appendix II: Microenterprise Best Practices 

Design-Related Best 

Practices 
Appendix II: Microenterprise Best Practices 

Page 39 GAO-04-171 Microenterprise Development 

• Adopt an appropriate lending model. Some models, such as group lending 

or village banking,1

 may be more appropriate than individual lending 

programs for certain activities or institutions. CRS adopted a group 

lending model to serve the needs of the poor in Bulgaria. (This model also 

supports the CRS goal of advancing social and economic justice by serving 

the poorest.) A study of group lending activities in Africa, Asia, and Latin 

America indicated that more successful group lending models vary 

according to the local culture. For example, in South Africa, the South 

African Get Ahead Foundation adapted the traditional African rotating 

savings program to create similar group lending activities. 

• Offer an array of services. In addition to credit, services such as savings 

options and insurance are valuable to clients and, by providing other 

revenue sources, can assist MFIs in reaching sustainability. In Indonesia, a 

CRS MFI established a savings program in a village bank for its 

microenterprise clients. ACCION International, using a group lending 

model, has each member contribute a minimum amount to a common pool 

of savings. 

• Establish appropriate pricing policies for services. USAID requires 

financial institutions that receive microenterprise funding, even those that 

emphasize lending to the very poor, to charge unsubsidized interest rates. 

For example, CRS specifies in its microenterprise handbook that the MFIs 

it manages should charge unsubsidized interest rates. In Bulgaria, Egypt, 

and Peru, the annual interest rates can be as high as 40 percent annually, 

although the repayment period is often less than 1 year. 

• Control loan delinquency rates. Loan delinquency rates greater than 10 

percent have been found to seriously undermine MFI sustainability. 

Several MFIs offer financial incentives to their loan officers partially based 

on the repayment rates of their loan portfolio. MFIs in Peru, Bulgaria, and 

Egypt use different methods to determine financial incentives to reward 

their loan officers, but all base the amount of financial incentive on the 

loan repayment rate of the officer’s portfolio. At one implementing 

organization in Egypt, loan officers must maintain at least a 97 percent 

repayment rate on their loan portfolios to be eligible for financial 

incentives. An MFI in Bulgaria that provides individual loans requires that 

five people provide guarantees for each loan. The MFI also employs a loan 

collection officer and an attorney to file in court to collect on delinquent 

 1

In group lending and village banking, group members, rather than an individual, accept 

joint responsibility for repaying the loan. 
Appendix II: Microenterprise Best Practices 

Page 40 GAO-04-171 Microenterprise Development 

loans. MFIs in Egypt and Bulgaria that focus on poverty lending use a 

group lending model to provide for prompt loan repayment. 

• Address potential policy constraints. USAID guidance advises missions to 

consider the local economic environment when designing and 

implementing microenterprise activities. For example, the guidance 

advises missions not to provide assistance to MFIs during periods of high 

inflation. USAID officials told us the agency suspended a microenterprise 

activity because the Government of Egypt tax policies were too restrictive. 

Grant agreements may also include a component focused on policy and 

regulatory reforms to facilitate microenterprise activity. Such reforms may 

include permitting financial institutions to offer savings to clients, 

streamlining business registration procedures and assisting 

microentrepreneurs in registering and obtaining title to their businesses’ 

assets. A USAID grant agreement in Bulgaria required the implementing 

organization to coordinate efforts in legislation on policy reform within 3 

years. 

• Require transparency and accountability in operations. USAID requires 

implementing partners and MFIs to report annually on financial and 

operational performance. In Peru, a USAID-funded technical assistance 

provider conducts audits of more than 40 MFIs to assess their 

implementation-related practices. 

• Provide adequate resources to successfully manage a microenterprise 

activity. Effective management information systems and other assets are 

necessary for implementing organizations and financial institutions to 

make decisions, motivate performance, and provide accountability over 

funds. USAID provides resources to help implementing partners and MFIs 

improve their management capacity. For example, most USAID grant 

agreements provide funding to rent office space, to purchase management 

information systems, including the computers needed to track outstanding 

loan balances and due dates, and to purchase other equipment such as 

office furniture. 

• Provide necessary training. Training for implementing organizations and 

clients in areas such as financial management and computers is often 

needed to ensure that MFIs manage operations effectively. USAID grant 

agreements may provide funding for training of implementing 

organizations’ staff. Implementing organizations, such as an Opportunity 

International-funded MFI in Colombia, includes weekly training of clients 

in areas such as marketing and product presentation. A USAID-funded 

study of five nongovernmental organizations implementing 

Implementation-Related 

Best Practices 
Appendix II: Microenterprise Best Practices 

Page 41 GAO-04-171 Microenterprise Development 

microenterprise activities concluded that heavy investment in training was 

a factor in the success of village banks. 

• Provide incentives to loan officers. USAID-supported MFIs in Bulgaria 

and Egypt provide loan officers incentive-based salaries. Criteria for the 

incentives included the number of clients recruited and the clients’ loan 

repayment rates. Incentives can double loan officers’ monthly earnings. 

• Require a manageable loan portfolio for loan officers. Implementing 

organizations in Bulgaria and Egypt, such as CRS and Opportunity 

International, limit the number of clients one loan officer can manage. The 

number can vary depending on the ability of the officer, but few manage 

more than 300 clients. Also, because incentives are based primarily on 

loan default rates, officers are motivated to limit their pool of clients to a 

size they can manage effectively. 

• Monitor and evaluate performance. Donors and implementing 

organizations should monitor the performance of the MFIs they support to 

ensure they are meeting program goals. These goals can include a focus on 

the poor and women, as well as financial indicators, such as repayment 

rates and progress toward sustainability. They should also perform audits 

on a regular basis to ensure the accuracy of information reported. USAID 

typically performs midterm and final evaluations of its grant agreements. A 

cross-country study of village banks in seven countries concluded that 

oversight of the banks’ operations was a critical factor in their success. 

Further, USAID requires annual financial reports of implementing 

organizations. 

• Promote MFI sustainability. This goal supports (1) sound financial 

practices, (2) expanding and maintaining outreach, and (3) reducing 

dependency on donor support. USAID and other implementing 

organizations encourage MFIs to charge unsubsidized interest rates to 

cover the cost of operations. A USAID-funded study of successful 
Appendix II: Microenterprise Best Practices 

Page 42 GAO-04-171 Microenterprise Development 

microenterprise activities in Indonesia and Bangladesh concluded that 

MFIs must have a commitment to, and a plan for, reaching sustainability.2

 2

Mohini Malhotra, Poverty Lending and Microenterprise Development: A Clarification of 

the Issues, GEMINI Working Paper No. 30 (Washington, D.C.: U.S. Agency for International 

Development, 1992). 
Appendix III: Review of Microenterprise 

Studies 

Page 43 GAO-04-171 Microenterprise Development 

We collected, reviewed, and analyzed a set of 22 studies, 20 of which 

provide an overview of existing research and practice in microenterprise 

or its components. The purpose of our review was to obtain general 

information on the primary findings, issues, and debates in microfinance 

and microenterprise and to complement other USAID-specific components 

of our data collection efforts. 

We selected these studies on the basis of three criteria: (1) each study was 

published in 1998 or later, (2) each was peer reviewed or published by 

journals or publishers respected in the field, and (3) each was 

recommended by 2 or more of 15 microfinance experts we consulted. We 

also included two case studies (published and peer reviewed), because 5 

or more of the experts we consulted recommended them. We ensured that 

the studies selected covered a range of microenterprise subtopics and 

scientific journals relevant to economic and social development issues. A 

primary reviewer summarized each study using a data collection 

instrument developed specifically for the purposes of this review. A 

secondary reviewer then verified each study summary. 

We reviewed each of the 22 articles and summarized the findings and 

relevant suggestions or recommendations, paying particular attention to 

information on poverty impacts, outreach, women’s empowerment, 

sustainability, and best practices (see table 1). (Note: The 

recommendations in the third column of the table are those of the studies’ 

authors and do not represent the viewpoint of GAO.) 

Appendix III: Review of Microenterprise 

Studies 
Appendix III: Review of Microenterprise 

Studies 

Page 44 GAO-04-171 Microenterprise Development 

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

Author 

title 

source Primary findings Author recommendations 

1 Bhatt, Nitin; Tang, ShuiYan. 

Delivering Microfinance 

in Developing 

Countries: 

Controversies and 

Policy Perspectives. 

2001. Policy Studies 

Journal 29 (2): 319-333. 

• Attempts to replicate best-practice models of 

microfinance based on successful programs (Grameen, 

BRI, BancoSol) have largely been disappointing. 

• Few programs have lived up to their original objective of 

“including the excluded.” 

• In most cases, subsidies have ended up funding 

inefficient and lax management practices that have 

resulted in limited outreach, high loan default rates, and 

unsustainable operations. 

• The best solution for the 

microfinance industry is to have a 

diverse array of institutions that are 

both non- and for-profit, subsidized 

and unsubsidized, and bare-bones 

and integrated. 

• There is a need for better, more 

accurate financial reporting and 

cost-benefit analysis in 

microfinance. 

2 Cohen, Monique. 

Making Microfinance 

More Client-Led. 

2002. Journal of 

International Development 

14 (3): 335-50. 

• The microfinance industry has been largely a single 

product industry; this product has worked well for people 

around the poverty line but is less effective at reaching 

the very poor. 

• Although most MFIs serve a wide range of clients, the 

majority of clients are clustered just above and just below 

the poverty line. 

• Many poor people are highly indebted and microfinance 

loans are only one component of the debt burden of many 

households. 

• High drop-out rates in some places have arisen as 

competition between MFIs has increased. 

• Poverty-targeted programs tend to reach a higher 

percentage of lower income clients; even here, poorer 

populations often exclude themselves from microfinance 

programs. 

• Many poor people “patch” together funds from a variety of 

sources, including MFIs, in order to meet their 

consumption and investment needs. 

• Most MFI management information systems lack 

adequate client information that can be used as a tool in 

decision making and product development. 

• To achieve outreach to 

underserved market segments and 

to the very poor, the microfinance 

industry must focus on clients’ 

specific financial needs and design 

appropriate financial services 

accordingly. 
Appendix III: Review of Microenterprise 

Studies 

Page 45 GAO-04-171 Microenterprise Development 

3 Steven Haggblade; Mead, 

Donald C.; Meyer, 

Richard. 

An Overview of Policies 

and Programs for 

Promoting Growth of the 

Rural Nonfarm 

Economy. 

Forthcoming. In 

Developing the Rural 

Nonfarm Economy, edited 

by Steve Haggblade, 

Peter Hazel, and Thomas 

Reardon. 

• In analyses of the impacts of micro loan programs on 

rural nonfarm economies, outreach has proven 

impressive, financial sustainability has proven elusive, 

and income increases have been generally documented 

at the household and firm levels, particularly for the 

better-off poor and in Asia. 

• Micro loans have not advanced our understanding of the 

challenge of lending to enterprises in rural areas where 

population densities are lower and where the seasonality 

in cash flows and lending costs is higher. 

• Business development services involving the delivery of 

nonfinancial services to rural nonfarm enterprises are 

more heterogeneous, more problematic, and have 

produced decidedly fewer results than the delivery of 

financial services to rural nonfarm enterprises. 

• In the future, improvements in rural 

welfare will need to go beyond 

financial markets and services to 

develop new engines of economic 

growth, new technologies, and new 

ways of doing business. 

• A focus on subsectors, supply 

chains, and clusters can lead to 

tailored systemic interventions that 

unleash growth potential for large 

numbers of rural firms. 

4 Hulme, David. 

Impact Assessment 

Methodologies for 

Microfinance: Theory, 

Experience, and Better 

Practice. 

2000. World Development 

28 (1): 79-98. 

• Microfinance impact assessments vary greatly in their 

range, rigor, and practicality; there have been relatively 

few quasi-experimental, control-treatment studies, and 

practitioners have found such studies to be expensive 

and difficult to use. 

• There is increasing movement toward mixed studies 

incorporating quantitative and qualitative elements and 

toward designing impact assessment activities into 

microfinance programs. 

• Impact assessments must be 

tailored to the resources, needs, 

and time frames defined by the 

program’s context. 

5 Khandker, Shahidur R. 

Fighting Poverty with 

Microcredit: Experience 

in Bangladesh. 

1998. New York: Oxford 

University Press. 

• Globally, micro loan programs have been able to reach 

the poor and enhance both their productive and human 

capital by generating self-employment. 

• The long-run cost-effectiveness of micro loans depends 

on the overall growth of the economy. 

• Bangladesh is one of the few countries in which micro 

loan programs have been successfully replicated. 

• Microfinance in the Bangladesh programs reduced 

poverty by increasing per capita consumption among 

program participants and their families; poverty reduction 

estimates based on consumption impacts show that 

about 5 percent of program participants can lift their 

families out of poverty each year through microfinance. 

• One percent of rural households in Bangladesh can free 

themselves from poverty each year through micro loans. 

• Participation in micro loan programs enhanced women’s 

productive means by increasing their access to cash 

income from market-oriented activities and by increasing 

their ownership of nonland assets. 

• Subsidies in the Bangladesh programs studied were 

necessary to defray an array of high costs associated 

with providing microloans to the poor. 

• In replicating microfinance 

programs, it is necessary to design 

a socially conscious and 

transparent system of accountability 

that works for both program officials 

and borrowers. 

• The poor and women need special 

banking, so the commercialization 

of micro loans should not divert 

attention from meeting this special 

need. 
Appendix III: Review of Microenterprise 

Studies 

Page 46 GAO-04-171 Microenterprise Development 

6 Matin, Imran; Hulme, 

David; Rutherford, Stuart. 

Finance for the Poor: 

from Microcredit to 

Microfinancial Services. 

2002. Journal of 

International Development 

14 (2): 273-94. 

• Poor people must and do save in order to finance the 

large lump sum payments needed to deal with an array of 

life- and environment-based needs and crises. 

• The poor are a heterogeneous group of vulnerable 

households with complex livelihoods and varied needs. 

• The success of the group lending model globally is mixed. 

• Weekly frequency of repayment and repayment 

incentives (typically larger repeat loans) correlate strongly 

with success, defined in terms of arrears rate and subsidy 

repayment index. 

• A shift away from credit for 

business development toward 

financial services of all types for the 

poor will help them to effectively 

manage the many risks and crises 

that emerge in their lives. 

7 Mayoux, Linda. 

From Access to 

Empowerment: 

Widening the Debate on 

Gender and Sustainable 

Micro-Finance. 

2000. Journal fur 

Entwicklungspolitik 16 (3): 

247-273. 

• Some policies introduced for financial sustainability result 

in adverse impacts on empowerment. 

• Beneficial impacts of microfinance per se on women 

cannot be assumed; impacts vary substantially across 

cases and programs. 

• Microfinance services have enabled some, but not all, 

women to increase their incomes and negotiate 

improvements in their family and community position; 

microfinance alone is the most limited for the poorest and 

most disadvantaged women. 

• Women’s decisions about loan use involve assessments 

of benefits, costs, and risks in the context of the gender 

norms of household resource allocation and decisionmaking. 

• Women’s choices about activity and ability to increase 

income are constrained by gender inequality; market, 

resource, and skill constraints; and microfinance delivery. 

• An empowering gender policy 

should include increasing women’s 

incomes from their own activities; 

control of income from loans and 

activities; negotiated improvements 

in household well-being, and 

access to support networks. 

• A gender policy that supports 

financial sustainability and 

empowerment should consider 

improving the conditions of service 

delivery, reducing costs of 

complementary services (e.g., 

training, gender 

awareness/support), and 

mainstreaming gender policy. 

8 Mead, Donald C; 

Liedholm, Carl. 

The Dynamics of Micro 

and Small Enterprises in 

Developing Countries. 

1998. World Development 

26 (1): 61-74. 

• House-to-house baseline surveys make clear that the 

number of micro and small enterprises (MSE) is far larger 

than that reported in most official statistics. 

• In most countries, the majority of MSEs operate in rural 

areas, are engaged in the trade and manufacturing 

sectors, are owned and operated by women, and are 

more likely to be operated from the home. 

• Younger, smaller, male-headed manufacturing and 

services MSEs in urban areas are more likely to grow 

than are older, larger, female-headed trade MSEs in rural 

areas. 

• When the economy is more buoyant, new jobs come from 

the expansion of existing firms; in times of stagnation, 

existing MSEs cut back on employment and a larger 

percentage of new jobs comes from start-ups. 

• Policies and projects for supporting 

MSE development must be aware 

of the diversity of MSEs and focus 

on the types of enterprises and on 

the stages in the enterprise’s life 

cycle where interventions can do 

the most good. 
Appendix III: Review of Microenterprise 

Studies 

Page 47 GAO-04-171 Microenterprise Development 

9 Morduch, Jonathan. 

The Microfinance 

Promise. 

1999. Journal of 

Economic Literature (37) 

4: 1569-1614. 

• There are few reliable studies of the net poverty impacts 

of microfinance programs; those which do exist suggest 

some limited positive impacts, as well as other mixed 

results. 

• Sustainable microfinance programs have by and large not 

been able to reach the very poor in large proportions or 

numbers. 

• Microcredit supplements clients’ income and does not 

produce fundamental shifts in clients’ employment 

patterns; microcredit rarely generate new jobs for others. 

• The features of microfinance program designs vary to a 

high degree globally. 

• Incentives and specific program design elements such as 

group lending, weekly repayments, graduated repayment 

schedules, and forced savings, have been important in 

the successes that microfinance programs have achieved 

to date. 

• Microcredit has had very limited success in regions with 

low population densities and with seasonal income 

patterns. 

• Savings programs will strongly 

complement the credit-driven 

approach that has dominated 

microfinance to date. 

• To alleviate poverty, new 

approaches to management 

structures and product/program 

design are necessary. 

10 Morduch, Jonathan. 

The Microfinance 

Schism. 

2000, World Development 

28 (4): 617-629. 

• There is a strong consensus among prominent policy 

making organizations that microfinance institutions (MFI) 

that focus on profitability (through high interest rates) will 

have the strongest effects on poverty. 

• This consensus on best practices is at odds with actual 

practice, where the large majority of MFIs are not focused 

on profitability, have not given up subsidies, and are not 

sustainable. 

• Moderate subsidies have been necessary in some 

programs to attain social objectives not present in forprofit MFIs. 

• Efficient operations and clear incentive structures for 

clients and loan staff are more important factors in 

achieving success in microfinance than a focus on 

profitability; nonprofit, subsidized programs have been 

able to operate efficiently, provided they adhere to clear 

budgeting and performance criteria. 

• Governments have played critical indirect roles in cases 

such as Indonesia’s BRI and Thailand’s BAAC, which are 

state-owned commercial banks. 

• A diverse array of socially oriented, 

subsidized, and profit-oriented, 

sustainable microfinance 

institutions is best for the 

microfinance industry and for widescale poverty alleviation. 

• If subsidized programs are to 

continue at current funding levels, 

they will likely need to rely 

increasingly on their own 

governments. 
Appendix III: Review of Microenterprise 

Studies 

Page 48 GAO-04-171 Microenterprise Development 

11 Navajas, Sergio; 

Schreiner, Mark; Meyer, 

Richard; Gonzalez-Vega, 

Claudio; Rodriquez-Meza, 

Jorge. 

Microcredit and the 

Poorest of the Poor: 

Theory and Evidence 

from Bolivia. 

2000. World Development 

28 (2): 333-346. 

• In a study in La Paz, Bolivia microfinance lenders tended 

to serve those near the poverty line, not the “poorest of 

the poor.” 

• Rural and group lenders tended to serve larger numbers 

of poorer clients than urban and individual lenders. 

• In addition to depth, defined as the degree to which an 

MFI reaches the very poor, factors such as worth, cost, 

breadth, length, and scope are important in evaluating 

outreach to and the social welfare of the poor. 

• Length of outreach (time frame in which an organization 

produces loans) is the key aspect of outreach because it 

prompts improvements in the five other aspects. 

• Policy-makers and MFIs should 

consider all aspects of outreach in 

making judgments about the focus 

and social benefits of microfinance. 

12 Rankin, Katherine N. 

Social Capital, 

Microfinance, and the 

Politics of Development. 

2002. Feminist Economics 

8 (1): 1-24 

• There is substantial evidence that microfinance and micro 

loan programs have served to strengthen existing 

patterns of male and class-based power relations, rather 

than empowering women. 

• Development agencies and policy 

should place greater emphasis on 

finding ways to empower the poor 

and disadvantaged so that they can 

overtly challenge dominant social 

power relations. 

13 Rhyne, Elisabeth. 

Microfinance 

Institutions in 

Competitive Conditions. 

2002. In The 

Commercialization of 

Microfinance: Balancing 

Business and 

Development, edited by 

Elisabeth Rhyne and 

Deborah Drake. Kumarian 

Press. 

• The microfinance industry has to date primarily been a 

one-product industry, based on short-term (3 to l2 

months) group-based lending, with frequent repayments, 

and small loan sizes. 

• Microfinance institutions have traditionally taken an 

inward-looking approach to their development, focusing 

primarily on streamlining operations to achieve greater 

outreach. 

• In some countries, there has been a substantial increase 

in competition among MFIs for clients, e.g., Bolivia, 

Bangladesh, Nicaragua, and Uganda, which has 

increased the need for MFIs to be more oriented toward 

their 1) competition and 2) clients. 

• Overlending is a key problem that arises in competitive 

markets. 

• Maintaining sustainability, while 

becoming more attuned to the 

needs of clients, is critical; MFIs 

must adapt to the changing needs 

of clients to survive and develop in 

the newly competitive microfinance 

environment. 

• MFIs must be attuned to the 

problem of overlending. 

14 Robinson, Marguerite S. 

The Microfinance 

Revolution: Sustainable 

Finance for the Poor 

(Chapters 1 and 2). 

2001. Washington, D.C.: 

The World Bank. 

• Sustainable microfinance only occurs in systems 

providing commercial financial intermediation; other 

models (e.g., subsidized credit) are not sustainable in the 

long term and are not affordable on a global scale. 

• Only institutional commercial microfinance can provide 

sustainable financial services to the working poor by 

providing low-cost credit and wide outreach. 

• The lowest levels of the poor need food, employment, 

and/or government or donor assistance and grants. 

• The shift away from donor-assisted 

credit delivery to sustainable 

financial institutions that provide 

commercial microfinance is 

essential to meet the global 

demands for microfinance. 

• Governments must support 

commercial microfinance through 

regulation, supervision, and public 

education to ensure success. 
Appendix III: Review of Microenterprise 

Studies 

Page 49 GAO-04-171 Microenterprise Development 

15 Rutherford, Stuart. 

The Poor and Their 

Money. 

2000. New Delhi, India: 

Oxford University Press. 

• The poor can save, do save, and want to save money; 

the poor have to save to make the large lump sum 

payments that come up frequently in their lives. 

• The argument about whether the poor need savings or 

loans is false; they need both. 

• Financial services for the poor help them trade their 

savings for lump sums of cash; good financial services for 

the poor are those that perform this trade well. 

• The key to microfinance is to find 

creative ways to collect small sums 

(savings, repayments, insurance 

premiums) and turn them into large 

sums (loans, withdrawals from 

savings, or insurance pay-outs). 

16 Schreiner, Mark. 

Aspects of Outreach: A 

Framework for 

Discussion of the Social 

Benefits of 

Microfinance. 

2002. Journal of 

International Development 

14 (5): 591-603. 

• There are six interacting dimensions of outreach: worth to 

clients, cost to clients, depth, breadth, scope, and length. 

• Tradeoffs exist in achieving outreach: programs focusing 

on sustainability achieve breadth, length, and scope at 

the expense of depth; programs focused on poverty 

alleviation achieve depth at the expense of breadth, 

length, and scope. 

• Microfinance institutions should 

focus on sustainability because the 

longer an MFI is in operation the 

greater the number of clients and 

the greater the overall impact on 

poverty. 

17 Sebstad, Jennefer; 

Cohen, Monique. 

Microfinance, Risk 

Management, and 

Poverty. 

2000. AIMS. U.S. Agency 

for International 

Development. 

• Microfinance programs have been more successful in 

reaching clients from moderately poor and vulnerable 

non-poor households than from extremely poor 

households. 

• Clients use loans for a wide range of purposes beyond 

enterprise development. 

• Micro loans are more useful for clients in protecting 

against risks ahead of time than in smoothing 

consumption following a shock. 

• Investment in productive assets is more prevalent among 

clients having larger loan sizes, higher numbers of loans, 

and more time in the program. 

• Microloans have positive impacts on reducing 

vulnerability measured as diversified income sources, 

increased numbers and types of assets, and women’s 

empowerment. 

• Future programs should link 

services to clients’ needs and 

demands, should become more 

flexible, and should diversify 

services offered. 

• Linking financial services with other 

supportive services could improve 

clients’ ability to deal with risks. 
Appendix III: Review of Microenterprise 

Studies 

Page 50 GAO-04-171 Microenterprise Development 

18 Snodgrass, Donald R.; 

Sebstad, Jennefer. 

Clients in Context: The 

Impacts of Microfinance 

in Three Countries. 

Synthesis Report 

2002. AIMS. U.S. Agency 

for International 

Development. 

• Overall, microfinance makes a difference to people’s 

lives; however, microfinance does not have the 

unequivocally large, positive impact on microenterprise 

development and poverty reduction that has been 

claimed for it by some. 

• Microfinance impact is a function of product 

characteristics, the macroeconomic situation, and the 

length of time the client has been in the program. 

• The microfinance programs reviewed had significant 

impact on a variety of individual-, household-, and 

enterprise-level income and well-being indicators, 

although the nature and magnitude of these impacts vary 

across countries and programs. 

• Microfinance provided recipients with resources for 

dealing with risks typically not available to nonrecipients. 

• Receiving a micro-loan resulted in greater household and 

enterprise decision-making authority for women in the 

study. 

• Expanding and diversifying services 

to include savings, insurance, and 

emergency loans will increase 

impact and enhance clients’ ability 

to cope with shocks. 

19 Snow, Douglas R; Buss, 

Terry F. 

Development and the 

Role of Microcredit. 

2001. Policy Studies 

Journal 29 (2): 296-307. 

• We have very scant knowledge of the relationships 

between program designs and outcomes. 

• There have been very few strong microfinance program 

outcomes studies; as a consequence, “there is good 

reason to fear reliance on program design as a surrogate 

for outcomes.” 

• If forced to stand alone, few micro loan programs, if any, 

would survive. 

• The twin concepts of sustainability and outreach are 

inherently contradictory. 

• Governments, if not all donors, 

ought to have specific goals for 

micro loan programs and these 

should be grounded in strong 

research and knowledge of 

impacts. 

20 Von Pischke, J.D. 

Current Foundations of 

Microfinance Best 

Practices in NonIndustrialized Countries. 

2001. In Replicating 

Microfinance in the United 

States, edited by Jim Carr 

and Zhong Yi Tong. 

Washington, D.C.: Fannie 

Mae Foundation. 

• Major players in both sustainability- and poverty-oriented 

MFIs have developed a consensus about preferred 

microfinance strategies. 

• They have generally agreed upon 12 best practices: 

• Create sustainable institutions. 

• Charge interest rates that will enable the lender to 

cover costs. 

• Control arrears. 

• Use subsidies for institution building, i.e., technical 

assistance and capitalization. 

• Behave competitively from the outset. 

• Maintain uncompromising commitment to the target 

group. 

• Select “owners” who will provide effective 

governance. 

• Manage risk, explore failure. 

• Develop good management information systems. 

• Be transparent. 

• Focus on incentives. 

• Exchange information on defaulters. 
Appendix III: Review of Microenterprise 

Studies 

Page 51 GAO-04-171 Microenterprise Development 

21 Woller, Gary M.; Dunford, 

Christopher; Woodworth, 

Warner. 

Where to Microfinance? 

1999. International 

Journal of Economic 

Development 1 (1): 29-64. 

• There is general agreement in microfinance that poverty 

reduction and the achievement of financial self-sufficiency 

are the basic goals for the industry. 

• The industry disagrees on how to achieve these goals: 

the institutionists emphasize financial self-sufficiency over 

a focus on the very poor; the welfarists emphasize 

assisting the very poor over the need for financial selfsufficiency. 

• The institutionist perspective has become more prominent 

in the microfinance industry, but its assertions that 

subsidized institutions cannot survive for long periods and 

cannot have strong, large-scale impacts on the very poor 

are not fully supported by existing evidence and are 

based on an array of questionable or inconsistent 

assumptions. 

• Most microfinance institutions lie somewhere along a 

continuum ranging from traditional business and 

traditional social service orientation. 

• There is no need for a once-andfor-all choice between competing 

approaches; the microfinance 

industry should be characterized by 

a diversity of microfinance 

institutions that cater to various 

segments of low-income 

communities. 

22 Wright, Graham. 

Replication. Regressive 

Reproduction or 

Progressive Evolution? 

2000. Journal of 

Microfinance 2 (2): 61-81. 

• Replication of a best practices model for microfinance 

program design has been difficult, because the contexts 

in which such a model would be implemented vary so 

greatly. 

• Institutions attempting to replicate the same general 

microfinance model are characterized by a high level of 

diversity in implementation methodologies. 

• The poor often participate in a variety of formal and 

informal financial institutions. 

• To be successful, microfinance 

programs must be adapted and 

tailored to the cultural, economic, 

social, and political features of the 

contexts in which they are 

implemented. 

• Implementation and replication of 

programs must include a period of 

research, experimentation, and 

adaptation. 
Appendix IV: USAID’s Microenterprise 

Results Reporting 

Page 52 GAO-04-171 Microenterprise Development 

To monitor and evaluate its microenterprise portfolios, USAID developed 

a data collection process and information management system known as 

the Microenterprise Results Reporting (MRR). The term also refers to an 

annual report that presents the agency’s financial data—primarily amounts 

it obligates for microenterprise development—and programmatic 

information. 

The MRR data are collected through annual surveys of USAID staff in 

headquarters and at overseas missions and the institutions that receive 

USAID funding. A USAID contractor is responsible for data collection and 

the management information system. Beginning early in each fiscal year, 

the contractor requests obligations data for microenterprise projects from 

USAID headquarters and missions. The mission staff report current year 

obligations and identify the recipient institutions, categorizing them as 

microfinance, business development services (BDS), or policy services 

providers. In addition, the mission staff identify institutions that received 

obligations in previous years for ongoing projects. 

Separate surveys have been designed for the microfinance institutions 

(MFI), BDS providers, and policy service providers. The survey for MFIs 

asks about outstanding loan balances, the number of loans to women, 

maximum loan sizes, loan loss, loans below the poverty lending threshold 

percentage, the number of rural clients, savings, and the financial 

sustainability of the institutions. The survey for BDS providers asks about 

the types of services provided, the number of clients overall, the number 

of women clients, the number of rural clients, the number of clients with 

“poverty loans,” data sources for clients, the clients’ industrial sector, the 

institutions’ competitors, the demand for BDS, and exit strategies. The 

policy service providers survey asks about the types of institutions and for 

descriptions of policy issues covered. 

The number of respondents to the annual surveys during 1998 to 2001 has 

remained fairly constant, ranging from 361 to 411. Most MRR respondents 

complete the MFI survey. In 2000, for example, 512 surveys were sent out; 

282 of the 361 respondents completed the MFI survey, 99 completed the 

BDS survey, and 18 completed the policy survey. The reported response 

rates rose in recent years, from 56 percent (411 surveys) in 1998 to 84 

percent (492 surveys) in 2001. 

USAID contractor staff analyze the data and, in some cases, apply 

methodologies the agency has developed to assess whether it has met 

particular program goals, such as its poverty-lending target. This 

Appendix IV: USAID’s Microenterprise 

Results Reporting 
Appendix IV: USAID’s Microenterprise 

Results Reporting 

Page 53 GAO-04-171 Microenterprise Development 

methodology is designed to weight the individual institutions’ obligations 

by the amounts of loans that are considered poverty loans. 

The data and the analyses are presented in the annual reports, which also 

provide examples of USAID-funded microenterprise projects. In addition 

to publishing the data in the MRR reports, the contractor also publishes 

selected data on a Web site accessible to the agency’s missions, 

institutions that receive USAID-funding, and interested others. 
Appendix V: Comments from the U.S. Agency 

for International Development 

Page 54 GAO-04-171 Microenterprise Development 

Appendix V: Comments from the U.S. Agency 

for International Development 

Note: GAO comments 

supplementing those in 

the report text appear at 

the end of this appendix. 

See comment 1. 
Appendix V: Comments from the U.S. Agency 

for International Development 

Page 55 GAO-04-171 Microenterprise Development 

See comment 4. 

See comment 3. 

See comment 2. 
Appendix V: Comments from the U.S. Agency 

for International Development 

Page 56 GAO-04-171 Microenterprise Development 
Appendix V: Comments from the U.S. Agency 

for International Development 

Page 57 GAO-04-171 Microenterprise Development 
Appendix V: Comments from the U.S. Agency 

for International Development 

Page 58 GAO-04-171 Microenterprise Development 

See comment 5. 
Appendix V: Comments from the U.S. Agency 

for International Development 

Page 59 GAO-04-171 Microenterprise Development 

See comment 7. 

See comment 6. 
Appendix V: Comments from the U.S. Agency 

for International Development 

Page 60 GAO-04-171 Microenterprise Development 

See comment 9. 

See comment 8. 
Appendix V: Comments from the U.S. Agency 

for International Development 

Page 61 GAO-04-171 Microenterprise Development 

See comment 4. 

See comment 10. 
Appendix V: Comments from the U.S. Agency 

for International Development 

Page 62 GAO-04-171 Microenterprise Development 
Appendix V: Comments from the U.S. Agency 

for International Development 

Page 63 GAO-04-171 Microenterprise Development 

See comment 12. 

See comment 11. 
Appendix V: Comments from the U.S. Agency 

for International Development 

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

for International Development 

Page 65 GAO-04-171 Microenterprise Development 

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

2003. 

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

of its microenterprise strategy and program. Our report focuses 

primarily on microfinance, since this component of USAID’s 

microenterprise program has received, and continues to receive, the 

bulk of the agency’s funding. Microfinance has also been the principal 

focus of long-term studies funded by USAID and others. We found no 

long-term studies or evaluations that assessed the impact of USAID’s 

support for Business Development Services (BDS) or its policy work in 

the area of microenterprise development. Our discussions with USAID 

employees in Peru, Egypt, and Bulgaria regarding BDS and policy 

initiatives yielded some information on these efforts, but we found that 

no data on these efforts had been collected systematically. 

2. USAID said that it has long used loan size as a proxy for services to the 

very poor, recognizing that it is imperfect but a statutory requirement. 

Because of the limitation of loan size as a proxy, we analyzed impact 

studies and evaluations funded by USAID and others that collected 

information on borrowers’ economic status to determine the extent to 

which microfinance has reached the very poor. These studies, based 

on in-depth research across multiple countries and settings, found that 

the very poor are rarely reached with micro loans, for reasons outlined 

in this report (see app. III for a summary of key studies on this topic). 

To complement information contained in these studies, we discussed 

this issue at two roundtable meetings with international experts; we 

also interviewed USAID officials and nongovernmental organization 

officials working with USAID-funded programs in the countries where 

we conducted fieldwork. The consensus across the literature and 

among the experts is that microfinance projects often have difficulty 

reaching the very poor. 

3. USAID said that the MRR has used a single, clear definition of 

sustainability in questionnaires to implementing partners. We disagree 

with USAID on this point, and we have added information to this 

section to clarify our concern regarding the agency’s lack of a 

standardized method for measuring microfinance institutions’ (MFI) 

sustainability. As noted in the report, 38 percent of MFIs that received 

USAID funding in fiscal year 2001 reported that they had achieved 

financial sustainability. In addition, the figures cited in USAID’s 

response combine data on operational and financial sustainability, 

despite the fact that operational sustainability is defined in USAID’s 

GAO Comments 
Appendix V: Comments from the U.S. Agency 

for International Development 

Page 66 GAO-04-171 Microenterprise Development 

policy guidance as an interim measure toward the goal of achieving full 

financial sustainability. 

4. USAID stated that allocating the impact between USAID and other 

donors would be impractical and methodologically questionable. 

However, it also says that it plans to include language in its annual 

report indicating that many of USAID’s awardees receive support from 

other sources as well, and that these sources deserve a share of the 

credit for the awardees’ impacts. 

5. See comment 2. USAID states that it made about 2 million loans in 

fiscal year 2001 that met the statutory standard for service to the very 

poor. The agency said that it also utilized other methods of reaching 

this group. As noted in the report, Congress recognized the limitations 

of loan size as an indicator for targeting and reaching the very poor 

and directed USAID to develop more accurate methods to ensure that 

this group is reached in the future. 

6. USAID said that the report suggests that loans to the very poor can 

have negative consequences and may be a significant or widespread 

problem. As noted in the report, the very poor can benefit from credit, 

but some evidence suggests that microcredit should compliment, not 

substitute, for investments in core services, such as health and 

education. 

7. USAID states that their record of supporting MFIs and achieving 

sustainability is strong. With regard to the issue of MFIs’ achieving full 

financial or operational sustainability, we note in the report that 

USAID’s policy establishes full financial sustainability as its goal; that 

is, to develop fully financially sustainable MFIs, capable of providing 

services indefinitely without USAID or other donor support. We did 

not report data on operational sustainability because this measure is 

defined in USAID’s policy manual as a “useful interim standard of 

financial performance.” Accordingly, we focused on full sustainability, 

a standard that, if widely attained, could ensure that these institutions 

would be available to provide these services in the future. Also, see 

comment 3. 

8. USAID said the report suggests that sustainability might not be 

consistent with serving very poor clients. Our report does not state or 

suggest that sustainability might not be consistent with serving very 

poor clients. We agree with USAID that attaining full financial 

sustainability may be more difficult for MFIs serving greater numbers 

of very poor borrowers. 
Appendix V: Comments from the U.S. Agency 

for International Development 

Page 67 GAO-04-171 Microenterprise Development 

9. USAID incorrectly attributed to us an audit conducted in Egypt; this 

audit was conducted by the USAID Inspector General. 

10. USAID stated that its policy allows microenterprise funds to be 

obligated for activities that do not meet the definition of 

microenterprise development found in the MRR and that 

microenterprise awardees do not have to solely serve micro-scale 

enterprises. However, our report addresses the reporting of such 

activities, not the policy. According to the 2001 MRR, 

“Microenterprises are small, often informally organized businesses that 

are owned and operated by poor and very poor entrepreneurs. USAID 

defines a microenterprise as one that comprises 10 or fewer 

employees, including unpaid family workers, in which the 

owner/operator of the enterprise...is considered poor. By limiting its 

definition of microenterprises to those whose owners/operators are 

poor, USAID ensures that the focus of its efforts remains on the most 

vulnerable households in higher-risk environments.” Despite this 

definition, the annual MRR reports present data on a wide variety of 

activities that do not meet this definition. This includes its policy work, 

much of its BDS work, its obligations to small and medium businesses, 

and loans to those that are not poor. As a result, it is uncertain how 

much of USAID’s funding is going to poor microenterpreneurs. We 

believe that USAID should be more transparent in reporting these 

results. 

In addition, despite USAID’s statement that the MFIs and missions 

report only activities that meet the definitions of microenterprise as 

defined in the MRR, we found no evidence of this in our work in three 

countries or our analysis of MRR data. As noted in this report, we 

found numerous examples of the missions’ and implementing partners’ 

reporting activities to the MRR that did not meet the MRR definition. 

Based on USAID’s comments, we have modified this section of the 

report to further clarify our position and the basis for these 

observations. USAID also said it will include more explicit guidance on 

its website to address the issue. This could potentially improve this 

aspect of USAID’s reporting. 

11. USAID stated that the report focused on a narrow definition of 

program impacts. This report does not take a narrow view of the 

impacts of USAID’s microenterprise program. In addition to our 

assessment of its impact on poverty alleviation and poverty reduction, 

there are sections focused on reaching the poor and very poor and 

other services these groups may need; outreach to women; the 

sustainability of MFIs; the reliability of the MRR; best practices 
Appendix V: Comments from the U.S. Agency 

for International Development 

Page 68 GAO-04-171 Microenterprise Development 

identified by the microenterprise development industry; USAID’s 

efforts to identify and promote best practices; whether USAID 

incorporates best practices in their projects; and a synopsis of 22 key 

studies. In both the body of the report and appendix III, we include 

considerable discussion of the extent to which microfinance can help 

alleviate poverty by reducing risk and vulnerability. 

12. USAID states that microenterprise development can be a successful 

intervention to shift from humanitarian to development assistance 

following conflicts and natural disasters. The USAID policy manual 

(section II.H.4.), titled “Avoiding Poor Prospects for Microfinance 

Development,” states that microfinance should not be viewed as a 

response to alleviate the large-scale human suffering created by wars 

and civil conflict. It notes that such assistance will inevitably conflict 

with the basic requirements of building sound financial institutions. 

Despite this guidance, we found that USAID/Bulgaria used emergency 

funds provided for the Danube River Initiative to respond to the 

economic hardship resulting from the Kosovo crisis, providing funding 

to MFIs that committed to work in this region. Officials of the 

implementing partner told us that this humanitarian initiative, while 

important from a social perspective, proved to be financially 

unsustainable in light of the many challenges refugees faced. 

Accordingly, the implementing partner terminated its programs in 

these regions, according to USAID officials in Bulgaria. 
Appendix VI: GAO Contact and Staff 

Acknowledgments 

Page 69 GAO-04-171 Microenterprise Development 

Phillip Herr (202) 512-8509 

In addition to the person listed above, Edward George, Jim Strus, 

Martin De Alteriis, Mona Sehgal, David Dornisch, Yesook Merrill, 

Valerie Caracelli, and Reid Lowe made key contributions to this report. 

Appendix VI: GAO Contact and Staff 

Acknowledgments 

GAO Contact 

Staff 

Acknowledgments 

(320170) 
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