Volume 9 An Electronic Journal of the U.S. Department of State Number 1

February 2004 

MICROENTERPRISE

Laying the Foundation

for Economic Development 

Economic

Perspectives
2

ECONOMIC PERSPECTIVES

Microenterprise: Laying the Foundation 

for Economic Development

U.S. DEPARTMENT OF STATE ELECTRONIC JOURNAL VOLUME 9, NUMBER 1

Successful small businesses are the primary engines of economic

development, income growth, and poverty reduction in much of the

developing world. These businesses can also build foundations for stable

communities, civil society, and gender equality. However, poor

infrastructure, weak public services, inadequate mechanisms for dispute

resolution, and lack of access to markets and formal financing remain

major impediments to small business growth.

The United States, the multilateral development agencies, and many

bilateral aid donors are working to improve this situation by developing

new programs that help microenterprises — small, locally owned businesses

with up to 10 employees — contribute to dynamic, competitive industries.

Over the past five years, America’s average annual funding for microenterprise has been around $155 million.

This support has reached more than 3.7 million microenterprises worldwide — whose activities include

producing goods for export, such as footwear, furniture, agricultural crops, and other foods; providing services

ranging from equipment repair to information technology; marketing raw materials to manufacturers; and

trading a wide variety of goods. As these businesses expand and integrate into the formal economies of their

countries, they empower the world’s poor, create higher incomes and more jobs, contribute to economic

growth, and strengthen democratic societies.

I am proud of America’s key role in promoting microenterprise. U.S. objectives are threefold: to improve

access to financial services for the world’s poor; to support access to business services that specifically address

constraints felt by poorer entrepreneurs; and to improve the business climate through regulatory, legal, and

policy reforms. Our efforts are global, from Mali in Africa and Jordan in the Near East to Azerbaijan in

Europe and Peru in Latin America. Our successes will be universal, with the concerted efforts of the

international community. I hope you will join us in taking action towards that goal.

In this issue of Economic Perspectives, you will find insights from key government officials and leading

scholars in the field of microenterprise on access to finance and enterprise development and its societal

implications. I believe that these issues are more important than ever in the 21st century because

microenterprise provides hope and concrete tools for the world’s poorest to improve their own lives and

realize the basic dignity of self-sufficiency.

Colin L. Powell

U.S. Secretary of State
3

ECONOMIC PERSPECTIVES

An Electronic Journal of the U.S. Department of State

http://usinfo.state.gov/journals/journals.htm

CONTENTS

MICROENTERPRISE: LAYING THE FOUNDATION 

FOR ECONOMIC DEVELOPMENT

❏ FOCUS

THE ROLE OF MICROENTERPRISE IN U.S. DEVELOPMENT POLICY 6

By Emmy Simmons, Assistant Administrator, Bureau for Economic Growth, Agriculture and Trade, U.S. Agency for

International Development

Microenterprises are the predominant source of income and employment for hundreds of millions of people worldwide.

The U.S. government sees support for these microenterprises as a key component of its poverty reduction strategy and

foresees that this assistance will increasingly focus on communities whose economies have been ravaged by civil wars and

HIV/AIDS.

PAVING THE WAY FOR ENTREPRENEURS TO ENTER THE MARKET ECONOMY 10

By Gaddi H. Vasquez, Director, Peace Corps

The Peace Corps is funneling help to community-based small businesses and microenterprises, particularly those that

focus on youth and women. Working side by side with low-income entrepreneurs, Peace Corps volunteers are helping

them, and by extension their countries, develop new links to domestic and international markets. 

MICROCREDIT LOANS ARE CRITICAL TOOLS TO HELPING THE WORLD'S POOR 13

By Congressman Christopher H. Smith

Microenterprise programs are effective because they help the poor help themselves – a bottom-up approach distinct

from the top-down strategies of most foreign aid bureaucracies. A member of Congress explains how legislation he

authored, which was signed into law by President George W. Bush, will increase microenterprise spending for the

poorest of the poor.

FINANCING DEVELOPMENT: BANKING ON MICROENTERPRISE 15

By Katharine McKee, Director, Office of Microenterprise Development, U.S. Agency for International Development

Only five percent of low-income households around the world have access to financial services. Yet these services are

now considered critical to small business development and income and employment growth in all countries. McKee

outlines U.S.-supported initiatives to increase financial services to poor entrepreneurs, including the use of substitutes

for traditional collateral, flexible repayment schedules, and access to expanded services such as insurance and flexible

savings accounts.

BEST PRACTICES IN MICROENTERPRISE DEVELOPMENT: A USAID PERSPECTIVE 19

Office of Microenterprise Development, U.S. Agency for International Development

Successful microenterprise development requires products tailored to the diverse financial needs of individuals and

entrepreneurs, cost structures that allow providers of microenterprise services to make profits, and regulatory and tax

policies that encourage enterprise development.
4

❏ COMMENTARY

BUILDING AN ENABLING ENVIRONMENT: A LONG-TERM PERSPECTIVE OF MICROENTERPRISE 20

By Charles Cadwell, Kathleen Druschel, and Thierry van Bastelaer, The Center for Institutional Reform and the Informal

Sector, University of Maryland

Small businesses and microenterprises thrive best where good governance is firmly in place. The authors suggest that

foreign assistance be refocused toward building the legal and regulatory framework that promotes business development.

WOMEN AND MICROFINANCE: OPENING MARKETS AND MINDS 23

By Susy Cheston, Senior Vice President for Policy and Research, Opportunity International

The microfinance industry has long recognized women as a force in international development and as a market worthy

of attention, but it could do even better if it addressed ongoing barriers to women's participation and empowerment.

TWO VIEWS OF MICROENTERPRISE LENDING

MICROFINANCE AND THE GLOBAL DEVELOMENT CHALLENGE 27

By Alex Counts, President, Grameen Foundation USA

It has been clearly shown that microfinance can have a major impact on reducing poverty at both the local and national

levels. Women business owners often are associated with the best credit risks and are more likely than men to funnel

earnings into their children’s education. The author suggests that formal business training is not always a prerequisite to

successful business development.

CREATING AND BUILDING A SUCCESSFUL MICROFINANCE ORGANIZATION 30

By Gregory F. Casagrande, Founder and President, South Pacific Business Development 

Foundation

Small loans, often not more than a few hundred dollars, have helped to improve income and employment growth for

many Samoans and others in the independent Pacific island nations. The author outlines some of SPBD's loan

strategies that have resulted in a nearly 100 percent repayment rate by its borrowers. 

PROFILES OF MICROENTREPRENEURS 33

Four stories about successful microentrepreneurs from Benin, Haiti, Russia, and the Philippines.

❏ FACTS AND FIGURES

QUICK FACTS 35

USAID FUNDING FOR MICROENTERPRISE 36

❏ RESOURCES

ADDITIONAL READINGS 38

KEY INTERNET SITES 40

Economic Perspectives • An Electronic Journal of the U.S. Department of State • Vol. 9, No. 1, February 2004.

On the cover: A member of the Oromia Coffee Union, a microenterprise in Ethiopia, displays shade-grown organic

coffee cherries. 

Photo courtesy of ACDI/VOCA (Agricultural Cooperative Development International/Volunteers in Overseas

Cooperative Assistance).
5

U.S. Department of State

Bureau of International Information Programs

February 2004

The Bureau of International Information Programs of the U.S. Department of State provides products and services that explain U.S. policies, society

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ECONOMIC PERSPECTIVES

An Electronic Journal of the U.S. Department of State Volume 9, Number 1, February 2004

Editor ................................................. Jonathan Schaffer

Managing Editors .................................... Linda Johnson

........................... Alyson McFarland

Contributing Editors .............................. Berta Gomez

.............................. Kathryn McConnell

.............................. Bruce Odessey

.............................. Andrzej Zwaniecki

Publisher ............................................. Judith S. Siegel

Executive Editor .................................... Guy E. Olson

Production Manager ............................... Christian Larson

Assistant Production Manager ................... Sylvia Scott

Editorial Board: George Clack, Kathleen R. Davis, and Francis B. Ward
6

❏ THE ROLE OF MICROENTERPRISE ASSISTANCE 

IN U.S. DEVELOPMENT POLICY

By Emmy Simmons, Assistant Administrator, Bureau of Economic Growth, Agriculture and Trade, U.S. Agency for 

International Development

FOCUS

The U.S. government believes that a key component of its

poverty reduction strategy lies in support for very small

businesses called microenterprises, says Emmy Simmons,

assistant administrator at the U.S. Agency for International

Development (USAID). This support, she says, is now

expanding to address some of the world’s most difficult

development challenges – rebuilding economies ravaged by

civil wars and communities hurt by HIV/AIDS.

Simmons outlines key USAID strategies in support of

microenterprise and how these efforts reduce poverty not only

for the local entrepreneur but also for the local community.

“As the predominant source of income and employment for

hundreds of millions of people worldwide, the

microenterprise sector’s influence on individuals, households,

and national economies is clear and profound,” she says.

In many countries, microenterprises — small, informally

organized commercial operations owned and operated

mostly by the poor — constitute the majority of

businesses. They account for a substantial share of total

employment and gross domestic product (GDP), and

they contribute significantly to the alleviation of poverty.

They are often the chief economic defense of the most

vulnerable households in high-risk environments, such as

civil conflict, or during natural disasters. As the

predominant source of income and employment for

hundreds of millions of people worldwide, the

microenterprise sector’s influence on individuals,

households, and national economies is clear and

profound.

For the past three decades, support for microenterprise

development has been an important feature of U.S.

foreign assistance. The United States Agency for

International Development (USAID), the U.S.

government’s lead agency for bilateral foreign assistance

and humanitarian assistance, defines “microenterprise” as

a firm of 10 or fewer employees, including unpaid family 

workers, that is owned and operated by someone who is

poor. USAID promotes microenterprise development by:

• Providing financial and technical assistance to

institutions and networks that extend credit and

financial and sustainable business-development services

to poor households. 

• Promoting policy reforms that enable the smallest

businesses to compete against larger firms and achieve

their income and job-creation potential.

• Supporting experimentation and research to identify

and promote best practices.

The Microenterprise for Self-Reliance and International

Anti-Corruption Act of 2000 established microenterprise

development as an integral part of U.S. foreign assistance.

The law authorized grants by USAID to support poor

microentrepreneurs, further specifying that half of all

funds benefit the very poor, usually living on less than

one U.S. dollar a day. USAID works with more than 700

U.S., local, and international organizations to implement

this initiative. The great majority are private-sector

providers of financial and business services to the vibrant

microenterprise sector.

As the leading bilateral donor for microenterprise

development, USAID over the past two decades has

created a remarkably effective approach to reducing

poverty in a sustainable manner. Its partnerships with

U.S. private voluntary organizations (PVOs) and

microenterprise practitioners have shown that

microenterprise assistance can help alleviate poverty and

be commercially viable.

As a result of U.S. government support, more than two

million poor people throughout the developing world

have access to credit from a wide range of financial

institutions. Loan recipients use the money to increase

their incomes, build assets, and improve their lives. They
also prove their creditworthiness by achieving repayment

rates that typically exceed 95 percent. More than three

million poor people are depositing their savings in

lending institutions, allowing them to better plan for

their families’ futures and cope with crises. Almost

670,000 clients benefit from USAID-supported business

development services, which help them reach new

markets, improve their skills and productivity, and raise

their incomes.

WHY ARE MICROENTERPRISES IMPORTANT?

In many countries, especially those in Africa and Asia, the

microenterprise sector constitutes the majority of the

working population. A few statistics illustrate the key role

that micro and small firms play in generating overall

employment:

• Firms of five or fewer employees account for half of the

non-farm workforce in Latin America and two-thirds of

the non-farm workforce in Africa. 

• Informal sector firms generate three out of every four

new, non-farm jobs in Thailand and half of all new jobs

in Indonesia. 

• In Indonesia, firms with five or fewer employees

account for almost half of total manufacturing

employment while small firms account for an additional

18 percent.

• In Thailand, micro and small enterprises comprise

more than 97 percent of all firms in the manufacturing

and trade/service sectors. Micro firms generate 71

percent of total employment in the trade/service sector.

Many USAID-assisted microenterprise development

programs have broad impacts on poverty as income from

the enterprise increases and stabilizes household income.

But the benefits are not just enterprise-related. Families

often gain access to a range of financial services — for

instance, specially tailored loans for school fees, medical

emergencies, wedding and funeral expenses, insurance

products, and remittance services that enable them to

receive funds sent from abroad faster and at lower cost.

Access to financial services is critical in helping poor

households build up assets, cope with shocks, and seize

new economic opportunities.

A 2002 study by CGAP (the Consultative Group to

Assist the Poor, a 29-donor consultative group for

microfinance) cited examples of diverse benefits in a

range of countries. In El Salvador, for instance, the

weekly income of Foundation for International

Community Assistance (FINCA)1 clients increased on

average by 145 percent. In India, half of SHARE2 clients

graduated from poverty. The CGAP study revealed

equally impressive gains in education, health, and

nutrition. In Vietnam, clients of a Save the Children

partner organization, reduced food deficits from three

months to one. In Bangladesh, nearly all girls in Grameen

Bank-client households received schooling, compared to

60 percent of girls in non-client households. 

Statistics at the national-economy level are also

compelling: 

• Firms of five or fewer employees generate a substantial

share of GDP in many countries.

• No fewer than 90 percent of workers in India owe their

livelihoods to informal sector employment.3 These

workers contribute 60 percent of net domestic product

and 70 percent of domestic income. More than half of

the economically active population in the Philippines is

employed in micro and small businesses.4

• Mexico looks to microenterprises for 32 percent of its

gross domestic product and 64 percent of its total

employment.5

• Approximately 49 percent of GDP in Peru and 70

percent in Nigeria and Egypt come from the microdominated informal economy.6

• In Ukraine, 2.6 million businesses — 87 percent of all

businesses in that country — are self-employed

individuals who produce, distribute, and/or sell goods in

the local marketplace.

Microenterprises may also be integral to the success of

key economic sectors. In South Africa, for example, the

construction sector generates a third of GDP and

includes 90,000 firms, of which 87,000 are micro- and

small-scale. Outsourcing by large construction firms to

specialized, small subcontractors is a very common

feature of the industry. In Bangladesh, more than 90

percent of the firms engaged in the $350 million shrimp

export business are microbusinesses. In Honduras,

microfirms account for 30,000 of 40,000 horticultural

firms that emerged in the wake of Hurricane Mitch. They 

7
8

partner with larger firms to compete in export markets

and improve quality control and processing.

THREE AREAS OF USAID 

MICROENTERPRISE SUPPORT

USAID’s microenterprise program focuses on three areas

of strategic support: policy/enabling environment,

business services, and microfinance.

A supportive policy environment, including a favorable

business and investment climate, is critical to successful,

sustainable microenterprise development. USAID supports

reform of laws, regulations, and policies to facilitate the

creation and operation of microenterprises and to expand

access to financial and other services by the underserved

poor. This can include helping countries streamline their

business registration process; building the capacity of

microentrepreneurs to work through independent business

associations to advocate for policy reforms; and promoting

anti-corruption efforts and tax reform.

A variety of organizations offer business development

services (BDS) to help microenterprises increase revenues,

build capacity, initiate new economic activities, or

increase their leverage in the marketplace. Such services

include marketing assistance, product development,

business training, advisory or information services,

productivity-enhancing technologies, and linkages to

financial services.

USAID does not support direct subsidization of business

services for microentrepreneurs. Instead, it supports the

development of markets by helping BDS providers extend

services that boost microenterprise income and

competitiveness. Service providers often need help to

tailor their services to poorer clients. Access to

appropriate financial and business services enables

microenterprises to seize new economic opportunities and

increases the potential impact of sustained reductions in

poverty levels.

Linking small producers to larger firms and lucrative

markets is often the key to success. For instance, in

Bangladesh the USAID-supported JOBS7 program

supports firms producing hand-made sandals for export

to Paris. With project assistance, the larger exporters

organized groups of smaller producers to supply this

market, providing them with inputs, designs, and quality

control in addition to export services. The business

services facilitated by JOBS helped flexible, laborintensive micro-firms enter emerging niche markets for

which larger firms are not well suited.

In Haiti, 37 coffee-grower associations representing

25,000 small growers were assisted in development of a

common logo for the “Haitien Bleu” premium coffee

brand. Backed by consistent quality standards and a

targeted market, Haitien Bleu has provided the micro

producers returns significantly higher than they

previously were receiving for coffee harvests without

quality controls and premium designations. 

Microfinance involves the provision of diverse financial

services to families and firms excluded from the formal

financial market. When this field was in its infancy,

microfinance meant small loans for microentrepreneurs to

use in starting or expanding their businesses. The

predominant methodology was the group loan, based on

the Grameen Bank model developed in Bangladesh,

which required individual entrepreneurs to receive loans

in groups, attend weekly meetings, and take responsibility

for repayment by all group members.

Over the years, microfinance has grown to include a

variety of lending methodologies. It now encompasses a

wide range of financial services. Loans can be offered on a

group or individual basis, with amounts and repayment

terms increasingly flexible and tailored to client needs.

Other microfinance services include savings deposit

services, insurance, and transfer/remittance services. The

list continues to grow as microfinance institutions

develop new products in response to client demand.

Roughly two-thirds of USAID microenterprise funds

support development of credit and financial services

targeted to poor entrepreneurs and their households.

These services typically include credit for working capital

and investment, savings, insurance, and payments services

of various types. USAID support led to the development

of a number of successful microfinance methodologies

over the past two decades, adapted to a wide variety of

settings and client groups. Loan repayment rates typically

exceed 97 percent.

USAID’s support for microfinance focuses on two equally

important objectives. The first of these is the

development and expansion of strong microfinance

institutions (MFIs) — those with effective governance

structures and credible business plans to cover all

operating expenses, including the cost of capital, through

operating income within a reasonable timeframe. The
Economic Perspectives • An Electronic Journal of the U.S. Department of State • Vol. 9, No. 1, February 2004. 9

second objective is the promotion of products and

services with the potential to reach poor and very poor

entrepreneurs, especially underserved populations such as

rural residents, women, and those in conflict or crisis

situations.

The majority of USAID funds support very poor

entrepreneurs — those considered to be well below the

poverty line in their countries.8 Program features for

these clients may include group guarantees as a substitute

for traditional loan collateral and very small loan sizes

with frequent loan repayments. By grouping clients, MFIs

can achieve economies of scale and recoup their costs

despite the very small revenue generated by each

transaction. An important innovation permits clients to

make frequent, very small savings deposits, reflecting the

actual availability of cash in the household. 

NEW DIRECTIONS FOR MICROENTERPRISE

DEVELOPMENT

In recent years, USAID field-based microenterprise

programs have moved toward integrating microenterprise

development activities into broader programs that address

problems faced by microentrepreneurs and their

households, such as civil conflict and HIV/AIDS. For

example, Constanta, a Georgian microfinance institution,

was created in 1998 after the civil war, with assistance

from Save the Children. It designed its products and

outreach strategy to ensure service to women who were

internally displaced persons (IDPs), typically supporting

families on their own. Constanta now has more than

15,000 active clients and has served well over 20,000 very

disadvantaged microentrepreneurs. It has received grants

from USAID and other donors totaling just over $4

million for its loan capital and operations. A recent

impact assessment of 828 clients documented that 72

percent of clients had been able to improve their families’

nutritional status, 28 percent had improved children’s

schooling, and 22 percent had created new jobs through

microenterprise. Of the 74 percent of respondents that

reported income increases, 92 percent attributed the

increase to credit access that enabled them to tap new

economic opportunities. Results such as these suggest that

microfinance can be a powerful tool for poverty

alleviation in even the toughest economic and political

environments. Support for microfinance is one of the

strategies the United States will use to accelerate

reconstruction in places as diverse as Afghanistan and

Sudan. 

In areas devastated by HIV/AIDS, such as in Zimbabwe,

USAID missions are using microfinance to mitigate the

economic impact on orphans and others affected by the

disease. Currently, one in four people between the ages of

15 and 45 in Zimbabwe has HIV, and some 624,000

children under the age of 15 have lost one or both

parents to the disease. USAID funds programs to provide

training, business skills, and financial services to affected

communities. It also assists the national microfinance

network, Zimbabwe Association of Micro Finance

Institutes (ZAMFI), as well as local affiliates of

international networks. This support to national and

multi-country networks has been a key component of the

USAID mission’s strategy for addressing the multiple

needs of Zimbabwe’s economically active poor in an

integrated fashion.

Strategies for making microenterprise work are

expanding. U.S. commitment for making microenterprise

work is expanding. More than ever the delivery of welltailored financial and business services to this important

sector of the economy is showing its ability to pull huge

numbers of people out of poverty. ❏

1 The Foundation for International Community Assistance.

2 Society for Helping Awakening Rural Poor through Education, an

associate of Women's World Banking.

3 (ILO), "Women and men in the informal economy: A statistical

picture," p. 7 (no date) The International Labour Office defines

informal sector employment to include both self-employment in

informal enterprises (i.e., small and/or unregistered) and wage

employment in informal jobs (i.e., lacking contract, benefits or social

protection).

4 ILO, pp. 34, 36.

5 ILO p. 37.

6 "The Informal Sector: Refugees from Under-Performing Legal and

Institutional Systems," presentation by Kate McKee, Washington, DC,

2002.

7 Job Opportunities and Business Support.

8 USAID Microenterprise Results Reporting, 2000, p. 26 (chart).

Section 105 of P.L. 106-309 added a new Sec. 131 to the Foreign

Assistance Act, which requires that 50 percent of all microenterprise

resources be targeted to very poor entrepreneurs, defined in the law as

those living in the bottom 50 percent below the poverty line as

established by the national government of the country. The section

also sets out loan sizes in different regions to serve as a standard for

measuring the poverty level of clients, with loans in 1995 United States

dollars of $1,000 or less in the Europe and Eurasia region; $400 or less

in the Latin America region; and $300 or less in the rest of the world.
The Peace Corps focuses on underserved segments of

countries in which it serves, particularly women and youth,

in its support for community-based small businesses and

microenterprises, says Director Gaddi Vasquez. By providing

training in entrepreneurial, business management, and

leadership skills, and establishing youth business clubs to help

young people put their skills to use, Peace Corps volunteers

are helping countries develop new links to domestic and

international markets. “Where volunteers once constructed

wooden bridges, the 21st century Peace Corps volunteer

builds economic bridges by paving the way for entrepreneurs

to enter the market economy,” Vasquez says.

The U.S. Peace Corps is promoting development of

community-based small business and microenterprise

projects in many of the world’s poorest countries. By

combining traditional business management training with

innovative information technologies, Peace Corps

volunteers are nurturing new entrepreneurs and helping

them create links between developing-country suppliers

and domestic and international markets. 

From Africa and Latin America to Central and Eastern

Europe, the Peace Corps has provided assistance to

hundreds of thousands of entrepreneurs for the past 43

years. What separates the Peace Corps approach from

those of other development agencies is its cadre of skilled

volunteers who understand the local language, culture,

and markets, and who live and work in local

communities where they integrate community members

in every facet of their projects.

With the fall of the communist era in the late 1980s and

the rise of market economies in Central and Eastern

Europe and the former Soviet Union, the Peace Corps

launched in the region a number of formal Small

Enterprise Development (SED) projects. At the same

time, volunteers continued to build on the cooperative

movement in Latin America and advance the tradition of

entrepreneurship in Africa and Asia. The goal of these

projects was to impart entrepreneurial skills while

strengthening the capacity of local organizations and

service providers that assist micro and small businesses.

The Peace Corps now has stand-alone SED projects in 36

countries around the world and promotes SED activities

in almost all of the more than 65 other country programs

it operates. In fiscal year 2002, close to 1,000 SED

volunteers assisted more than 80,000 individual

entrepreneurs and 8,000 service providers and

organizations. Where volunteers once constructed

wooden bridges, the 21st century Peace Corps volunteer

builds economic bridges by paving the way for

entrepreneurs to enter the market economy. 

BUILDING COMMUNITY SUPPORT

After 12 weeks of intensive language, cross-cultural,

health, safety and security, and technical business training

in Ukraine, Peace Corps Volunteer Jon Daigle was

assigned to the Division of Economy in Khmelnytsky

Oblast, or governmental region. With his newfound

knowledge of the Ukrainian language and local business

and cultural norms, as well as his understanding of the

country’s economic situation, Daigle worked with local

colleagues to promote “economic cluster development,”

an economic model that encourages interdependence

among local businesses within a particular industry.

Daigle assisted his colleagues to design and implement a

seminar that promoted economic investment in the oblast

and at the Ukrainian Stock Exchange in Kyiv. He also

helped his colleagues develop an investment promotion

program to attract funds from the United States and

Europe. As a result of these efforts, the national MicroFinance Bank opened a branch office in Khmelnytsky to

provide seed loans to small- and medium-sized enterprises

in the region. The next step for the oblast administration

is to open a business-training center for potential clients

of the Micro-Finance Bank.

A much smaller community in another part of the world,

Dagana, Senegal, is a departmental capital (there are three

departmental capitals per region, which is equivalent to

an oblast) with a population of 25,000 located 80 miles

from the regional capital of Saint Louis. Dagana is a

cultural crossroads rich in traditional art of the Wolof,

Peulh, and Moor ethnic groups. Unfortunately, few

❏ PAVING THE WAY FOR ENTREPRENEURS TO ENTER 

THE MARKET ECONOMY

By Gaddi Vasquez, Director, U.S. Peace Corps

10
tourists visit the community and few festivals and other

cultural events take place there. This makes it difficult

for traditional artisans to sell their products or to create

linkages that would allow them to reach larger markets.

After hearing about the work that other Peace Corps

volunteers had done at an arts and crafts fair during

Senegal’s annual Saint Louis Jazz Festival, volunteer Erika

Miller recognized an opportunity to promote both

Dagana’s artists and the city as a tourist destination at the

next festival. With Miller’s guidance, Dagana’s mayor

agreed to sponsor a promotional project with the modest

amount of $320.

Part of the mayor’s money was used to pay for a booth at

the Saint Louis fair as well as transportation and lunches

for the artists. Miller persuaded six artists to part from

their families — a difficult feat in this rural area — and

to bring their works to the festival. She helped each artist

to create a publicity book, teaching them an important

marketing principle. After the artists arrived, they

toured local galleries to market their products. Another

portion of the mayor’s grant was used to create a Dagana

tourism promotion committee, which produced a

tourism promotional brochure under Miller’s guidance.

Upon her return to Dagana after the festival, the

community hailed Miller’s efforts in helping Dagana “get

on the map.”

Both Daigle in Ukraine and Miller in Senegal were

successful in getting their communities noticed in larger

markets and in attracting investment. They are

representative of volunteers in practically all Peace Corps

countries who leverage their understanding of local

business environments and their cross-cultural skills to

gain the trust of their local colleagues, identify new

opportunities, and facilitate economic development.

A MODEL FOR MICROENTERPRISE

DEVELOPMENT

The Peace Corps approach involves host country partners

in the entire process — from project planning and

training design to participation in pre- and in-service

training and project implementation. Buy-in and

ownership of Peace Corps activities by the Khmelnytsky

Oblast administration in Ukraine and by Dagana in

Senegal were essential to achieving sustainable results that

met local needs.

Buy-in cannot be achieved unless the community sees a

project’s relevance to local needs, particularly underserved

segments such as youth and women. The Peace Corps

tries to ensure such relevance by managing projects not

from Washington but through its individual country

headquarters. It is the country offices that assign

volunteers to work alongside host country counterparts.

Both parties are involved in making sure that the work is

relevant to local development needs and that the training

of local staff is adequate to sustain project activities after

the volunteers depart. These activities often include

counterparts providing training in organizational

management and business practices to members of

international or local nongovernmental organizations or

community-based organizations such as a farmers

cooperatives or artisan associations, as well as to

individual micro and small entrepreneurs.

In the developing world, women cultivate 80 percent of

all the food produced and make up one third of the

world’s wage-labor force. As microenterprise managers,

women in Africa, Asia, and Latin America produce and

sell produce, processed food, and handicrafts. Volunteers

often work directly with women’s cooperatives, as well as

with microfinance institutions, to help women access the

appropriate training, business advice, and financial

resources to start and expand their businesses.

For example, at the beginning of her tour in 2000 in

Togo, one Peace Corps volunteer initiated a Tontine

Tatchoyim, a revolving credit group for women. After

three years of operation, the Tontine continues to grow

and thrive. The group now has enough funds to open

bank accounts, reinvest in businesses, and pay for the

education of members’ children. This system allows

group members to keep their money safe from the social

pressures (such as demands from family or community

members for a share of the profits) to which small

businesses often fall prey. Tontine Tatchoyim, which

started with no funds, now has an annual income of

400,000 CFA, the common currency of 14 African

countries, or about $800.

The world has some 1.2 billion youth between the ages of

10 and 19, and 87 percent of them live in developing

countries. Despite shrinking government payrolls in

many developing countries, young people often expect to

be hired by the state upon completion of secondary

school. In many of the countries Peace Corps serves, the

lack of jobs for this growing demographic group has led

to an increase in youth crime, particularly in urban areas.

11
Economic Perspectives • An Electronic Journal of the U.S. Department of State • Vol. 9, No. 1, February 2004.

To change attitudes and provide opportunities for the

future, Peace Corps volunteers have been training out-ofschool and in-school youth in entrepreneurial, business

management, and leadership skills while establishing

youth business clubs to help young people put their skills

to use.

In coordination with Nicaragua’s Ministry of Education,

Sports, and Culture, volunteer Joran Lawrence developed

entrepreneurial and business skills among youth in local

high schools, youth centers, and homeless youth shelters.

More than 300 young Nicaraguans took part in these

training activities. As a result, a group of youth started a

T-shirt printing business, and the profits were used to

fund an educational campaign to combat the spread of

HIV/AIDS.

INNOVATION IN PROJECT IMPLEMENTATION

Peace Corps volunteers are responding to a growing need

for expertise in business sub-sectors such as Information

and Communications Technology (ICT), microfinance,

and ecotourism — growing areas that provide

opportunities for local, regional, and international

investment.

Volunteers find business solutions for microenterprises

through the implementation of computerized accounting

systems, inventory databases, and Internet access. They

use local radios to transmit information about successful

practices in business management to people around the

country and disseminate current market prices to farmers.

ICT helps lenders track client loans and uses the Global

Positioning Systems (GPS) to provide virtual addresses

where street names don’t exist.

Peace Corps volunteers also help increase reimbursement

rates for microfinance institutions by providing the

necessary business training to potential clients and loan

recipients, increasing the rates of on-time payments and

business profitability. Volunteers also promote equitable

community involvement in managing and operating

ecotourism sites as businesses that serve both the needs of

the community and of tourists. Microenterprises

involved with the sites benefit from volunteer-provided

training in the “4 Ps” of marketing — price, product,

placement, and promotion — as well as in quality

control, hospitality, and accounting.

PROMISING PRACTICES

During the two years that they normally spend in their

host-nation communities, SED Peace Corps volunteers

take as their guiding principle the old adage that teaching

a man how to fish is better than giving him a fish to eat.

But these volunteers go beyond teaching the basics “of

fishing” to train women, men, and young people to create

linkages between suppliers, producers, and buyers; explore

opportunities for access to credit; market their products,

and strengthen the organizations that will support their

business efforts over the long term.

Whether assisting local staff to transform a school's

resource center into a self-sustaining IT microenterprise

in Panama or training members of a women's association

in Nepal to sell their handicrafts on the Internet, Peace

Corps volunteers have contributed to the overall

development of hundreds of thousands of communities.

Key to their success has been the ability and willingness

of volunteers to become full members of their host

communities. By speaking the local languages,

understanding the cultural norms and mores, and living

more or less as their neighbors live, volunteers are laying

foundations for sustainable development and prosperity.

Host country nationals, meanwhile, are gaining, along

with a foothold in the global economy, a greater

understanding of Americans. Open communication,

mutual respect, and collaboration are the tools paving the

way. ❏

12
13

U.S. Representative Christopher H. Smith says he likes

microenterprise programs because they directly help the poor

help themselves, a bottom-up approach distinct from the topdown approach of most foreign aid bureaucracies.

Author of legislation signed by President George W. Bush to

expand and reform the U.S. federal government's

microenterprise program, Smith says the new law both

increases the level of spending and directs more money to the

poorest of the poor. Smith is vice chairman of the House of

Representatives International Relations Committee and

chairman of the U.S. Commission on Security and

Cooperation in Europe.

Baulia Parra Pruneda may never become a household

name. She may never make the cover of a leading

financial news magazine, nor will she likely earn

significant attention in the world of finance.

But Baulia, a resident of Monterrey, Mexico, has her own

success story that is remarkable because it is the tale of a

woman who, with a small amount of financial assistance

and a significant amount of determination, was able to

improve life for herself and her family.

When her husband lost his job in 1998, Baulia was

determined to support her six children. Even though she

had never worked before and could not read or write, she

taught herself to sew by following designs that she saw in

magazines. 

A $150 microenterprise loan supported by the United

States Agency for International Development (USAID)

provided capital for her to purchase the necessary supplies

to launch her endeavor into self-sufficiency. After

building her small business through a series of U.S.-

sponsored microloans, she now sells over 100 items per

week. The money she earns not only provides food for

her children but has also enabled her to install running

water and a second floor in her home.

As inspiring as Baulia's story is, it is thankfully not

unique. When given the opportunity and the seed capital

to produce, people can turn their economic situation

around in a dramatic way. The goal now is to build on

past successes that have reached tens of thousands of

people and apply lessons learned to efforts aimed at

developing an even better U.S. foreign-aid microcredit

program.

In June 2003, President George W. Bush signed into law

my bill, the Microenterprise Enhancement Act (PL 108-

31), which will expand our existing microenterprise

program so that more people can share in the hope that

has already proven so fruitful to women like Baulia, who

are living in some of the world's poorest countries. The

law places an increased priority on microenterprise

funding by authorizing a $25 million increase in the

program's budget — to $200 million — for the 2004

fiscal year.

My new law also establishes a new framework to ensure

that more funds go to the poorest of the poor through the

development and implementation of easy-to-use and costeffective poverty assessment programs and techniques.

Previous legislation failed to accomplish the goal of

directing 50 percent of the money to the poorest of the

poor. The program had relied on only a single

measurement tool — average loan size — to evaluate and

rank poverty outreach efforts.

The administrators had assumed that only the poorest

people would apply for such small loans and that,

therefore, making so many small loans was accomplishing

the goal.

But with currency values varying from country to country,

and loans varying depending on the type of business being

established, the “average loan size” methodology has failed

as a measure for evaluating both outreach efforts and

poverty. 

Accordingly, PL 108-31 requires USAID to devise new,

more meaningful poverty-assessment tools and give

consideration to low-cost, easy-to-implement tools.

Identifying and targeting the poorest potential clients who

❏ MICROCREDIT LOANS ARE CRITICAL TOOLS 

TO HELPING THE WORLD’S POOR

By Christopher H. Smith, U.S. Congressman from New Jersey
Economic Perspectives • An Electronic Journal of the U.S. Department of State • Vol. 9, No. 1, February 2004.

would stand to benefit the most from microenterprise

loans has proven to be more difficult than originally

anticipated. I am hopeful that once developed, these

poverty assessment techniques may prove more useful not

only for microenterprise, but also in other areas of foreign

aid.

It is important to note that over two million clients are

benefiting from USAID-assisted programs that provide the

necessary capital through these small loans, which

sometimes total only $200, $300, or maybe $400. While

these awards may seem small in our society, the

microcredit loans are key to the individuals who receive

them. These loans can make the difference by helping

them develop their own businesses, build their own

homes, and care for themselves.

About 70 percent of the loans are awarded to women

business owners, helping them to overcome the many

added obstacles women still face in developing countries.

The loans and the businesses they foster empower women

and give them the means to support themselves and to

break the cycle of poverty and discrimination that has

made them vulnerable to the perpetrators of slave labor

and human trafficking that run rampant through many

poor nations.

Another remarkable statistic is that an estimated 97

percent of all of the loans are repaid. This high rate of

return payment helps replenish the pot of funds so that

more individuals can apply for and benefit from

microcredit loans.

One of the reasons I am so enthusiastic about

microenterprise programs is that they are fundamentally

different from traditional foreign-aid programs. They are

based on a bottom-up, grass roots approach rather than a

top-down model. The assistance goes directly to the

people in need rather than to government agencies that

may get sidetracked or bogged down with their own

political agendas.

Studies on the effects of microenterprise programs find

they promote higher household income and increased

family well being, including improved nutrition and

education among children. 

With success stories like Baulia and many others, I am

excited about the potential of microcredit loan programs.

I look forward to continuing to champion the cause of

microcredit in the Congress so we can ensure the money

continues to flow to those in need. ❏

14
Only 5 percent of low-income households around the world

have access to financial services. Yet these services are now

considered critical to small business development, income, and

employment growth in all countries, says Katharine McKee,

director of the Microenterprise Development Division at the

U.S. Agency for International Development (USAID).

McKee outlines key strategies used by USAID in its support of

microfinance, which is now at the forefront of global antipoverty strategies. Innovative approaches to serving lowincome entrepreneurs and households, she said, include

finding substitutes for traditional collateral, promoting

flexible repayment schedules, and offering a broader range of

financial services such as insurance and flexible savings

accounts.

To grow and prosper, businesses of all sizes and in all

countries need access to financial services. Such access is a

particular challenge for poor families around the world

that need loans, credit, and savings to establish, sustain,

and expand small businesses and microenterprises. Once

considered peripheral to mainstream development policy,

access to microfinance is now at the forefront of a global

anti-poverty strategy that has tremendous potential to

generate income and expand employment at both the local

and national levels.

Financial services are equally important in protecting

against the unforeseen consequences of illness, incapacity,

or death of a breadwinner; natural disasters, war and other

crises. With financial services, poor families can send their

children to school, buy medicine, and get through lean

times when cash and food are scarce.

Despite the importance of financial services for both

poverty reduction and equitable economic growth, experts

estimate that only 5 percent of low-income households

around the world have access to such services. The

international development community, with a vision it

calls “financial sector deepening,” is promoting the

extension of diverse financial services by a wide range of

bank and non-bank financial institutions to ever larger 

numbers of low-income and middle-class households

around the world.

Support for microfinance has been a focus of U.S. foreign

assistance programs for more than 25 years. The United

States Agency for International Development (USAID)

annually provides over $100 million for projects that

create large-scale, effective, and sustainable microfinance

services for the poor in developing and transition

countries.

The United States complements its direct investments in

microfinance development through its support for

international financial institutions (IFIs) such as the

World Bank, the International Finance Corporation

(IFC), and regional development banks. Several IFIs,

including the Inter-American Development Bank, the

Asian Development Bank, and the European Bank for

Reconstruction and Development, have strong track

records in supporting financial services for micro and

small enterprises.

The results of USAID’s investments over the years are

impressive: (see microenterprise investments table).

In some countries, support for microfinance over the years

has transformed the national financial landscape by

incorporating hundreds of thousands of bank-ready clients

and stimulating innovations that change the way

mainstream banks do business. Microfinance customers

now make up the majority of financial services clients in

countries as diverse as Kyrgyzstan, Uganda, and Bolivia.

In Bolivia, for example, USAID's microfinance 

program has been instrumental in a massive expansion of

financial services in terms of the number of borrowers and

savers as well as the overall performance of the country’s

financial markets.

According to information collected by USAID based on

data furnished by central banking authorities, the dollar

assets of microfinance institutions (MFIs) — those groups

that lent money principally to small businesses and lowincome households — operating in Bolivia rose nearly

300 percent between 1992 and 2001, a rate of growth

❏ FINANCING DEVELOPMENT: 

BANKING ON MICROENTERPRISE

By Katharine McKee, Director, Microenterprise Development Division, U.S. Agency for International Development 

15
16

more than eight times that of commercial banks. By

2001, the number of borrowers from MFIs was more than

double the number of borrowers from commercial banks,

and 797,000 Bolivians held savings at MFIs compared to

just 658,000 in commercial banks.

USAID provides the majority of its microfinancing

through its field “missions” in developing and transitional

countries. Currently, approximately 50 USAID missions

support microfinance and microenterprise development

programs. Funding is divided roughly equally among the

four USAID regions — Africa, Latin America and the

Caribbean, Asia and the Near East, and Europe and

Eurasia. 

RESPONDING TO LENDING REALITIES

Enterprises need working capital loans, longer-term

financing for equipment and other investments, and

savings and payment services in order to create jobs and to

take advantage of new economic opportunities. Families

need access to flexible savings accounts, remittance and

payment services, insurance, loans for housing, school

fees, emergencies, and so on, to be able to increase their

income and assets, reduce their vulnerability to crises, and

meet obligations related to such events as births, deaths,

and weddings. USAID has invested in developing a wide

range of services to meet these disparate needs.

One key lesson from its work is that careful market

research is critical before financial institutions introduce

new financial services. For too long, for example, most

MFIs offered only short-term working-capital loans.

Faced with new competition for clients, the MFIs now

understand the importance of tailoring product features

and service delivery techniques to meet the needs of

various clients. An MFI seeking to serve farm families in

remote rural areas, for example, must adjust its loan

repayment terms and savings services to the cash flow

cycles of the families and community, which can vary

dramatically by season and agricultural cycle. The same

MFI might find that, instead of setting up a fixed branch

office, it needs to employ mobile loan officers who travel

throughout the countryside to serve its clients.

Microfinance has come a long way from the days when

few believed that poor families’ repayment of their loans

for business and household needs could rival the 

performance of the most high-performing banks. Nor did

many believe that poor families could be successful savers,

building up financial assets of their own. How were these 

breakthroughs in microcredit and microsavings achieved?

A few key principles have been critical to the successes —

charging interest rates that cover lending costs, managing

delinquency carefully, and tailoring flexible financial

products in terms of collateral and repayment schedules

(see box on “Best Practices in Microenterprise

Development: A USAID Perspective).

MFIs recognize that few new clients have the kind of

collateral many banks require to secure loans. Therefore,

MFIs have developed collateral substitutes — products

designed to create strong incentives for repayment. One

such technique is a system of “stepped loans.” Initial loans

are small and short-term, but larger loans of longer

maturities become available to borrowers with perfect

repayment records. Another collateral substitute is a group

loan program that requires clients to essentially guarantee

the repayment performances of other group members; if

one borrower misses a payment, others will be unable to

USAID Microenterprise Investments 

1999 2000 2001 2002

Loan clients 1,997,839 2,175,198 2,904,152 2,723,146

Total loan portfolio $655,906,588 $883,273,258 $934,253,554 $1,269,622,200

Savings clients 3,069.604 3,155,100 3,514,200 3,196,300

Total savings portfolio $349,663,487 $533,500,000 $424,800,000 873,400,000

BDS* clients 401,530 254,809 835,458 668,808

Women clients (MF) 69% 70% 73% 69%

Women clients (BDS) 61% 75% 47% 48%

Very poor clients (MF) 67% 67% 69% 59%

Very poor (BDS) 29% 18% 30% 53%

*BDS Business Development Services

MF Microfinance
17

borrow, motivating fellow members to both pressure and

support each other. 

Another initiative would base access to credit on a

household's entire income rather than just from the real or

projected revenue of the business for which the loan is

sought. This recognizes that cash is fungible within

households.

Innovations have not been limited to credit programs.

Savings innovations include the deployment of mobile

staff to collect savings on a daily basis from vendors and

the introduction of rural automatic teller machines

(ATMs) that use thumbprint recognition technologies to

enable illiterate clients to access their accounts.

LINKING FINANCIAL INSTITUTIONS

WITH MARKETS

USAID’s second key microfinance strategy is to invest in

diverse retail financial institutions able to serve different

markets. With USAID support, many nongovernmental

organizations (NGOs) and associations and credit unions,

as well as commercial banks, are now able to specialize in

offering microcredit and microsavings services, as well as

other financial products, to poorer clients and smaller

enterprises. 

In countries with little microfinance experience, USAID

often supports the creation of “market leaders” —

financial organizations that demonstrate that the poor are

creditworthy and responsible users of diverse financial

services. Equally important, the initiative proves that

financial services to this market segment can be profitable,

which encourages other commercial players to enter

underserved markets. 

USAID has provided grants for initial operating funds,

loan capital, and management information systems to help

hundreds of specialized MFI market leaders get started.

Follow-up grants have enabled these institutions to grow

and achieve sustainability, in which revenues from

operations fully cover the costs of offering the services,

including loan losses, inflation, and costs of financing

future growth through borrowed funds.

Providing young MFIs access to specialized technical

assistance and training has been a critical ingredient for

their success. The leading international microfinance

networks such as ACCION International, FINCA

International, and Opportunity International have helped

their affiliates become market leaders and demonstrate the

viability of microfinance in diverse countries around the

world. With USAID support, the World Council of

Credit Unions’ “savings first” approach, in which

communities mobilize their own savings to serve as the

capital for loans, is operating successfully in more than a

dozen countries to support networks of local credit unions

that offer a compelling model of how to provide viable

savings, credit, and other services to low-income and

working-class families.

Loan guarantees and other credit enhancements, provided

through USAID’s Development Credit Authority, have

enabled successful MFIs to access local and international

capital markets to finance rapid growth through debt and

bonds. Targeted small grants and technical assistance have

also helped banks and other mainstream financial

institutions begin offering microfinance services, often

delivered through a specialized affiliate that tailors its

products and delivery methods to the needs of smaller

businesses and poorer households in a community.

SUPPORTING MARKET INFRASTRUCTURE

AND REGULATORY REFORM

In some countries with more mature microfinance

markets, USAID has shifted from supporting individual

retail institutions to a strategy of giving broader support to

the microfinance industry as a whole and to the market

infrastructure it needs to thrive. This often entails

competitive grant funding to help providers with new

product development, or investments in specialized

institutions such as credit information bureaus and

microfinance ratings agencies. The resulting increased

competition can be an effective path to product

innovation, greater efficiencies, and better services and

prices for clients.

Undergirding USAID’s three strategies are efforts to

improve the legal and regulatory environments for

microfinance. If interest rates are capped, for example,

financial institutions might not be able to charge enough

to cover the higher costs and risks of serving poorer and

more remote clients. Laws passed to protect the poor

might block their access to the financial services they

need. Banks may be unable to serve them if loan

documentation and reserve requirements are not adjusted

to reflect the distinctive risk management and cost-control

methods employed in successful microfinance. Successful
Economic Perspectives • An Electronic Journal of the U.S. Department of State • Vol. 9, No. 1, February 2004. 18

NGO MFIs with proven ability to lend over the long

term in this market might be good candidates to offer the

flexible savings services that poorer customers typically

demand. However, without changes in banking laws, they

may be prohibited from offering deposits to the general

public.

USAID assistance in the policy arena has sought to

remove those legal and regulatory barriers that currently

restrict NGOs and other specialized providers from

providing microfinance. USAID funding has also helped

build the capacity of bank and credit union regulators to

protect poor people's savings. Well-trained regulators help

to ensure that microfinance providers are adequately

overseen. As top-notch NGO microlenders transform

into regulated depositories, bank supervision agencies may

need to adapt their rules, systems, and staffing.

SUPPORTING GROWTH OF

SUCCESSFUL MICROENTERPRISES

Attention has begun to focus on a new gap in the finance

market — the “missing middle.” As the most successful

microenterprises expand, they may need growth capital

beyond what MFIs and microfinance programs can

provide. In many countries, small- and medium-sized

firms find that their access to appropriate financial services

is even more limited than it is for microenterprises and

self-employed individuals. Recent U.S. foreign assistance

efforts have taken aim at the missing middle — trying to

ensure that successful micro-, small- and medium-sized

firms in developing and transitional economies are not

starved of the capital they need to create new jobs,

increase productivity, upgrade technologies, and tap new

markets and export opportunities.

One major initiative addressing this financing gap is the

new Africa Small Business Fund. This $225 million pilot

program is a joint venture between the World Bank’s

concessionary lending arm, the International

Development Association, and its private-sector affiliate,

the IFC. The Africa initiative builds on a strong

microfinance track record, in particular the successful

collaboration between the European Bank for

Reconstruction and Development, IFC, USAID, and

others to create high-performing specialized micro- and

small-business banks in transition countries such as

Georgia, Kosovo, Serbia, and Russia.

The first project to be approved under the Africa Small

Business Fund is a $32 million World Bank credit for

Nigeria. In response to the Nigerian government’s request

for assistance to enhance its bottom-up economic growth,

the small business loan program will direct funds to

strengthening local financial and non-financial institutions

that support small businesses so they can operate more

effectively and deliver sustainable commercially based

services.

The United States government is committed to helping

create vibrant financial sectors in developing and

transitional countries around the world. Financial services

spur broad economic growth, promote job creation, and

generate new opportunities for all citizens. As such, they

represent a critical element in the worldwide battle to

eradicate poverty. ❏
Economic Perspectives • An Electronic Journal of the U.S. Department of State • Vol. 9, No. 1, February 2004 19

Microenterprise development activities should respond

to demand

The design and delivery of credit, savings, and other

financial products and services should respond to the

diverse financial needs of individuals and entrepreneurs.

Ideally, careful market research should precede product

development.

• The terms of microloans, for example, need to reflect the

realities of the client’s business opportunities, cash flow,

and collateral. Whether a program offers individual or

group loans, amounts are likely to be relatively small and

repayment schedules short-term, collateral requirements

flexible, and transaction costs low. Tailoring products to

the very poor and rural households is particularly

important in order to maximize microfinance’s potential

to reduce poverty. Market research often reveals that

clients demand products beyond credit such as flexible

savings or remittance services.

• Donor support for business services should facilitate

linkages between private-sector providers of a wide variety

of services — from accounting and information services to

veterinary services and product design services — and the

entrepreneurs who need them to maintain their

competitiveness. For example, market access services

should address microenterprises’ needs to link both to

suppliers of inputs for their goods and to buyers of their

finished products.

• Payment mechanisms should take into account the levels

and timing of clients’ cash flows. For example, poorer

clients may not be able to pay large, up-front fees for

business services. This issue can be addressed by grouping

clients for service delivery and payment, building fees into

the margins of the products they sell to their buyers (who

provide them services beyond marketing), or breaking up

services such as training so that fees can be lower. 

Service providers must cover their costs and achieve

commercial sustainability

Few developing and transition countries can afford to 

subsidize business and financial services for their citizens

on any substantial scale. Thus, if microenterprises are to

have access to the services they need to succeed in

business, those services must be offered on a sustainable 

basis. Fortunately, sustainability has proven achievable in a

wide variety of circumstances.

• Microfinance institutions (MFIs) must charge interest

rates high enough to enable them to cover all their costs,

including loan losses and the cost of raising new capital to

expand. MFIs should achieve sustainability within five to

seven years by charging adequate interest rates, controlling

operating costs, and maximizing their efficiency. Business

service providers must offer their services on a

commercial/fee-for-service basis or cover their costs by

embedding them in other transactions. Offering these

services on a non-commercial basis distorts the business

services market and threatens its long-term sustainability.

• Efforts to promote specific business services should be

consistent with the larger objective of developing broad,

sustainable business services markets that strengthen

linkages within and between commercial sub-sectors.

A businesslike approach is key

• Delinquency management is critical to the development

of sustainable microfinance institutions and a healthy

financial sector in which poor people can rely on

consistent access to financial services.

• To ensure that microenterprises have access to the

business services they need in order to be competitive,

donors should promote a strong business services sector by

facilitating linkages between microenterprises and privatesector service providers — not by subsidizing the services

themselves.

Services alone may not be enough. Achieving

maximum impact of investments in microenterprise

development may require addressing policies that

constrain small businesses and compromise

individuals’ access to financial services.

• Limits on the assets poor people can use as collateral

against credit can block their efforts to improve their

lives.

• Onerous business registration requirements and regressive

tax policies are just two examples of the kinds of policy

barriers that disfavor microenterprises and can inhibit

economic growth on a national scale, particularly in those

countries in which microenterprises contribute substantially

to the national economy. ❏

BEST PRACTICES IN MICROENTERPRISE DEVELOPMENT:

A USAID PERSPECTIVE
Microenterprise works best in countries where the political,

economic, and social environments allow small entrepreneurs

to succeed beyond the level of basic survival, say Charles

Cadwell, Kathleen Druschel, and Thierry van Bastelaer from

the IRIS Center at the University of Maryland.

Drawing on the last two decades of experience, the authors

suggest that donors should focus more on the fundamentals

that "enable" successful microenterprise development. These

include solid legal and financial institutions, regulatory

reforms, governments that respond to the needs of their

citizens, and business groups that can advocate changes to

policies and practices that hurt their members' ability to

build and expand their businesses. Effectively addressing the

problems of today's poor, they say, requires a better

understanding of the mechanisms that perpetuate poverty

and the processes by which those mechanisms can be

improved.

In Kabul, Afghanistan, new microenterprises, having

sprung to life in the early hours after the Taliban fled the

capital city in 2001, sell previously banned items such as

music and radios as well as scarce necessities such as food,

clothing, and fuel. Across Bangladesh, millions who lack

education, capital, or information about distant markets

nonetheless carry on business activities that demonstrate

remarkable resilience and contribute to significant

portions of that country’s exports. In Africa,

communities ravaged by HIV/AIDS still have active

markets, with ever-increasing income generation activity,

as families burdened by adopted children and ailing

adults struggle to survive.

While there is wide acceptance of the critical role small

businesses and microenterprises play in providing jobs

and raising national income, the poorest countries are

often found lacking in this outcome. The greatest gains

from entrepreneurship are found in places where the

political, economic, and social environments allow

entrepreneurs to succeed beyond the level of basic

survival. This “enabling environment” for

microenterprise depends to a large degree on good

governance. In countries where citizens have only a

limited control over the policymakers and the public

sector, the enabling environment is often weakest.

It is not always clear what can usefully be done to

promote opportunities for microenterprises so that they

can prosper. While donors have often aimed support at

microfinance, or increasingly, delivery of business

development services, these efforts have not been

adequate to broadly improve standards in poor societies.

Even as initiatives such as the Grameen Bank – the

Bangladesh bank that introduced and popularized the

idea of giving small loans to microenterprises – have

expanded, the majority of poor people continue to lack

access to a range of market-supporting services, including

credit and savings services, from both government and

the private sector. These enterprises most often cite as

obstacles to their growth: lack of police protection from

crime, access to other government services based on

favoritism rather than merit, collection of illegal

payments by government officials, unpredictable

regulatory and enforcement practices, and a lack of

government support for private agreements and collective

arrangements between and among individuals and firms.

In light of these challenges, how should policymakers in

poor countries re-think their approach and how can

donors influence this process?

Two decades of experience suggest that donors need to

put more resources into those programs and policies that

“enable” – create the conditions for – successful

microenterprise development. An “enabling

environment” comprises institutions: laws, policies, and

informal rules, as well as the bodies that implement them.

These institutions support transactions that rise above the

simple exchange observed in street trade. The common

example of an economic institution is credit, where

repayment requires some means of enforcing a contract.

The peer pressure for loan repayment that is central to

❏ BUILDING AN ENABLING ENVIRONMENT: A LONG-TERM

PERSPECTIVE OF MICROENTERPRISE

By Charles Cadwell, Kathleen Druschel, and Thierry van Bastelaer, The Center for Institutional 

Reform and the Informal Sector (IRIS) at the University of Maryland

20

COMMENTARY
group lending practices represents a rudimentary form of

contract enforcement. But development depends on a

variety of complex forms of agreement, which permit not

only the extension of small, local credit but also the

mobilization of savings, the accumulation of capital

within firms, formal degrees of ownership, and

transparent processes by which to access information.

The weakness of the enabling environment in the poorest

countries has many causes. Poor effectiveness and low

credibility of the state and its officials undermine policies

across the board, including those essential to

microenterprises. A lack of specific policies and low

capacity to implement them also hinder improvement in

specific areas of a microenterprise-enabling environment.

These gaps are difficult for external donors to fill easily or

quickly. Narrow “technical assistance” services (such as

training of entrepreneurs or facilitated access to markets)

have not been the solution; even when such programs

have been available to host countries at low or no cost,

governments generally fail to implement them. This is

one of the reasons that donors are increasingly paying

attention to the incentives, which motivate action on the

part of officials, policymakers, and other economic and

political actors. Attention to how economic decisions are 

taken, by whom and with what end is an essential part of

the work needed to improve the environment for

microenterprises. Steps to facilitate access to credit by

small firms will founder if credit contracts are not

routinely enforced by courts, or if property registries are

non-existent or corruptly run. So it is important to

understand why courts in some places provide better

contract enforcement services and why some local

governments prey on firms while others encourage

enterprise.

If any interaction with the government – from entry into

school, to access to health care, to access to business

licenses – requires a bribe, then the obstacles facing

microenterprise are merely examples of more fundamental

governance problems, as has been suggested above. 

Communications and transportation infrastructures are

much more likely to be underdeveloped and poorly

distributed in places with weak governance institutions.

Services central to microenterprise, such as the issuance of

land titles and enforcement of contracts, will also be

lacking. Private providers of some of these necessary

services, who might try to step in to fill a gap left by

government, are themselves often stymied by the same

entry barriers that result from weak or corrupt

governance mechanisms. So another aspect of such a

"market augmenting government" – a government that

works to increase the reach of the markets rather than

replace them – is the scope it provides for markets to

evolve their own institutions, or for government decisions

to be informed by markets. Where these mechanisms are

suppressed, citizens will seek economic and political

opportunities in other ways – by emigration, withdrawal

into the sector of the economy that is not officially

recorded or recognized, and political and social dissent.

These observations suggest that, in an era of diminishing

donor resources, a focus on improving the enabling

environment for micro, small, and medium enterprises is

likely to affect significantly larger numbers of enterprises

– and at a lower per capita cost – than reliance on

targeted programs of enterprise support. As an example,

in the fiscal year that started October 1, 2001, the U.S.

Agency for International Development (USAID) spent

just under $170 million in microenterprise efforts. Ninety

two percent of that amount provided direct support to

microfinance initiatives or business development services.

The remaining 8 percent was devoted to improving the

enabling environment for microenterprises, much of

which funded the development of policies related to

provision of microfinance rather than the broader

environment for microenterprise. This is not to suggest

that USAID misunderstands the nature of the challenges

facing microenterprises – indeed its staff includes leading

thinkers and practitioners in the field – but rather to

recognize that the agency faces significant pressures from

Congress and interest groups to pursue programs that

more closely reflect a concern for short-term

humanitarian assistance than for long-term development.

There is no doubt that many or most of the recipients of

aid are better off for it. But it also is quite obvious that

the main causes of economic and social distress often

remain unaddressed in the very same places where

diligent microfinance or business development efforts

have been under way for a long time. A program of

support for microenterprise has to be refocused.

A growing number of donor initiatives are starting to

reflect this reality and translate new thinking into practice

on the ground. The joint World Bank-International

Financial Corporation Small and Medium Enterprise

Capacity Building Facility has supported efforts in

building business organizations that advocate changes to

policies and practices harmful to their members’ ability to

build and expand business. In Malawi, the National

21
Association of Business Women advocated for changes to

the land law policy, which would allow women to obtain

property titles and thus secure commercial loans. In

Belarus, 18 local business associations work together to

garner media attention about stifling enabling

environment policies. USAID is working at this, too, by

conducting research on how policies interact with

poverty, implementing programs that target the

microenterprise environment, and increasingly

emphasizing governance concerns, especially in the fragile

and failing states, which are often home to the poorest of

the world’s citizens.

Tackling these larger problems will take more time – the

issues are complex, and change of governance is not yet a

well-understood process. Only a few countries have

improved their enabling environment quickly (and some

would suggest that countries such as Poland or Slovenia

are special cases). In most places, bettering this

environment remains a difficult matter. Bad policies have

beneficiaries who cling tightly to their benefits, even if

those beneficiaries might be better off in the long run

with change. Organizing microenterprises to overcome

this inertia is a difficult task everywhere, but especially in

places with little interaction between the state and

citizens.

If our concern is development (or if we believe U.S.

national security concerns make poverty reduction an

even more urgent task than it currently is), then policies

and programs need to be effective in their overall impact

on broader economic and social goals, not just successful

in meeting the needs of direct recipients. This calls for

significant re-thinking in our microenterprise approach.

It requires long-term commitment to the policy

environment and to governance mechanisms that support

that environment.

If donors accept this broader perspective of poverty

reduction, they will need support from those who

advocate for the poor and for microenterprise. They will

need support from those who purport to advocate for

private sector development. Donors will need to develop 

better understanding of the processes by which actual

improvements are made in the enabling environment.

Which policies can be initiated by local governments,

even in countries with repressive regimes? What options

are there for organizing advocacy groups? Are there ways

to support private provision of “public” goods such as

dispute resolution or commercial standardsetting?

These are issues that we have worked on at the University

of Maryland's IRIS Center since our founding by

development economist Mancur Olson in 1990.

Because the poor and microenterprises bear the fullest

brunt of poorly conceived policies and inadequate

governance, attention to the governance and institutional

environment offers a powerful response to the poor's real

needs. To effectively address the problems of today's

poor, we need to understand much more about the

mechanisms that perpetuate their poverty and the

processes by which those mechanisms can be improved. ❏

Note: The opinions expressed in this article do not necessarily reflect the

views or policies of the U.S. Department of State.

Economic Perspectives • An Electronic Journal of the U.S. Department of State • Vol. 9, No. 1, February 2004. 22
23

The microfinance industry has been at the forefront of

recognizing women as a force in international development

and a market worthy of attention but can do even better if it

addresses ongoing barriers to women's participation and

empowerment, says Susy Cheston, senior vice president at

Opportunity International, a non-profit organization that

supports microenterprise development.

Cheston points to phenomenal progress, as shown by

estimates that the number of very poor women with access to

microloans reached 32.7 million in 2002, but argues that

many women worldwide are still unserved or underserved.

She says there are tremendous opportunities for innovation in

microfinance if new incentives focus on reaching new

markets, such as women who are currently excluded, clients

in rural areas and, above all, the very poor; delivering new

products, including expanded savings services and client

training to promote business, personal, and social

development; and new ways of doing business, such as

addressing continued obstacles to women’s empowerment and

including more women in the leadership of microfinance

institutions.

Giving loans to women was once considered

revolutionary. In just three decades, however, a series of

breakthroughs has shown that women — especially poor

women — are creditworthy and make excellent

consumers of financial products.

Today the majority of microfinance clients worldwide are

women, and this is especially true for programs targeting

the very poor. Not only is microfinance good for

women, but it also turns out that women are good for

microfinance. Women are highly motivated savers and

repay their loans at a higher rate than men. A big

breakthrough for microfinance was in its ability to

identify the characteristics of women’s businesses and

their use of financial services and then design products to

fit their needs. In the classic study Financial Services for

Women, C. Jean Weidemann lays out the basics of how to

provide credit to poor women: provide small, short-term

working capital loans that work for trade and service

businesses; overcome mobility restrictions by going to

women where they live and work; overcome legal

obstacles by using "solidarity," or group, guarantees and

character references rather than collateral; rely on

relationships and group processes rather than paperwork

so that illiterate women can participate; and provide

education on how to be a good credit consumer.

Recently, the industry has also given more attention to

women’s long-expressed need for savings services and for

other financial services such as consumption, housing,

and education loans.

ECONOMIC AND BUSINESS GAINS

The bottom line on microfinance is whether or not

clients are working their way out of poverty. According

to research by microfinance impact assessment specialist

Suzy Salib-Bauer on Sinapi Aba Trust, an Opportunity

International microfinance institution (MFI) in Ghana,

42 percent of mature clients (those in the program two

years or more) had an improvement in their poverty level

— either moving from “very poor” to “poor” or from

“poor” to “non-poor” status, as measured by a standard

household asset and income index. ASHI, an MFI in the

Philippines that exclusively targets poor women, found

that 77 percent of incoming clients were classified as

“very poor”; after two years in the program, only 13

percent of mature clients were still “very poor.”

Poor women are focused not only on investing in

opportunities for income and growth, but also on

managing risks and reducing their vulnerability by

protecting against emergencies and planning for events

such as marriage, childbirth, education for children, and

funerals. They therefore value savings services and tend

to be more careful about investing than men, with the

result that their businesses do not usually grow as fast as

those of men, but tend to be around for a longer time.

Most of what we know about business growth is based on

how women invest working-capital loans, as to date far

fewer women have been able to access larger asset-based

loans. In 2001 Lisa Kuhn Fraioli, a microlending

product manager and gender advisor for Opportunity

International, analyzed the changes women in Ghana

❏ WOMEN AND MICROFINANCE: 

OPENING MARKETS AND MINDS

By Susy Cheston, Senior Vice President for Policy and Research, Opportunity International
24

experienced in their businesses as a result of increased

working capital. She found the women had greater

control over their businesses, improved relationships both

with suppliers and with customers as their businesses

became better supplied and more reliable, greater

diversification, expansion into more profitable product

lines, and increased power and prestige in the

marketplace.

Even small gains can make a difference. A $50 loan

allowed a single mother of eight children in El Salvador

to sell rice in addition to beans — a little diversification

that improved the stability of her business and her ability

to feed her children. There are also plenty of exceptions

to the slow, incremental growth paradigm, such as a

woman in the Philippines who started out selling bundles

of wood on the sidewalk and leveraged a series of

working-capital loans into a full-fledged lumberyard with

10 employees and a delivery truck. When asset loans are

available, women can make strategic investments. A

Ghanaian woman used her asset loan to buy a freezer and

after only one month was able to produce and sell 500 ice

creams a day.

PERSONAL IMPACT AND FAMILY BENEFITS

Many impact studies have found that in some cases

simply having cash in hand — and greater control over

that cash — can lead to empowerment for women.

Indeed, studies from all parts of the world have

consistently found increased self-esteem to be among the

most striking impacts of microfinance.

This increased self-confidence goes hand in hand with

improved status at home. Ghanaian women clients of

Sinapi Aba Trust (SAT) found that their financial

contributions helped them earn greater respect from their

husbands and children, negotiate with their husbands for

help with housework (especially doing laundry), avoid

family quarrels over money, and gain increased respect

from extended family and in-laws. Women have even

been able to stop domestic violence. Working Women’s

Forum (WWF), a union/cooperative of poor women in

India, found 41 percent of its members who had

experienced domestic violence were able to stop it due to

personal empowerment and 29 percent were able to stop

it through group action. Women have also increased

their participation in decision-making. One example

comes from the Women’s Empowerment Project (WEP),

a program in Nepal incorporating savings, credit, and

literacy. WEP showed 68 percent of women had greater

power over family planning, arranging their children’s

marriages, buying and selling property, and sending their

daughters to school.

Empowerment effects have been especially well

documented in “credit plus” and group-based programs

that combine credit with other activities such as

education, leadership development, community problemsolving, and business development.

The benefits don’t end with individual empowerment.

Providing financial services to women brings about a

“multiplier effect” because, simply stated, women spend

more of their income on their families, leading to better

housing, nutrition, health care, and children's education,

especially for girl children. Sylvia Chant, a professor at

the London School of Economics, carried out studies in

Latin America, which are echoed by studies in Africa and

Asia, that show that men typically contribute 50 to 68

percent of their salaries to the collective household fund,

whereas women “tend to keep nothing back for

themselves.”

COMMUNITY PARTICIPATION

While most research focuses on business, personal, and

household impact, there is also evidence of changes in

how women perceive themselves and how others perceive

them within their communities. These changes in

perceptions have led to increased participation by women

in community leadership and, in some cases, political

positions.

Freedom from Hunger, a “credit with education”

network, found that its clients in Ghana were much more

likely to give business advice after entering the program

and that its clients in Bolivia were significantly more

likely to have been candidates for public office or to have

been members of the community’s sindicato, or labor

union, than non-clients. WWF in India found that over

89 percent of its members had taken up civic action for

pressing problems in their neighborhoods. At AGAPE,

Opportunity’s MFI partner in Colombia, Las Américas

Trust Bank organized, negotiated, and raised funds to

bring electricity to their barrio.
25

AN UNFINISHED PICTURE

Not surprisingly, however, traditional microfinance by

itself cannot lead to women’s full economic, social, and

political empowerment. In fact, in many cases

microfinance works not because it has changed the

prevailing laws or culture but because it has worked

around them. While some husbands help with

housework or the business, in most cases women clients

have not been able, or even tried, to challenge the existing

status quo and are often taking on responsibilities that

lead to a heavier workload and greater exhaustion —

although for most the increased income and

independence make this trade-off worthwhile. 

In some cases, as women’s income goes up, men’s

contribution to the household goes down. Some women

are pressured to pass their loans to their husbands or

another male relative, increasing their burden but not

always their benefits. Some MFIs report increases in

domestic violence once women become microfinance

clients. However, researchers Syed Hashemi and Sidney

Schuler, who have studied the impact of credit on women

in Bangladesh for over 10 years, found a lower incidence

of violence against women who were members of credit

organizations than among the general population.

Despite the increased prestige individual women

experience in the community, there has not usually been

change at the macro level leading to increased power and

opportunities for women in general in the marketplace

and within society.

The very microfinance industry that has served women so

phenomenally well nevertheless runs up against the same

cultural barriers found throughout society. Grameen

Bank in Bangladesh, a groundbreaker in reaching women

clients, for many years has maintained between 5 and 10

percent female loan officers. Grameen is not alone.

Many MFIs accept rather than creatively challenge

cultural reasons (in their various guises of concerns for

safety, comfort, capacity, education, etc.) that exclude

women from serving as loan officers. One typical

example from Zimbabwe is the stigma against women

driving motorbikes, which is a requirement for many loan

officers. While many men have served as treasured loan

officers to women clients, anecdotal evidence suggests

that a woman loan officer can bring added benefits to the

job by serving as a role model and “sister.” The industry

in general has not made a priority of ensuring that

women are involved in MFI leadership, either on boards

or in senior management. In many MFIs, 85 percent or

more of clients are women yet fewer than 25 percent of

the leaders are women.

Worse, some MFIs essentially ignore women as a market.

Many women-owned businesses are still regarded by loan

officers as income-generating activities rather than serious

businesses with growth potential. When MFIs do not

intentionally take women into account in marketing their

financial products, women often understand themselves

to be excluded. A Trust Bank program in Colombia

showed this phenomenon clearly when, after having

served exclusively women, it was opened for the first time

to both women and men — and 13 of the 14 potential

clients who showed up at the introductory meeting were

men. Further, lending programs designed for women are

often so committed to tried-and-true, one-size-fits-all

methodologies that they don’t respond to deeper

information about their clients’ assets and needs, with the

result that many women are inadvertently excluded from

participation or are unable to make the progress they are

capable of.

Even basic knowledge about the nature of women’s

businesses and the best ways to provide financial services

to support them is sometimes ignored or lost in the face

of new contexts and new pressures. The U.S. Agency for

International Development (USAID) commendably

commissioned a gender assessment of its programs in

Serbia and Montenegro that expressed concern that the

“basics” of providing financial services to women are

being disregarded, in part due to the emphasis on SME

(small and medium enterprise) lending. In another

example, many individual lending products worldwide

still require collateral even for women who have proven

themselves creditworthy through increasingly larger group

loans — this despite widespread knowledge that women

have less access to collateral and personal guarantees than

men — essentially preventing them from “graduating” to

more sophisticated financial products.

THE NEXT WAVE OF BREAKTHROUGHS

All of this suggests directions for further innovations that

could be as significant as the breakthroughs in reaching

poor women over the last three decades. The industry

has had incentives that have led to tremendous advances

in the financial sustainability of MFIs, the ability to reach

large numbers of clients, the ability to grow very quickly,

and the development of new financing sources. Yet there
Economic Perspectives • An Electronic Journal of the U.S. Department of State • Vol. 9, No. 1, February 2004. 26

is tremendous untapped potential that will require

stronger incentives for understanding the program

elements that lead to increased client impact — holistic

approaches such as the ones just described that have

brought increased empowerment benefits for women;

outreach to women for advanced financial services,

including enabling women to graduate into higher level

loan products; meeting women’s needs for safe and

accessible savings services; focusing on the importance

not only of increasing income but also of building up

assets and social capital; reaching clients in rural areas;

using microfinance groups as a vehicle to address the

HIV/AIDS crisis; including women in the leadership of

microfinance institutions, and, above all, providing

financial services to the extremely poor.

This last point of targeting the very poor cannot be overemphasized when talking about women and

microfinance. A client-centered agenda for the industry

includes understanding whom is being excluded from our

services and testing known limits to see if these women

and men, too, can be profitably reached. The industry

has developed a dogma — despite some evidence to the

contrary — that suggests that microfinance best serves

urban or near-urban clients among the moderately poor

and vulnerable non-poor. This may be what microfinance

experts know best for now — but only 20 years ago few

of us dreamed it would be possible for MFIs to be able to

cover the cost of borrowed funds.

One has only to look at microfinance in Egypt to

understand that the difficulties can be addressed.

According to a USAID report in fiscal year (FY) 2000, six

Egyptian microfinance institutions reported a total of

72,634 clients, with an average loan size of $506. Only

17 percent of these clients were women. In FY 2002,

these same institutions reported 115,345 clients (a

growth of 59 percent) with an average loan size of $372

and 54 percent of these clients were women. The secret?

The USAID mission strongly encouraged its long-time

grantees to add a new group-lending product specifically

designed for women, which now accounts for virtually all

of their growth — a classic example of what can happen

when women are taken seriously as a market. In the case

of PSHM, Opportunity’s MFI partner in Albania,

outreach to women increased from 22 percent to 44

percent in just six months as a result of a new individual

lending product targeted to women that features smaller

loan sizes, flexible guarantee requirements, and new

marketing techniques. These examples of striking

progress in a short time suggest that long-standing

barriers to women’s participation can yet be toppled.

My own experience suggests that most players in the

industry — practitioners, donors, academics, policymakers — would welcome the opportunity to reach more

women and ensure the greatest possible impact for them

and their families. But it simply is not as high a priority

as are so many other pressing issues. Practitioners are

strapped by the survival realities of the day while donors

are shy of leading the agenda on behalf of women or

appearing cross-culturally heavy-handed.

It has been said that the first step toward change is

realizing it is possible. Over the past several decades,

we’ve seen that it is possible to reach women, including

very poor women, and to bring about economic, social,

spiritual, and political transformation for the client, her

family, and her community. Providing financial services

to women has turned out to be an excellent idea — and

the best may be yet to come. ❏

(This article draws heavily on research and writing originally done in

collaboration with Lisa Kuhn Fraioli. For a more extensive review of

the impact of microfinance on women, see “Empowering Women

through Microfinance” by Susy Cheston and Lisa Kuhn Fraioli,

published in Pathways Out of Poverty: Innovations in Microfinance for

the Poorest Families by Kumarian Press in 2002.)

Note: The opinions expressed in this article do not necessarily reflect the

views or policies of the U.S. Department of State.
27

It has been clearly shown that microfinance can have a

major impact on reducing poverty at both the local and

national levels, says Alex Counts, president of Grameen

Foundation USA, an organization that provides financing

and technical assistance to financial institutions that offer

loans to the world’s poor. One key to a successful

microfinance operation, he says, is government regulatory

policies that support small business development.

Counts, a former Fulbright Scholar in Bangladesh who

worked closely with Dr. Muhammad Yunus, founder of the

Grameen Bank, examines the essential building blocks of the

microfinance sector today. Among his findings are that

women-run businesses often are associated with the best

credit risks and more likely to funnel earnings into their

children’s education and that formal business training is not

always a prerequisite to successful business development.

With 1.3 billion people living in abject poverty

worldwide and an internationally accepted goal to reduce

that number by half by 2015 (as part of the Millenium

Development Goals), targeted, scaleable, and sustainable

pro-poor strategies are needed as never before.

Poverty is arguably both a cause and an effect of many

international problems, including global hunger,

environmental degradation, overpopulation, illiteracy,

civil strife, economic stagnation, and armed conflict. If

the international community seeks to address these

interrelated issues in a serious and holistic manner, then

approaches such as micro-finance should be at the

forefront of the global agenda.

The microfinance industry has its origins in experimental

efforts in the 1970s to provide financial services, mainly

loans, and non-financial business advisory services to the

poor. One of the earliest pioneers was the Grameen Bank

Project of Bangladesh. Initiated by Professor Muhammad

Yunus in 1976 as a response to the 1974 famine, which

had devastated this newly independent nation, it was

essentially an intensive trial-and-error experiment to find

out how the economic activities of the poorest people in

one of the world’s least developed nations could be

supported. Loans of as little as $25 were provided to

finance livestock-raising, trading, all manner of cottage

industries, and services. Those who repaid were able to

access larger loans and take advantage of other investment

opportunities. Other methods were tried, but providing

financial services, especially individual loans delivered

through a group mechanism, was the one that stuck.

By 1983, enough had been learned and sufficient promise

had been shown that the Grameen Bank Project was

converted into an independent bank specializing in

providing financial services to the landless poor, especially

women. During the pilot phase (1976-1983), outreach

grew from fewer than 100 clients to more than 45,000.

Once the bank was launched, a period of sustained

growth resulted in outreach of 850,000 by 1990, 2.4

million by 2000, and 3.0 million as of December 2003.

Some 200 other providers in Bangladesh, many of them

successful Grameen imitators, today reach another nine

million families.

Astonishingly, a poor woman in Bangladesh is three times

more likely to be a member of a private institution that

provides her access to convenient and affordable financial

services than she is to be excluded from this access.

Worldwide, fewer than 15 percent of poor women are so

fortunate. Of course, this shows the growth potential if

sustained and leveraged investments are made on a

country-by-country basis. With less than 1 percent

market penetration in Pakistan, for example, the priority

goals for the years ahead come into sharp focus.

By the mid-1990s, according to independent and highly

credible research, some 120,000 Grameen families were

crossing the poverty line each year, usually in the fifth or

sixth year after beginning to participate. So while

microfinance is hardly a quick fix or a panacea, it was

achieving levels of poverty reduction on the micro level

that were unusual, if not unprecedented. Furthermore, in

most years, Grameen Bank turned a modest profit.

Grameen, like most microlenders, has maintained a

repayment rate between 95 percent and 99 percent for

❏ MICROFINANCE AND THE GLOBAL 

DEVELOPMENT CHALLENGE

By Alex Counts, President, Grameen Foundation USA
28

most of its history and does so at present. (Natural

disasters and other shocks have pushed it lower on a few

occasions, most recently in the late 1990s.)

The lessons of Grameen Bank’s pilot phase, which have

been studied and debated by the development profession

and independently confirmed by other pioneers, were the

essential building blocks of the microfinance sector today.

They can briefly be summarized as follows:

• Only if the poorest women are actively sought out and

targeted through effective marketing strategies – houseto-house “motivation” campaigns by local loan officers,

means tests, or other similarly effective strategies – are

they likely to benefit from microfinance programs.

• Perhaps counter-intuitively, even the poorest people

(i.e., those earning less than $1 per day per capita) do

not, in general, need formal training before launching a

business supported by a microfinance institution (MFI).

Their “survival skills,” honed in an environment where

there is neither a safety net nor wage employment to fall

back on, are well developed, though severely

undercapitalized. Providing capital, in a structured

format where peer accountability is emphasized, is the

most efficient and respectful means of ensuring rapid

progress. Costly business training and technical assistance

programs can therefore often be dispensed with or used

only in exceptional cases.

• Women are often the best credit risks, and they are

much more likely to use their profits to benefit their

children by making investments that are most likely to

break the generational cycle of poverty. In one World

Bank study of the Grameen Bank and two other large

MFIs in Bangladesh, a direct and positive relationship

was found between the amount a woman borrowed and

the likelihood that her daughter would go to school. A

similar relationship was not found in the case of male

borrowing.

• Microfinance can be provided in a business-like

manner and still materially benefit large numbers of poor

families as long as the overriding poverty reduction

objective and social empowerment vision remain

paramount in the minds of MFI leadership and field staff.

Incentives for front-line employees (by management) and

for MFIs themselves (by their stakeholders, including

donors and boards) are essential to ensuring this. I was

recently asked to join the board of Bank Fonkoze, Haiti’s

first bank for the poor, so that I could serve as the

“conscience” of this new institution (which evolved from

its roots as an non-governmental organization) and help

ensure that mission drift be minimized even as it becomes

a commercial financial institution. 

Essentially, the lesson of microfinance in the 1980s was

that poverty reduction could be franchised, under certain

conditions. This discovery has led to impressive growth

of the microfinance movement globally. According to the

Microcredit Summit Campaign

(www.microcreditsummit.org), some 67.6 million

families are benefiting worldwide. Of those families, an

impressive 37.7 million were among the “hard core poor”

when they started participating. This is no longer a

single success story driven by a charismatic leader (if it

ever was), but rather a growing international effort to

attack poverty in a systematic manner.

Grameen Foundation USA, established in 1997, has been

at the forefront of helping MFIs to expand their

operations and improve qualitative performance by

providing financing, technical assistance, and technology

consulting (often through volunteers).

The lessons of the two decades after Grameen became a

bank provide policy-makers with the tools they need to

create enabling environments. Those environments in

turn will allow microfinance to reach its full potential to

reduce poverty as it arguably has in Bangladesh, where

more than two-thirds of poor families are benefiting from

one of the 200 MFIs there. Some of the lessons learned

include:

• Not only do we know that the poor desperately need

credit and can borrow on terms on which the MFI can

lend profitably; we have also learned that the poor are

eager to have convenient savings and insurance services.

By providing these services, MFIs can create new and

sustainable sources of capital and at the same time

mitigate their risk as lenders. Regulatory support for

these activities is rare but critical to the continued if not

accelerated growth and sustainability of MFIs.

• Microfinance is perhaps best thought of as a platform,

rather than simply as another intervention. It creates an

infrastructure where the poor, previously seen as isolated

and without material assets or social capital, can be

mobilized in large numbers and provided finance to

participate in economic and social initiatives. Critical

mass can be achieved and brand loyalty engendered much

faster when operating through the microfinance channel.
Economic Perspectives • An Electronic Journal of the U.S. Department of State • Vol. 9, No. 1, February 2004.

Creating a network of poor and formerly poor families

with convenient access to financial services allows them to

participate in social and commercial schemes in large

numbers, either as vendors or consumers, or both. For

example, the Grameen Bank joined with Telenor of

Norway and established a mobile telephone company in

1997. Today, 45,000 Grameen borrowers in 45,000

villages (two-thirds of Bangladesh’s total) have taken loans

to buy mobile phones and establish pay phones serving

their villages. They do so profitably – for themselves, for

the Grameen Bank (the lender), and for GrameenPhone,

which, providing the infrastructure and the service at a

wholesale rate, earned a $45 million pre-tax profit last

year. Grameen Foundation USA’s Grameen Technology

Center has just launched a replication of this project in

Uganda. Another company, Grameen Kalyan, has

opened 15 health clinics alongside Grameen Bank

branches and has allowed borrowers to have a yearly

insurance premium of under $2 automatically deducted

from their savings accounts. This initiative has produced

improvements in public health. Moreover, the clinics have

achieved 70 percent cost recovery in a few years’ time and

expect to break even before long.

• Governments have an important role to play in microfinance. But they should not focus on providing

microfinancial services to the poor directly because such

action tends to be politicized and inefficient. Rather,

they can create supportive regulatory frameworks and

allocate financing to MFIs through wholesale funds or

other mechanisms that are not subject to politicization.

The case of Morocco is instructive. In 1997, it was one

of several Arab nations whose microfinance sector had

total outreach of about 10,000 clients. By instituting a

series of mostly supportive regulatory measures and

allocating $10 million through the Hassan II Fund, the

Moroccan microfinance sector leap-frogged Egypt (which

had led the region in outreach and other indicators) and

passed the 200,000 client mark in 2002. During the

same period, Lebanon and Jordan, for example,

experienced very modest increases, if any, in their sectors’

outreach. Similarly, the level of microenterprise

development in China is hampered largely by the lack of

a supportive regulatory environment, according to a

recent paper issued by Grameen Foundation USA. (See

http://www.gfusa.org/chinareg.htm). A summary of GFUSA’s recommendations for creating a pro-microfinance

regulatory regime can be found at

http://www.gfusa.org/gbrp/whitepaper.htm.

Information and communications technology has a

critical role to play in the recent and future growth of the

microfinance sector. Automation of the microfinance

process, which traditionally was done manually, has

tremendous potential to increase efficiency as well as

reduce the scope for error and fraud among loan officers,

of which Grameen Bank alone has more than 7,000.

Technology can also be a tool to allow the poor to create

more profitable businesses, as the GrameenPhone case

clearly suggests. Finally, standardizing data transmission

protocols will make it more transparent that the poor and

the institutions that serve them are good credit risks. In

turn, private capital markets will increasingly invest in

microfinance on a commercial basis, particularly in

nations such as India where there are regulatory

incentives to invest in anti-poverty programs. It has now

been clearly shown that microfinance can have a major

impact on poverty at the microlevel and at the national

level but only if policy-makers and others – mainly

government officials (especially banking regulators) and

private and public donors – make it a priority. If they

choose to do so in a manner consistent with best

practices, they will be seeding an industry that can sustain

itself without indefinite subsidies and that can work

synergistically with other poverty-reduction efforts.

Perhaps no better investment can be made in reaching the

Millennium Development Goals and achieving a measure

of true security – in the broadest meaning of the word –

for all in our lifetimes. ❏

Note: The opinions expressed in this article do not necessarily reflect the

views or policies of the U.S. Department of State.

29
Small loans, often not more than a few hundred dollars, have

helped improve income and employment growth for many

Samoans and others in the independent Pacific island

nations, says Gregory Casagrande, founder and president of

the South Pacific Business Development Foundation (SPBD).

SPBD, an independent, not-for-profit, charitable microfinance

institution, provides unsecured loans for the creation of simple

and sustainable businesses such as sewing operations; various

food processing businesses; pig, cow and chicken farms; trading

businesses, and taxi and distribution services. The author

outlines some of SPBD’s loan strategies that have resulted in a

nearly 100 percent repayment rate by its borrowers. 

Despite decades of development initiatives, the economies

of Samoa and the other independent Pacific island nations

continue to generate few economic opportunities for the

vast majorities of the local populations. It is clear that a

new paradigm for development is critical to the region.

The South Pacific Business Development Foundation

(SPBD), an independent, not-for-profit, charitable

microfinance institution (MFI), provides just such a

paradigm. Though only a few years old, SPBD’s efforts

suggest that a well-conceived microenterprise scheme

providing unsecured credit and entrepreneurial training

and operated by local staff can have a significant impact

on family and community income, living conditions, and

education.

SOUTH PACIFIC BUSINESS DEVELOPMENT

FOUNDATION

SPBD was founded in the independent nation of Samoa

in January 2000. My mission in creating the foundation

was to empower poor families via the provision of

training, unsecured credit, and ongoing guidance and

motivation to help them create sustainable businesses that

enable them to significantly improve their living

conditions. Since our launch, SPBD has worked with

over 2,600 poor families and has distributed over $1.1

million in unsecured credit, mostly to women. In 2003,

less than 1 percent of our creditors were one week or more

in arrears. SPBD, while relatively small by international

standards, is now the largest and most successful

microfinance organization in the Pacific island region and

growing steadily.

PACIFIC ISLAND ECONOMIES

Despite several previous failed attempts at microfinance in

the region, there was significant need in Samoa and in the

other independent Pacific island nations. According to

the United Nations Development Programme (UNDP),

Samoa is one of the world’s 49 least developed countries

and has a 48 percent rate of poverty. The economy is

nascent, and most persons have little hope of finding

formal wage employment. Lack of employment coupled

with a lack of access to credit leaves most people with little

meaningful opportunity. Most scratch out a subsistence

living in rural villages and hope to get a family member to

immigrate to New Zealand, Australia, or the United

States. These ex-pat family members, often among the

poorest in their new societies, are expected to send

remittances home.

Typical living conditions of a family prior to joining

SPBD include life in a grass-roofed hut with no walls and

a pebble floor, remote access to clean running piped water,

substandard outdoor sanitation, and limited access to

electricity. Many children do not attend school since

public schooling is not free. Families have meager

incomes, usually generated by erratic sales of fish or

produce and some casual labor for about $0.50 per hour.

Children frequently grow up in dilapidated homes that are

often marred by domestic violence.

Prior to 2000, there had been two well-funded

microenterprise initiatives and failures in Samoa and well

over a dozen failures across the region. Many academics

believed these failures were due to the very small size of

the national economies and to a non-business oriented,

traditional communal culture, which undermined

capitalistic solutions. I believed that the previous failures

were largely driven by weak management practices and

decided to embark on SPBD despite lack of support from

the major development players in the region (UNDP,

South Pacific Commission, NZAID, AusAID, Asian

❏ CREATING AND BUILDING A SUCCESSFUL

MICROFINANCE ORGANIZATION

By Gregory F. Casagrande, Founder and President of South Pacific Business Development Foundation

30
Development Bank). Several of these organizations had

already suffered from failed microfinance initiatives in the

region and were reluctant to support yet another.

PLANNING FOR SUCCESS

From the start, SPBD needed a clear vision of what

would constitute success. Our long-term goal was to

create an "institution permanently dedicated to serving

the financial needs of the poor." To achieve this goal,

SPBD focuses on:

• Working exclusively with the most needy in Samoan

society. 

• Ensuring a positive measurable impact on the lives of

our members and their families.

• Continually striving to achieve financial self-sufficiency.

The financial self-sufficiency objective is critical to

serving massive numbers of poor on a permanent basis.

Once we defined success, we developed tools to measure

whether we were achieving our three objectives.

We created a very simple, cost-effective “social metrics

survey” to measure objectively the poverty level of all new

SPBD applicants so as to ensure that the foundation

works only with the needy. This quantitative tool

measures the quality of the applicant’s housing,

sanitation, access to clean running piped water and

electricity, and the quality of their children’s education.

This enables us to compare family poverty levels

objectively and to specifically omit the non-poor from the

program. Furthermore, by measuring each family once a

year, we can determine whether the family is progressing

and whether SPBD is making an impact. 

Planning for financial self-sufficiency is not unlike

business planning in a typical commercial business.

SPBD follows the approach of establishing a target

“Affordable Business Structure” (ABS). The ABS is our

planned cost structure at break-even, in which interest

revenues equal total costs. It is our financial guiding

light. An ABS for microfinance institutions will vary

from country to country depending upon local

demographic and economic conditions.

Revenues vary with the number of clients served, the

average loan size, and the interest rate charged. Costs can

be broken into three broad categories: administrative, bad

debt expenses, and financing costs. The ABS sets a target

level for each revenue and cost component. These

targets, which we confirm against industry-wide, best-inclass benchmarks, must be internally consistent with one

another and supported by an operating strategy to achieve

them.

BUILDING MFI ORGANIZATIONAL CAPACITY

Sustainable organizations require a team that is trained,

empowered, and motivated to carry out the work. SPBD

recruits and employs local workers at competitive local

wages. We have not used expensive consultants but have

benefited from the donated services of many U.S.-based

volunteers. We recruit staff members that value our mission

and are interested in growing with SPBD. We motivate

staff by providing ongoing development opportunities, a

good career path, and annual merit increases and quarterly

bonus packages to high performers. All staff members have

clear job descriptions and sign up to specific goals each year.

Performance is regularly reviewed, and middle and senior

management positions are subjected to annual reviews by all

staff members.

Beyond our formal staff, SPBD has built a network of

relationships. These relationships include the matai

(chiefs) in each village in which we operate, leaders across

Samoan society, and practitioners, funders, and leading

thinkers in the global microfinance industry. SPBD

actively works on all of these relationships to assist with

our operations in the village, to attract funding and

volunteers, and to keep us on the cutting edge of

microfinance practices.

In our ongoing effort to build capacity, we have taken

great care to document our own set of operating and

financial processes in a set of manuals. These manuals,

which are continually updated and refreshed, provide a

basis for ongoing, controlled process improvement and

for staff development.

SPBD’s financial, human resource, and administrative

processes are not much different from what you might see

in a typical commercial bank. While not unique to an

MFI, they are critical to the success of an MFI and

should not be overlooked. Two specific areas of

importance are management information systems (MIS)

and internal control. A good MFI MIS system will have

a specialized loan portfolio management system and a

separate basic accounting package. These are worthwhile

investments. A reliable internal control system is vital to

detecting and, more importantly, preventing fraud.

31
Perhaps because we are a charitable, cash-intensive

organization, some people viewed us as a soft target. We

were tested many times, especially early on. Whenever

we have detected fraud, we have acted swiftly and

decisively, and because of these actions, fraud is no longer

a significant issue for SPBD although we remain vigilant.

Our operating processes are unique to the field of

microfinance and ensure that we maintain very high loan

repayment rates and that our members are successful at

operating their businesses. These processes include:

• SPBD provides all members with extensive upfront and

ongoing training. The two weeks of upfront training

includes an in-depth understanding of how the SPBD

program works and the basics of small business

management. The training is followed by a test on which

the applicants must score 80 percent in order to become a

member. This test weeds out people who are not fully

committed to the program. Members who show a sincere

interest in running a business but have not managed to

pass the test are given additional training and an

opportunity to retake the test. SPBD also provides

ongoing mini-training sessions at regular weekly meetings

held in each village.

• SPBD members form self-selected groups of four to

seven members that self-guarantee each other’s loans.

Self-selection is critical since village people will know

each other well and are best suited to judge the

creditworthiness of one another.

• Loan products are specifically designed to be appropriate

for the local market. Loan sizes, periodic repayment

amounts, and repayment frequency are all important

considerations. In Samoa, it is important to be aware that

new members are likely to be pressured by their community

to get as big a loan as possible – regardless of their ability to

repay. Frequent payments, while administratively expensive,

help members to develop new habits and keep the MFI and

the member well connected. SPBD ensures that loan

repayments do not exceed 30 percent of a member's

expected total weekly income.

• Members must run successful businesses. This is at the

heart of what we do. Our members create businesses

around existing livelihood skills and provide simple

services and products for which there is already a

demonstrated demand. Their business plans must pass

the scrutiny of their own self-guarantee groups, which

have the power to reject loan applications.

• Loan utilization checks are performed to ensure that

the loan has been used as stated on the loan application.

Loan misuse often leads to failed businesses and is a stress

on the system. When loan misutilization is detected at

SPBD, the member is removed from the program.

• The rules governing subsequent loan sizes provide

incentive to members to adhere strictly to all principles of

the program. Most members are interested in further

rounds of financing to expand their business or to

improve their homes or children’s education. At SPBD,

maximum-sized subsequent loans are available only to

members with perfect repayment records and perfect

weekly meeting attendance and in groups with perfectly

functioning group guarantees. There is a reduction in the

size of the subsequent loan for each infraction

committed. If the problems are too significant, the

member may become ineligible for a subsequent loan.

There are many other considerations, but tackling the

above is a good start.

SPBD’s program has had a direct positive impact upon

the lives of thousands of poor Samoans. By providing

meaningful opportunity via credit and training, SPBD

has helped women initiate simple and sustainable

businesses such as sewing operations, bakeries, and

various food processing businesses; village-based general

stores; pig, cow, and chicken farms; vegetable gardens and

small plantations; trading businesses; and taxi and

distribution services, and countless others. These small

businesses have generated significant additional cash flow

for the families and have empowered our members to

improve their lives in significant ways. We also provide

unsecured credit to successful SPBD microentrepreneurs

for housing improvements and childhood education.

These products help ensure that the benefits of the

business are directly translated into tangible benefits for

the entire family. A less tangible but equally real benefit

is the increase in self-esteem that accompanies a woman’s

success in business. It is true that success breeds success.

Our members demonstrate it every day through their

increased confidence and are actively passing this sense of

vitality and optimism onto their children and throughout

their village. The future is bright for SPBD members,

their families, and their communities. ❏

Note: The opinions expressed in this article do not necessarily reflect the

views or policies of the U.S. Department of State.

Economic Perspectives • An Electronic Journal of the U.S. Department of State • Vol. 9, No. 1, February 2004. 32
Fatouma Dijbril Issifou 

Parakou, Benin

Fatouma Dijbril Issifou began

selling vegetables when she was just

five, working alongside her mother

in a crowded market in the poor

West African country of Benin.

When she grew up, Fatouma

inherited the stall and was poised to live hand to mouth,

just as her mother had.

But Fatouma wanted to give her children a better life and

the chance to go to school. She knew that if she grew her

business, she would be able to save enough to make her

dreams a reality. She tried to put a little money aside at

the end of each day, but it was hard to save much.

Then a friend of hers told her about PADME, an

ACCION partner program in Benin. PADME saw that

Fatouma had the drive to succeed and approved her for a

loan of $130. She used it to buy vegetables in bulk at a

lower cost, boosting her earnings. A second loan for $260

allowed her to buy even more inventory and continue to

save. Now, she earns about $2 on a bushel of carrots and

a little more for a kilo of potatoes.

These may seem like small profits, but for Fatouma and

her family they have meant big changes. Before the loans

she was able to save just $13 a year to invest in her tiny

stand and she struggled to support her three children.

Today, two of them are in school and the youngest is

eager to follow in their footsteps.

“The loans have helped me a lot,” she says. “I can buy

medicine and there is enough food for the children. Now,

I don’t worry anymore.”

Jean-Exuvara Jolimeau

Croix-des-Bouquets, Haiti

Flowing lines and intricate shapes

are created with humble materials

and basic tools in the hot and dusty

Haitian town of Croix-desBouquets. The transformation takes

place with the dedication and skill

of extraordinarily talented metal sculptors, whose clank

and clatter have attracted buyers, designers, and collectors

for 50 years. 

In the early 1950s, sculptor Georges Liautaud began

creating sinuous, elegant two-dimensional scenes of

Haitian life, mythology, and fantasy. His ability to make

internationally recognized art from recycled oil drums

and scrap metal gave birth to a school of artists and

artisans whose younger members today discover new

techniques and subjects every day. 

Jean-Exuvara Jolimeau is one of those artisans. Jolimeau

learned his craft from his brother who, like so many

others in Croix-des-Bouquets, is a superb independent

artisan. Jean-Exuvara Joileau works from 6:00 in the

morning to 6:00 at night creating works that exude his

love of quality. On his angels and plates, which feature

gold leaf applied to the recycled metal, a process taught

him by Aid to Artisans (ATA) design consultant Frederic

Alcantara, you will not find better craftsmanship. There

are no rough edges, no sharp points on which you might

cut yourself. Even with his primitive tools — iron chisels,

hammers, metal brushes and good old-fashioned

sandpaper — Jolimeau creates works of art that sell

extremely well in the United States and Europe. 

Jolimeau’s gold leaf works have become so popular that he

has had to train other artisans in the intricate, timeconsuming process. And that is what ATA is all about —

creating and increasing employment for talented artisans

who share their love and craft with the rest of us.

33

❏ PROFILES OF MICROENTREPRENEURS
Economic Perspectives • An Electronic Journal of the U.S. Department of State • Vol. 9, No. 1, February 2004. 34

Tatyana Panova

Otradniy, Russia

Tatyana Panova lives in Otradniy, a

town of 50,000 located two hours

from the Russian regional capitol of

Samara. A professional chef, Tatyana

worked as a cook in one of the main

restaurants in the town for 16 years,

but health problems forced her to quit her job in the

restaurant. Tatyana’s husband worked in the oil industry,

but he rarely received his wages on time, so the family—

including the two children—could not count on a steady

income. Because they needed more income and because

Tatyana wanted her children to have an education, she

began her own small business. She cooked some small

pies, went to the local market, and sold the pies to traders

there. Her pies sold well, and she thought she could make

a go of it. Then, a few years later, her husband was laid

off at the oil refinery. Tatyana’s pie business was feeding

the family of four. She was working long hours but was

always short of money. “Russian women are used to

working hard because they feel a strong responsibility for

taking care of their children,” she says. Then, in the

summer of 1999, she was given an opportunity to make

her hard work more productive. She heard about the

Foundation for International Community Assistance

(FINCA), and decided to join one of FINCA Russia’s

first groups, “Talisman.” She invested her first loan in

meat, sugar, and other raw materials and started cooking

full lunches to deliver to the market. She engaged a

number of permanent clients, who waited patiently every

day for her lunches to arrive. With her second loan,

Tatyana invested in the raw materials to make pastries—

particularly kurniki—a traditional Russian pastry with

meat and potatoes inside. She found some cafes who

agreed to carry her products, and now sells 200-250

pastries and 40 lunches each day. Her husband has

returned to work at the oil refinery, and their son has also

found work there. Thanks to her mother’s earnings,

Tatyana’s daughter can now attend the technical college.

When she is not studying, she helps Tatyana with her

business. Tatyana dreams of buying a new, modern gas

stove with her next loan and perhaps purchasing a small

car in the future to help her deliver meals to her clients.

Of her connection with FINCA, she says, “FINCA does

the right thing helping women—they are always the main

bread-winners in the family.”

Lola Tasuna

Manila, Philippines 

Lola Tasuna’s tenement in Manila

faces a sidewalk sewage ditch. She

and the five people she lives with are

squatters. Like their neighbors, they

live in shelters constructed from

scrap materials. At 72, Lola should

be enjoying a comfortable retirement earned through her

life of hard work, but Lola knows she will eat only if she

works every day.

Her business is making kerosene lamps, a necessity in a

neighborhood where blackouts are frequent. With a loan

from Opportunity International, she buys clean jars at 5

cents a jar, paints the lids, adds wicks, and attaches metal

handles. She sells them for 10 to 25 cents, depending on

the size. With the help of family members, she can make

as many as 300 lamps a day, which net $30.

Life is easier for Lola than it was before she could afford

to buy clean jars. Then she had to search through garbage

dumps every morning to find jars. She washed them in a 

bucket of cold water, scraping off the labels and the filth

with her fingernails.

Lola’s pride in her handiwork and in her ability to earn

her livelihood shines out, despite her grim surroundings.

She does not feel poor, act poor, or talk poor. In a land

with no safety net of social services, Lola knows she is a

survivor. ❏

Note: The stories and photographs in the above profiles were provided by

ACCION International (www.accion.org; photo by Rohanna Mertnes),

Aid to Artisans (www.aidtoartisans.org), the Foundation for International

Community Assistance (www.finca.org), and Opportunity International

(www.opportunity.org).
Economic Perspectives • An Electronic Journal of the U.S. Department of State • Vol. 9, No. 1, February 2004. 35

• The U.S. government defines “microenterprise” as a firm

of 10 or fewer employees (including unpaid family workers)

that is owned and operated by someone who is poor.

• The Microenterprise for Self-Reliance Act, passed by the

U.S. Congress in 2000, mandates that half of all USAID

microenterprise funds go to the very poor, currently

defined as those living on less than $1 a day, or those

determined to be in the bottom half of the population

living below their country's poverty line.

• The U.S. government strategy for supporting

microenterprise development centers on policy and

regulatory reforms that support conditions for business 

development, access to business development services, and

delivery of microfinance.

• Firms of five or fewer employees account for half of the

nonfarm workforce in Latin America and two-thirds of

the nonfarm workforce in Africa.

• In Indonesia, firms with five or fewer employees account

for almost half of total manufacturing employment while

small firms account for an additional 18 percent.

• In Thailand, micro and small enterprises comprise more

than 97 percent of all firms in the manufacturing and

trade/service sectors. Micro firms generate 71 percent of

total employment in the trade/service sector.

• In Bangladesh, more than 90 percent of the firms

engaged in the $350 million shrimp export business are

microbusinesses.

• USAID's average annual funding for microenterprise over

the past five years has exceeded $160 million. This support

reached more than 3.7 million microentrepreneurs in fiscal

year 2002, more than two-thirds of whom are women.

• In South Africa, 87,000 of the 90,000 firms in the

construction sector are micro- and small-scale enterprises.

• According to a study conducted by the Consultative

Group to Assist the Poor, a consortium of 29 public and

private development agencies: the weekly income of

members of El Salvador’s FINCA, a microcredit lending

institution, increased on average by 145 percent; half of

the members of SHARE, a microcredit group in India,

brought their incomes above the poverty threshold, and

nearly all girls in Grameen Bank-client households in

Bangladesh received schooling, contrasted with 60

percent of girls in non-client households.

• Borrowers of very small loans from institutions

providing microenterprise support typically show

repayment rates exceeding 95 percent.

• According to Opportunity International, a non-profit

humanitarian agency that provides small loans to the

poorest of the working poor in 25 developing nations

around the world, 96 percent of its 176,147 poor clients

in 1999 repaid their loans on time and at market interest

rates. It said that 276,886 jobs resulted from these loans.

• In September 2003, The Agha Kan Fund for Economic

Development (AKFED) received a banking license for the

First MicroFinance Bank (FMFB) in Kabul, Afghanistan.

The institution, with an initial capital of $5 million, will be

the first of its kind to be established under the country's

new regulatory structure. It will focus on microenterprises

and small businesses, particularly underserved populations

and those in rural mountainous areas.

• The access to Credit for Southern Iraq (ACSI) program

is designed to provide financing to micro, small-, and

medium-scale businesses, with a particular focus on

women-owned enterprises and firms. Implemented by

CHF International, ACSI currently operates in the

governorates of Jajiaf, Karbalah, Babil, and Baghdad and

will soon expand to Basra and Qadissiya. Through

January 2004, a total of 1,025 loans had been disbursed

totaling $2.35 million.

• The UN General Assembly designated 2005 as the

International Year of Microcredit and has invited

governments, the United Nations system, concerned

nongovernmental organizations, and others from civil

society, the private sector, and the media to join in raising

the profile and building the capacity of the microcredit

and microfinance sectors. ❏

❏ MICROENTERPRISE QUICK FACTS

FACTS AND FIGURES
Business

Financial Development Enabling 

Region Country Microfinance policy Services Policy Total

AFRICA Benin $900 $100 $973 $1,973

D.R. Congo $1,187 $1,187

Eritrea $600 $300 $900

Ethiopia $200 $1,281 $1,481

Ghana $294 $2,947 $3,241

Guinea $953 $953 

Kenya $101 $280 $1,725 $200 $2,306

Malawi $541 $541 

Mali $796 $718 $1,514 

Mozambique $3,264 $3,264 

Namibia $95 $95 

Nigeria $3,300 $3,300

Senegal $3,236 $1,224 $4,460 

South Africa $1,298 $300 $1,225 $2,823 

Tanzania $1,993 $550 $2,544 

Uganda $882 $750 $1,632

Zambia $886 $135 $1,021

Zimbabwe $1,300 $500 $1,800 

Total $14,636 $680 $18,834 $885 $35,035

ASIA Bangladesh $344 $1,400 $1,744

India $1,300 $1,300

Indonesia $334 $636 $200 $714 $1,884 

Mongolia $1,300 $820 $2,120 

Nepal $600 $600

Philippines $3,798 $447 $389 $4,634

Vietnam $350 $350 

Total $6,726 $2,383 $2,809 $714 $12,632

EASTERN EUROPE Azerbaijan $3,714 $1,930 $5,644

Bosnia $750 $750 

Bulgaria $2,710 $2,710

Croatia $864 $864 

USAID MICROENTERPRISE FUNDING BY COUNTRY 

AND REGION 2002

36

(Thousand of dollars)
Economic Perspectives • An Electronic Journal of the U.S. Department of State • Vol. 9, No. 1, February 2004.

Business

Financial Development Enabling 

Region Country Microfinance policy Services Policy Total

Eastern European 

Region $500 $500 

Kazakhstan $2,007 $7 $1,318 $3,332

Kosovo $692 $692 

Kyrgyzstan $2,206 $116 $480 $2,802

Moldova $1,528 $1,528 

Poland $31 $31 

Romania $959 $959 

Russia $5,852 $1,800 $7,652

Tajikistan $1,735 $279 $200 $2,214 

Turkmenistan $520 $520 

Ukraine $1,949 $4,090 $1,500 $7,539

Uzbekistan $2,820 $205 $3,025 

Total $28,319 $2,407 $6,540 $3,498 $40,763

LATIN AMERICA 

AND CARIBBEAN Bolivia $1,750 $750 $2,500

Brazil $750 $750 

Ecuador $4,347 $145 $4,492

El Salvador $1,976 $704 $4,500 $7,180

Guatemala $801 $1,700 $2,501

Guyana $1,600 $1,600

Haiti $3,000 $3,000

Honduras $251 $581 $832 

Jamaica $1,000 $500 $1,500

Mexico $2,900 $600 $3,500 

Nicaragua $1,400 $1,400

Peru $4,094 $9,300 $13,394

Trinidad $97 $97

Total $22,365 $1,449 $17,331 $1,600 $42,745

NEAR EAST Egypt $21,000 $21,000 

Jordan $3,150 $3,150 

Morocco $696 $696 

West Bank/Gaza $650 $650 

Total $25,496 $25,496

MULTICOUNTRIES $11,931 $38 $1,182 $38 $13,188

GRAND TOTAL $109,472 $6,956 $46,696 $6,735 $169,859

Source: USAID Microenterprise Result Reporting, 2002

37
Allderdice, April and John H. Rogers. Renewable Energy

for Microenterprise. Golden, CO: National Renewable

Energy Laboratory. NREL/BK-500-26188. November

2000.

http://www.nrel.gov/villagepower/vpconference/vp2000/ha

ndbooks/microenterprise_handbook.pdf 

Burjorjee, Deena M., Rani Deshpande, and C. Jean

Weidermann. Supporting Women's Livelihoods: Microfinance

that Works for the Majority — a Guide for Best Practices.

New York: United Nations Capital Development Fund,

Special Unit for Microfinance. January 2002.

http://www.uncdf.org/english/microfinance/reports/thema

tic_papers/gender/supporting/ 

Cheston, Susy and Lisa Kuhn. Empowering Women through

Microfinance. Washington, D.C.: Microcredit Summit

Campaign. January 2002.

http://www.microcreditsummit.org/papers/empowerintro.

htm 

Cohen, Monique. Making Microfinance More Client-Led.

Journal of International Development, Vol. 14, No. 3,

April 2002, pp. 335-350.

Crane, Christopher A. Overcoming the “Poverty of Dignity”

with Microfinance. Washington, D.C.: InterAction,

Monday Developments, April 14, 2003.

http://www.opportunity.org/press/mediacoverage/Interacti

on-%20Mon%20Devel%20Article.pdf 

Espenhahn, Sarah and Gil Wilkins. Powering Development,

The World Today, Vol. 58, No. 3, March 2002, pp. 22-

24.

The Global Development Alliance: Expanding the Impact of

Foreign Assistance Through Public-Private Alliances.

Washington, D.C.: U.S. Agency for International

Development. 2003.

http://www.usaid.gov/our_work/global_partnerships/gda/p

nact008compliant.pdf 

Larson, Dave. Microfinance Following Conflict Technical

Briefs. Bethesda, MD: Microenterprise Best Practices,

Development Alternatives, Inc., September 2001.

http://www.usaidmicro.org/pdfs/mbp/microfinance_follow

ing_conflict_main_brief.pdf 

Linking the Poor to Opportunity: the Microenterprise

Development Initiative, Microenterprise Results Reporting for

2001. Report. Washington, D.C.: U.S. Agency for

International Development. March 2003.

http://www.usaidmicro.org/new/MRR2001Report.pdf 

Linking the Poor to Opportunity: the Microenterprise

Development Initiative, Microenterprise Results Reporting for

2001. Annex. Washington, D.C.: U.S. Agency for

International Development. March 2003.

http://www.usaidmicro.org/new/Annexes_MRR2001.pdf 

Littlefield, Elizabeth, Jonathan Morduch and Syed

Hashemi. Is Microfinance an Effective Strategy to Reach the

Millennium Development Goals? Focus Note No. 24.

Washington D.C.: Consultative Group to Assist the

Poorest. 2003.

http://www.cgap.org/assets/images/FOCUS24_MDGs.pdf 

Microenterpise Development: USAID’s Program Has Met

Some Goals; Annual Reporting Has Limitations.

Washington, D.C.: United States General Accounting

Office. GAO-04-171. November 2003.

http://www.gao.gov/new.items/d04171.pdf 

Prahalad, C.K. and Allen Hammond. What Works: Serving

the Poor Profitably, a Private Sector Strategy for Global

Digital Opportunity. Washington, D.C.: World Resources

Institute. 2002.

http://www.digitaldividend.org/pdf/serving_profitably.pdf 

Robinson, Marguerite. The Microfinance Revolution,

Volume 1: Sustainable Finance for the Poor. Washington

D.C.: The World Bank. 2001.

ADDITIONAL READINGS ON MICROENTERPRISE 

38

RESOURCES
Economic Perspectives • An Electronic Journal of the U.S. Department of State • Vol. 9, No. 1, February 2004. 39

Sebstad, Jennefer and Monique Cohen. Microfinance, Risk

Management, and Poverty. Washington, D.C.: AIMS,

Management Systems International. March 2000.

http://www.mip.org/pdfs/aims/wdr_report.pdf 

Smith, Julie A. Solar-Based Rural Electrification and

Microenterprise Development in Latin America: a Gender

Analysis. Golden, CO: National Renewable Energy

Laboratory. NREL/SR-550-28995. November 2000.

http://www.nrel.gov/docs/fy01osti/28995.pdf 

Snodgrass, Donald R. and Jennefer Sebstad. Clients in

Context: the Impacts of Microfinance in Three Countries.

Washington D.C.: AIMS, Management Systems

International; U.S. Agency for International

Development. January 2002.

http://www.microfinancegateway.org/content/article/detai

l/3262 

Stephens, Blaine. Benchmarking Arab Microfinance.

Washington, D.C.: The Microfinance Information

eXchange. December 2003.

http://www.microfinancegateway.org/files/14260_ArabBe

nchmarkingReport.pdf 

van Bastelaer, Thierry. Imperfect Information, Social

Capital and the Poor’s Access to Credit. Working Paper No.

234. College Park, MD: Center for Institutional Reform

and the Informal Sector. February 2000.

http://www.gdrc.org/icm/sk-and-mf.pdf 

Yunus, Muhammad. Poverty Alleviation: Is Economics Any

Help? Lessons from the Grameen Bank Experience. Journal

of International Affairs, Vol. 52, No. 1. Fall 1998. ❏
U.S. Agency for International Development

Microenterprise

http://www.usaidmicro.org 

KEY INTERNET SITES

UNITED STATES GOVERNMENT 

African Development Bank

http://www.afdb.org/ 

Asian Development Bank

http://www.adb.org/microfinance/default.asp

The Consultative Group to Assist the Poor (CGAP)

http://www.cgap.org/about/microfinance.html

European Bank for Reconstruction and Development

http://www.ebrd.com/country/sector/fi/index.htm

Inter-American Development Bank

http://www.iadb.org/exr/topics/micro.htm

International Finance Corporation

http://www2.ifc.org/sme/

International Labor Organization

Business Development Services

http://oracle02.ilo.org/dyn/bds/bdssearch.home 

United Nations Capital Development Fund 

http://www.uncdf.org/english/microfinance/index.html

World Bank

Rural, Micro Finance & Small Business Development

http://wbln0018.worldbank.org/networks/fpsi/

rmfsme.nsf/

INTERNATIONAL ORGANIZATIONS

MICROENTERPRISE INFORMATION RESOURCES

40

A SAMPLING OF MICROENTERPRISE AND RELATED ORGANIZATIONS

Glossary of Terms from ACCION International

http://www.accion.org/micro_glossary.asp 

Microcredit Summit Campaign

http://www.microcreditsummit.org/ 

Microfinance Network

http://www.bellanet.org/partners/mfn/ 

MicroRate - a Rating Agency for Microfinance

http://www.microrate.com/ 

The MixMarket - Global Information Exchange for the

Microfinance Industry

http://www.mixmarket.org/ 

Small Enterprise Education and Promotion Network

http://www.seepnetwork.org/ 

Virtual Library on Microcredit

http://www.gdrc.org/icm/ 

ACCION International

http://www.accion.org/default.asp 

ACDI/VOCA

http://www.acdivoca.org

Aid to Artisans

http://www.aidtoartisans.org/

Appropriate Technologies for Enterprise Creation

(ApproTEC)

http://www.approtec.org/index.shtml
Economic Perspectives • An Electronic Journal of the U.S. Department of State • Vol. 9, No. 1, February 2004. 41

Center for Institutional Reform and the Informal

Sector

http://www.iris.umd.edu/default.asp

Counterpart International, Inc.

http://counterpart.org/programs/edevpt

Development Alternatives, Inc.

http://www.dai.com/practice_areas/fbe/mse-finance.htm

Foundation for International Community Assistance

(FINCA)

http://villagebanking.org/home.php3

Fund for Support of Microentrepreneurship (FORA)

http://www.forafund.ru/?pageId=31

Grameen

http://www.grameen.com/ 

Katalysis

http://www.katalysis.org/index.html 

Microfinance Centre for Central and Eastern Europe 

and Newly Independent States

http://www.mfc.org.pl/

MicroSave-Africa

http://www.microsave-africa.com/

Opportunity International

http://www.opportunity.org/ 

South Pacific Business Development Foundation

http://www.spbd.ws/spbdteam.asp 

Trickle Up

http://www.trickleup.org/index.asp ❏
Volume 9 An Electronic Journal of the U.S. Department of State Number 1

February 2004 

MICROENTERPRISE

Laying the Foundation

for Economic Development 

Economic

Perspectives