Microenterprise Development
USAID has been the leading bilateral donor promoting a strategy critical for both poverty reduction and economic growth -- microenterprise development - for more than 25 years.
Microenterprise development directly strengthens the economic activities of poor households, while helping them build diverse assets and cope with emergencies and other risks. Micro and small enterprises contribute a large share of total GDP and employment in developing economies. In Indonesia, for instance, firms of 5 or fewer employees contribute almost half of total manufacturing employment, and small firms an additional 18%. Improving the performance of micro and small enterprises therefore yields powerful returns to the economy as a whole. A critical aspect of this strategy is developing sustainable financial services that support micro and small enterprises and meet low-income families' needs for credit, savings, insurance, and remittance services.
Program Emphasis
USAID promotes microenterprise development through three time-tested approaches that help raise incomes and create livelihoods: 1) financial and technical assistance to build sustainable microfinance institutions (ranging from banks to credit unions to non-governmental organizations [NGOs]) and engage the broader financial market in delivering financial services for the poor; 2) initiatives that link small enterprises and poor producers including agricultural smallholders into higher-value markets; and 3) policy reforms that level the playing field for small firms, including those in the unregistered "informal sector."
In both microfinance and enterprise development, USAID is a recognized leader supporting innovations in service delivery, identifying best practices, and applying cost-effective approaches. An independent peer review of USAID's microfinance programs conducted by the Consultative Group to Assist the Poor (CGAP, the 31-donor microfinance consortium based in the World Bank) placed USAID in the top rank of the 17 donors. USAID received top ratings in three of the five performance areas rated -- staff capacity, accountability for results, and appropriate instruments - and was rated highly in the other areas of knowledge management and strategic clarity.
Program Successes
More than six million low-income people throughout the developing world have access to much-needed credit, savings, insurance, and support for their businesses as a result of the work of USAID and its 600 implementing partners Microenterprise development approaches have proven robust, achieving strong results in diverse contexts, including conflict-affected and post-disaster settings. The table below summarizes results achieved in microenterprise development programming over the past eight years.
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Results for Microfinance Activities | 1996 | 1999 | 2002 | 2004 |
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Number of loan clients | 1,116,540 | 1,997,839 | 2,726,998 | 3,793,498 |
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Number of savings clients | 2,018,714 | 3,069,604 | 3,221,531 | 5,421,121 |
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Percentage of sustainable institutions | 13% | 42% | 60% | 71% |
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Microloan repayment rates typically exceed 95%, demonstrating the creditworthiness of low-income entrepreneurs and families. Another measure of success is sustainability - many of the microfinance institutions (MFIs) that USAID helped create (and 71% of 2004 active microfinance partners) are now profitable and able to finance future growth and product diversification from profits and access to commercial finance rather than from donor funds. USAID has assisted this transition to commercial capital through its Development Credit Authority (DCA) program, which provides partial loan guarantees.
Many individual success stories contribute to the strong performance record of microfinance. For example, USAID helped a state-owned bank, Bank Rakyat Indonesia (BRI), start and expand a special unit to deliver services to poorer clients. BRI's "Unit Desa" now has more than 25 million savers, more than 3 million borrowers and loans valued at $1.7 billion; it is also the most profitable unit of the bank. In Bolivia, USAID has invested in building a broad and diverse microfinance sector over the years. Many partners have grown beyond the need for donor assistance. Bolivian NGOs, credit unions and specialized finance companies providing microfinance consistently outperform the conventional banking sector in terms of both new clients served each year and profitability. In Afghanistan, the microfinance sector has grown to serve more than 200,000 clients in the space of little over two years, with the help of USAID and other donors.
More than 700,000 microbusinesses currently benefit from enterprise support provided by USAID partners. Income gains to poor producers that successfully link into higher-value markets can be impressive. Recent programs in Kenya, India, and Central America, for example, have more than doubled the income of producers by helping them participate in fast-growing horticulture markets, upgrade their operations through improved technology and inputs, and organize to obtain higher prices for their produce. Similar gains have been achieved by microenterprises in sectors as diverse as construction, handicrafts, dairy, and retail.
USAID urges its implementing partners to find sustainable, win-win solutions for larger and smaller firms in the value chain, improving the competitiveness of the entire chain. For example, by organizing small Kenyan avocado producers and upgrading their quality, agro-processors and exporters have been able to fulfill larger contracts and pass on a fair share of the increased revenues to the growers. The lead firms in the chain are now willing to invest their own resources to build up their suppliers' capacity, having recognized it is in their commercial interest to do so. The assistance and services are expected to continue once donor funding ends.
Challenges Ahead
USAID is helping its partners adapt to work in ever more challenging settings and with new target groups. For example, numerous pilot projects are underway to find cost-effective methods to deliver financial services sustainably to smallholder households in remote rural areas. New ways to manage risks of agricultural lending, collect rural savings at lower cost, or offer new products such as remittances through partnerships between banks and NGO microfinance institutions are being developed. New technologies offer some promise to drive down the costs of service delivery and enable new types of services. For example, it is now possible to use cell phones to make loan payments and transfer remittances, and microfinance institutions are experimenting with personal digital assistants to increase the efficiency of lending in rural areas. An MFI in Bolivia has developed a low-cost automated teller machine that uses biometric identification for those without conventional identification and touch screens with pictures for those with limited literacy to better serve rural clients.
Best practice microfinance and microenterprise techniques require adaptation to work in post-conflict and post-disaster realities, where livelihoods must be rebuilt, market linkages restored, and MFIs assisted to restart operations and meet the demands of old and new clients. In areas with high HIV-AIDS rates, clients need new types of services (e.g., flexible savings, emergency loans, burial insurance) while their MFIs and enterprise support institutions struggle to adapt their business model to cope with staff illness and deaths. Youth unemployment is a critical concern in a growing number of countries - both financial services and enterprise support services must be retooled to serve this target group.
Strategic Allocation of Microenterprise Resources
Microfinance and microenterprise development strategies have proven their relevance and effectiveness in extremely diverse settings. Funding needs to be tailored to country contexts. For example, in fragile states and other places with extremely limited access to financial services, (e.g., Afghanistan, Iraq, southern Sudan, Mongolia), USAID typically initiates microfinance programming by supporting the start-up and expansion of a small number of best-practices institutions that will serve as "market leaders" and demonstrate the viability of microfinance.
As the market matures, others are attracted into the sector and the number of microfinance providers and diversity of products increases. At this point, USAID may shift from supporting individual retail institutions to giving broader support to the microfinance sector as a whole and to the market infrastructure it needs to thrive. This often entails smaller, more focused grants to a larger number of providers to catalyze new product development or outreach to more rural areas. The increased competition that results generally leads to product innovation, greater efficiencies, and better services and prices for clients. USAID investments in institutions such as credit information bureaus and ratings agencies can help the entire sector to grow. DCA loan guarantees may become relevant.
USAID has pioneered the approach among donors of linking small firms and low-income producers into growth opportunities, while strengthening the competitiveness of an entire value chain. Increasingly, larger assistance programs in competitiveness, agribusiness, trade capacity, and alternative livelihoods are designed to better integrate microenterprises into higher-return value chains. In post-disaster and post-conflict settings, a focused effort may be required to rebuild key sectors and supply chains that have been disrupted. Livelihoods support programs, which focus on self-employment and very small businesses, are often critical to the success of "alternative development" programs.
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