SPEAKERS CONTENTS INSERTS Tables
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28–970PDF
2006
REVIEWING THE PROGRESS AND CHARTING THE PATH AHEAD: THE MICROENTERPRISE RESULTS AND ACCOUNTABILITY ACT OF 2004
HEARING
BEFORE THE
SUBCOMMITTEE ON AFRICA, GLOBAL HUMAN RIGHTS AND INTERNATIONAL OPERATIONS
OF THE
COMMITTEE ON
INTERNATIONAL RELATIONS
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
JULY 27, 2006
Serial No. 109–193
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Printed for the use of the Committee on International Relations
Available via the World Wide Web: http://www.house.gov/international—relations
COMMITTEE ON INTERNATIONAL RELATIONS
HENRY J. HYDE, Illinois, Chairman
JAMES A. LEACH, Iowa
CHRISTOPHER H. SMITH, New Jersey,
Vice Chairman
DAN BURTON, Indiana
ELTON GALLEGLY, California
ILEANA ROS-LEHTINEN, Florida
DANA ROHRABACHER, California
EDWARD R. ROYCE, California
PETER T. KING, New York
STEVE CHABOT, Ohio
THOMAS G. TANCREDO, Colorado
RON PAUL, Texas
DARRELL ISSA, California
JEFF FLAKE, Arizona
JO ANN DAVIS, Virginia
MARK GREEN, Wisconsin
JERRY WELLER, Illinois
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MIKE PENCE, Indiana
THADDEUS G. McCOTTER, Michigan
KATHERINE HARRIS, Florida
JOE WILSON, South Carolina
JOHN BOOZMAN, Arkansas
J. GRESHAM BARRETT, South Carolina
CONNIE MACK, Florida
JEFF FORTENBERRY, Nebraska
MICHAEL McCAUL, Texas
TED POE, Texas
TOM LANTOS, California
HOWARD L. BERMAN, California
GARY L. ACKERMAN, New York
ENI F.H. FALEOMAVAEGA, American Samoa
DONALD M. PAYNE, New Jersey
SHERROD BROWN, Ohio
BRAD SHERMAN, California
ROBERT WEXLER, Florida
ELIOT L. ENGEL, New York
WILLIAM D. DELAHUNT, Massachusetts
GREGORY W. MEEKS, New York
BARBARA LEE, California
JOSEPH CROWLEY, New York
EARL BLUMENAUER, Oregon
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SHELLEY BERKLEY, Nevada
GRACE F. NAPOLITANO, California
ADAM B. SCHIFF, California
DIANE E. WATSON, California
ADAM SMITH, Washington
BETTY McCOLLUM, Minnesota
BEN CHANDLER, Kentucky
DENNIS A. CARDOZA, California
RUSS CARNAHAN, Missouri
THOMAS E. MOONEY, SR., Staff Director/General Counsel
ROBERT R. KING, Democratic Staff Director
Subcommittee on Africa, Global Human Rights and International Operations
CHRISTOPHER H. SMITH, New Jersey, Chairman
THOMAS G. TANCREDO, Colorado
JEFF FLAKE, Arizona
MARK GREEN, Wisconsin
JOHN BOOZMAN, Arkansas
JEFF FORTENBERRY, Nebraska
EDWARD R. ROYCE, California,
Vice Chairman
DONALD M. PAYNE, New Jersey
GREGORY W. MEEKS, New York
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BARBARA LEE, California
DIANE E. WATSON, California
BETTY McCOLLUM, Minnesota
EARL BLUMENAUER, Oregon
MARY M. NOONAN, Subcommittee Staff Director
GREG SIMPKINS, Subcommittee Professional Staff Member
NOELLE LUSANE, Democratic Professional Staff Member
SHERI A. RICKERT, Subcommittee Professional Staff Member and Counsel
LINDSEY M. PLUMLEY, Staff Associate
C O N T E N T S
WITNESSES
The Honorable Jacqueline E. Schafer, Assistant Administrator, Bureau for Economic Growth, Agriculture and Trade, U.S. Agency for International Development
Mr. Joe Mwangi-Kioi, Director of Monitoring and Evaluation, Grameen Foundation USA
Gary M. Woller, Ph.D., President, Woller & Associates
Ms. Susy Cheston, Senior Vice President, Opportunity International
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LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
The Honorable Christopher H. Smith, a Representative in Congress from the State of New Jersey, and Chairman, Subcommittee on Africa, Global Human Rights and International Operations: Prepared statement
The Honorable Jacqueline E. Schafer: Prepared statement
Mr. Joe Mwangi-Kioi: Prepared statement
Gary M. Woller, Ph.D.: Prepared statement
Ms. Susy Cheston: Prepared statement
APPENDIX
Material Submitted for the Hearing Record
REVIEWING THE PROGRESS AND CHARTING THE PATH AHEAD: THE MICROENTERPRISE RESULTS AND ACCOUNTABILITY ACT OF 2004
THURSDAY, JULY 27, 2006
House of Representatives,
Subcommittee on Africa, Global Human Rights
and International Operations,
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Committee on International Relations,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2 o'clock p.m. in room 2200, Rayburn House Office Building, Hon. Christopher H. Smith (Chairman of the Subcommittee) presiding.
Mr. SMITH. Good afternoon to everyone. I would like to welcome Members and our witnesses to this hearing of the Subcommittee on Africa, Global Human Rights and International Operations.
Today we will review a topic which has been of great interest to me and to other Members of this Subcommittee for many years, and that is the issue of microenterprise. While the term ''foreign aid'' can sometimes assume a rather negative connotation, the tools of microfinance and microenterprise provide a shining counterpoint to some other programs that simply don't perform.
It was not uncommon in the past to see foreign aid delivered in a top-down manner to corrupt governments and organizations where it could never realistically reach its intended recipients. Such programs never delivered the benefits they promised.
Microenterprise, on the other hand, takes advantage of a very different method. It uses a trickle-up approach that focuses on helping the most impoverished people in the world build themselves up little by little into self-sufficiency by providing them with access to financial services like small loans and savings accounts.
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The sum of $58 does not seem a great deal of money to most of us in the developed world, but it is precisely the amount that helped change forever the life of Janet Korutaro, a widow from Nsike Village, Uganda.
Opportunity International, represented today by its Senior Vice President, Susy Cheston, who has been a great help over the years in crafting our legislation, provided Janet with a loan in this amount so that she could expand the small grocery store that she runs in her house.
This loan and subsequent loans, of $115 and $171, have allowed Janet to significantly expand her business, adding sugar, salt, eggs, and a refrigerator to hold juice, soda and fruits, along with other improvements. Janet's daily net profit is just $1.15, but this goes very far in Uganda. These three small loans have helped to take a widow in Africa from barely surviving and not daring to dream to believing that all of her dreams might actually come true. Today Janet anticipates being able to educate all of the children in her care, buy land and build a little house.
Similar microloans have benefited over 5.8 million other clients of USAID-assisted microprograms in fiscal year 2005.
The result is clear—microenterprise has the power to dramatically change lives for the better.
Success stories like Janet's are what microfinance and the Microenterprise Results and Accountability Act of 2004, as well as the legislation we did in 2003, Public Law 108–484, are all about. When I offered these pieces of legislation we worked very hard in the House and the Senate and with the Administration and nongovernmental organizations to encourage the best possible microfinance programs, allowing us to reach the greatest number of people with services that truly have an impact on their lives.
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The act directs USAID to report to Congress on the status of the agency's microenterprise programs each year at the end of June. I am pleased to have read and reviewed the first such report which covers USAID's activities through 2005. It is a comprehensive, thorough and informative report that will benefit not just the United States Congress but the whole industry. While I am sure that Members will have several questions today concerning the content of the report, I want to congratulate and thank USAID, Ms. Schafer, for a very, very high quality product.
The Microenterprise Results and Accountability Act of 2004 also includes a number of other provisions that we believe will improve the quality of microfinance initiatives around the globe. Among these are provisions that mandate the development of more reliable poverty assessment tools and of systems to measure effectiveness of for-profit contractors and not-for-profit partners. In addition, we included directives on USAID's central funding and on microenterprise programs for people afflicted with HIV/AIDS and for victims of human trafficking.
The final question that we must examine is this: Are these programs focused enough on directly benefiting the poor and other groups who would benefit the most from the tools of microfinance? Our witnesses today, who represent the Administration and the non-profit, consultant, and academic communities, will help to provide us with the answers to these vital questions.
I want to conclude with a story. When I went to Uganda just a few months ago, I visited Mbuya Reach Out, a faith-based organization under the auspices of Our Lady of Africa Church in Mbuya, Kampala. This center, like many others around the world, is using microcredit to transform lives, serving over 1,800 HIV-positive clients and their families. Not only did these individuals get the anti-retrovirals that were needed, that were life-sustaining, they also had the hope that my job brings, and my wife and I and other members of our delegation all spent several dollars on the items that were being sold in one of the outlets that was the result of a microfinancing loan.
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Income generation and self-reliance are encouraged in Mbuya through Bread for Life, a microfinance program that has provided more than a thousand small loans for small business investment and skills training through the Roses of Mbuya, a tailoring workshop that targets unemployed HIV-infected women.
Is this exactly how all microfinance programs are focused? No. But it does illustrate well the profound impact that American foreign aid can have on real human lives when the tools of microenterprise are put to work. I hope we can continue the discussion of this topic constructively today and I can firmly say that this Subcommittee, and I do believe the Full Committee as well, will remain involved in this very important area.
[The prepared statement of Mr. Smith follows:]
PREPARED STATEMENT OF THE HONORABLE CHRISTOPHER H. SMITH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW JERSEY AND CHAIRMAN, SUBCOMMITTEE ON AFRICA, GLOBAL HUMAN RIGHTS AND INTERNATIONAL OPERATIONS
Good afternoon. I would like to welcome fellow Members, our witnesses, and other visitors to this hearing of the Subcommittee on Africa, Global Human Rights and International Operations. Today we will review a topic of great interest to me and to other Members of this Subcommittee for many years—microfinance.
While the term ''foreign aid'' can sometimes assume a rather negative connotation, the tools of microfinance and microenterprise provide a shining counterpoint to other programs that just don't perform.
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It was not uncommon in the past to see foreign aid delivered in a top-down manner to corrupt governments and organizations, where it could never realistically reach its intended recipients. Such programs never delivered the benefits they promised.
Microenterprise, on the other hand, takes advantage of a very different method. It uses a ''trickle-up'' approach that focuses on helping the most impoverished people of the world build themselves up, little by little, into self-sufficiency by providing them with access to financial services like small loans and savings accounts.
The sum of $58 does not sound like a great deal to most of us in the developed world, but this is precisely the amount that helped change forever the life of Janet Korutaro, a widow from Nsike Village, Uganda.
Opportunity International, represented today at our hearing by its Senior Vice President, Susy Cheston, provided Janet with a loan in this amount so that she could expand the small grocery store that she runs in her house. This loan and two subsequent loans ($115 and $171) have allowed Janet to significantly expand her business, adding sugar, salt, eggs, and a refrigerator to hold juice, soda, and fruits, along with other improvements.
Janet's daily net profit is just $1.15, but this goes far in Uganda. These three small loans have helped take a widow in Africa from barely surviving and not daring to dream, to believing that all of her dreams might actually come true. Today, Janet anticipates being able to educate all of the children in her care, buy land, and build a little house.
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Similar microloans have benefited over 5.8 million other clients of USAID-assisted micro programs in Fiscal Year 2005. The result is clear—microenterprise has the power to dramatically change lives for the better.
Success stories like Janet's are what microfinance and the Microenterprise Results and Accountability Act of 2004, PL 108–484, are all about. When I authored that legislation, we worked very hard in the House and the Senate with both the Administration and with non-governmental organizations to encourage the best possible microfinance programs, allowing us to reach the greatest possible number of people with services that truly have an impact on their lives.
The Act directs USAID to report to Congress on the status of the Agency's microenterprise programs each year at the end of June, and I am pleased to have read and reviewed the first such report, which covers USAID's activities through FY 2005. It is a comprehensive, thorough and informative report that will benefit not just the United States Congress, but the whole industry. While I'm sure that Members will have several questions today concerning the content of the report, I want to congratulate and thank USAID for such a quality product.
The Microenterprise Results and Accountability Act of 2004 also includes a number of other provisions that we believe will improve the quality of microfinance initiatives around the globe.
Among these are provisions that mandate the development of more reliable poverty assessment tools and of systems to measure the effectiveness of for-profit contractors and not-for-profit partners. In addition, we included directives on USAID central funding and on microenterprise programs for people afflicted with HIV/AIDS and for victims of human trafficking.
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The final question that we must examine is this: Are these programs focused enough on directly benefiting the poor and other groups who would benefit the most from the tools of microfinance? Our witnesses today, who represent the Administration and the non-profit, consultant, and academic communities, will help to provide us with answers to this vital question.
I will conclude with a story. When I went to Uganda just a few months ago, I visited Mbuya Reach Out, a faith-based organization under the auspices of Our Lady of Africa Church in Mbuya, Kampala. This center, like many others around the world, is using microcredit to transform lives, serving over 1,800 HIV-positive clients and their families.
Income generation and self reliance are encouraged at Mbuya through ''Bread for Life,'' a microfinance program that has provided more than 1,000 small loans to clients for small business investment, and skills training through ''Roses of Mbuya,'' a tailoring workshop that targets unemployed HIV-infected women.
Is this exactly how all microcredit programs are focused? No, but it illustrates well the profound impact that American foreign aid can have on real human lives when the tools of microenterprise are put to work. I hope that we can continue the discussion of this topic constructively today, and I can firmly say that this Subcommittee will certainly remain involved in this very important area. Thank you.
I now yield to my good friend and colleague from New Jersey, the Ranking Member Mr. Payne.
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Mr. SMITH. And having said that, I would like to now introduce our very distinguished witnesses. We will begin first with the Honorable Jacqueline Schafer, who is Assistant Administrator of the Bureau for Economic Growth, Agriculture and Trade of the U.S. Agency for International Development since November 2005. Prior to joining USAID, Ms. Schafer served as Director of the Arizona Department of Environmental Quality, as Assistant Secretary of the Navy, and a member of President Ronald Reagan's Council on Environmental Quality. And I would also point out that she has lived in New Jersey, in Haddon Heights, and went to school in Teaneck, New Jersey.
So, my fellow New Jerseyan, welcome and please proceed as you would like.
STATEMENT OF THE HONORABLE JACQUELINE E. SCHAFER, ASSISTANT ADMINISTRATOR, BUREAU FOR ECONOMIC GROWTH, AGRICULTURE AND TRADE, U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT
Ms. SCHAFER. Thank you, Mr. Chairman, and Members of the Subcommittee, for the opportunity to appear before you today to report on USAID's progress in implementing the Microenterprise Results and Accountability Act of 2004. I respectfully request, Mr. Chairman, that my entire written statement be included in the official record of this hearing.
Mr. SMITH. Without objection, so ordered.
Ms. SCHAFER. In fiscal year 2005, USAID obligated $211 million for microenterprise development, which supported 435 institutions in 68 countries throughout the developing world. USAID-assisted microfinance institutions served 5.8 million loan clients as well as 6.4 million savings clients. Enterprise development support reached more than 690,000 clients. In Africa and Asia in particular, institutions serving these clients also implement programs that aim to increase the productivity and profits of smallholder farmers through access to more and better inputs, improved practices, value-added processing, and access to high value markets.
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Sixty-one percent of the clients that benefited from USAID microenterprise support were women, like Maria Terese Perez, an entrepreneur I met in Mexico City who has after 2 years of loans from FinComun, a USAID-supported microfinance institution, expanded her business of sewing and selling school uniforms and children's clothing to the local market. Although Mrs. Perez is not among the poorest clients that benefited from USAID microenterprise support, the impact of the loans that she received extends to her nine employees, who now have higher incomes and can invest in their own family's futures by meeting their education and health care needs.
Mr. Chairman, I say that she is not the poorest, but her workroom is maybe 10-by-10, including storage for the cloth, and a third floor walk-up in what we might call a rough part of town. She was cheerful, hopeful and appreciative of the services of FinComun and aware that the United States supported her business in an important way.
The impact of USAID microenterprise programs extends beyond people like Mrs. Perez, her family, her employees, and her customers to Mexico's entire financial sector, which is undergoing a long-term structural change, integrating poor households and enterprises into the vision, business model and product range of the country's major financial institutions.
I would like to update you and the Committee, Mr. Chairman, on the status of activities required by the most recent amendments to the statute, including new grant programs, increased assistance to USAID's field missions that implement microenterprise programs, and improvements in our data collection system.
First, the FIELD-Support Leader's with Associates cooperative agreement, LWA, was competitively awarded in 2005 to a team of highly qualified organizations led by the Academy for Educational Development. This team, comprising 10 core members and 17 resource organizations, has a proven track record of reducing poverty and promoting sustained, equitable growth through microenterprise development, microfinance, value chain development, institution and human capacity building, and the promotion of market-based approaches. This year's tranche of leader funding from my bureau's Microenterprise Development Office is supporting initial activities worldwide that will focus on testing new approaches and sharing knowledge widely within the practitioner community about remittances, natural resources management affecting agricultural productivity, health services and mapping the social performance of microfinance institutions. I am told that, while still procurement sensitive, in fiscal year 2006 associate awards from our missions will encumber nearly 20 percent of the $350 million ceiling for this 5-year procurement instrument. So we are off to a good start.
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The Agency will also award grants this year totaling up to $10 million through the Implementation Grants Program. These grants will go to institutions working to increase access to financial services for very poor clients and to link very poor people into markets. In addition, awards under the Grants Under Contract mechanism totaling almost $3 million will be made to three different types of institutions. The first are institutions working to increase their capacity to learn from their activities and share that knowledge with the broader industry. The second are institutions working to fund innovative ways to serve poor and very poor clients in Europe and Eurasia, and third are institutions using information technology to broaden their outreach and reduce transaction costs.
USAID also has increased its technical support to missions in 2005. Our bureau's microenterprise technical officers helped regional bureaus and missions to conduct thorough reviews of proposed strategies and activities, and they have been proactive in supporting missions that are developing new strategy elements and components. For example, extensive technical assistance to USAID Afghanistan has supported a major new rural finance program that will extend credit savings and other financial services and support to tens of thousands of smallholder producers and rural families that have extremely limited access to finance.
In this past year our staff has provided on-site assistance to about 25 other missions, including Sudan, Liberia, Uganda, Tanzania and South Africa, and extensive virtual technical support in both strategy and activity design for others, including Iraq.
In fiscal year 2005, USAID instituted changes to our Microenterprise Results Reporting system to, among other things, identify the portion of obligated funds that are sub-obligated by the original recipient to other awardees, and thus improve our understanding of who the ultimate recipients of the funding are. We found, however, that the direct recipients considerably understated the amounts that will benefit local organizations. So we have revised the data collection process for 2006 to capture more accurately the portion of funding that is intended for eventual sub-obligation even when the sub-obligation is not completed during the fiscal year in which the initial award was made. There is some time lag. We expect this change to yield more accurate details of USAID microenterprise funding by institution type.
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With regard to development of the poverty measurement tools mandated by the Microenterprise for Self-Reliance Act of 2000, a rigorous effort involving methodologists, academic advertisers and practitioners has led to the completion of the development, testing and certification of two new tools that can be implemented by partners beginning in October 2006. While USAID and its partners had hoped that these two tools that have been developed and certified for use at the regional or international level would predict client poverty status with acceptable accuracy, this has not proven to be the case. The testing process has yielded results that indicate that tools tailored to specific country, and even sub-national, characteristics would achieve significantly better accuracy. Practitioner organizations selected on a competitive basis have received funding to field-test country-level tools to ensure that these instruments meet the law's practicality standard; that is, that the diverse range of practitioners with which USAID works can comply at a reasonable cost.
By October 1, 2006, country specific tools will be available or in development for many countries, including some of those with the largest microenterprise development programs. USAID will continue to work in partnership with researchers and practitioner communities to develop and/or certify country specific tools for other countries in which USAID operates microenterprise programs.
Mr. Chairman, allow me to touch briefly on the umbrella study that we referenced in our 2005 report. Generally it found that the ability of umbrella programs to work with a range of institutions on a variety of interventions at multiple levels of the financial system results in a more sustainable financial system in which poor people are more likely to enjoy the benefits of economic growth. Moreover, the study found that the nature of the program that is umbrella versus single institution was not a factor in determining either cost effectiveness or the sustainability of the institutions themselves.
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Mr. Chairman, that concludes my oral statement and I appreciate again the opportunity to present our program.
[The prepared statement of Ms. Schafer follows:]
PREPARED STATEMENT OF THE HONORABLE JACQUELINE E. SCHAFER, ASSISTANT ADMINISTRATOR, BUREAU FOR ECONOMIC GROWTH, AGRICULTURE AND TRADE, U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT
Thank you, Mr. Chairman and Members of the Subcommittee, for the opportunity to appear before you today to report on USAID's progress in implementing the Microenterprise Results and Accountability Act of 2004, since your September 20, 2005 hearing.
Generating economic growth in developing countries while reducing poverty is a fundamental development challenge. It is also critical to national strategic and security interests, as reflected in the growing role USAID is being asked to play in rebuilding, developing, transforming and sustaining partnership countries.
Only a few weeks ago here in Washington, President Bush addressed the private-sector Initiative for Global Development saying that ''the reduction of extreme poverty in our world must be a key objective of American foreign policy.'' And, the President added, the effort to eliminate global poverty ''needs to be part of the calling of the United States in the 21st century.'' The President also emphasized that he expected principles of transparency, performance and accountability to be applied to all our development aid, saying, ''We're going to be generous in our contribution and demand results in return.'' So, Mr. Chairman, our assistance programs are being held to account by both the Congress and the Chief Executive.
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USAID's vision for microenterprise development is to strengthen economic opportunities for poorer households and the business activities on which they typically rely to enable these families to build assets, cope with the risks and vulnerability that accompany poverty, and plan for better futures for their children. These strategies support delivery of effective financial and business services that poorer families and entrepreneurs need to succeed in these challenges, as well as policy changes that reward initiative and hard work. USAID's partnerships with hundreds of diverse U.S. and local microenterprise practitioners have also demonstrated that microfinance and microenterprise development services can contribute to poverty alleviation in a sustainable and commercially viable way.
In September's hearing, the Agency presented the status of our efforts to implement the law in the context of these overall strategies and programs. Today, I will present the Agency's response to the twelve reporting requirements in the Microenterprise Results and Accountability Act of 2004, as well as our implementation of key activities that we know to be of special interest to the committee.
RESULTS
Funding, client results and program examples
In Fiscal Year (FY) 2005, USAID obligated $211 million for microenterprise development, supporting 435 institutions (218 of which had new agreements this fiscal year) in 68 countries throughout Africa, Asia and the Near East, Latin America and the Caribbean, and Europe and Eurasia. Nearly $22 million of this support came from central programs.
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USAID's microfinance support has helped strengthen financial sectors to better meet the needs of poor households and new and growing microenterprises. Microfinance institutions (MFIs) and other financial institutions that received USAID microenterprise assistance in FY 2005 served 5.8 million loan clients, as well as 6.4 million savings clients. Sixty-one percent of these clients were women.
What does USAID support mean for these clients? In Mexico City, I met Maria Terese Perez, a businesswoman who makes her living sewing and selling school uniforms. In her two years as a client of FinComun, a USAID-supported microfinance institution, Ms. Perez was able to expand her business to nine employees, buying material more cheaply in the low season with a loan from FinComun, and sewing enough uniforms to have on hand when the high season hits. A new type of loan from FinComun will enable her to buy a machine that can embroider cloth, so she can expand into higher-value fashions.
Ms. Perez and her employees, who now have higher incomes, can invest in their families' futures by meeting their education and health care needs. But the impact extends beyond Ms. Perez, her family, her employees and her customers, to Mexico's financial sector, which is undergoing a long-term, structural change geared toward integrating poor households and microenterprises into the vision, business model and product range of the country's major financial institutions. This means that millions of Mexicans like Ms. Perez can count on the sustained access to the financial services they need to cushion against financial shocks, meet their families' needs, build their businesses and other assets and invest in the future of their communities and their nation.
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Some of the institutions USAID supported in FY 2005 were able to gain access to and increase their loan capital through the use of USAID's partial credit guarantees. USAID's partial credit guarantees of $6.361 million leveraged $224 million in private sector credit for institutions serving microfinance clients.
There are many impressive examples. USAID and Deutsche Bank launched the Global Commercial Microfinance Consortium in November 2005 in an effort to empower low-income households and small enterprises through increased availability of financial services. Spearheaded by Deutsche Bank, the $75 million program aims to channel financing from conventional and social investors into high-performing microfinance institutions around the world, so they can scale up their offerings of diverse financial services to low-income households and small enterprises. The USAID guarantee (put together through a team effort between EGAT's Development Credit and Microenterprise offices and the Global Development Alliance Secretariat) helped bring private commercial investors to the table. In its first full quarter of activity, the Consortium has approved and disbursed eight loans to microfinance institutions (totaling $13 million). Eleven new approvals are pending (totaling $24.4 million), and the value of deals under discussion exceeds remaining funds.
USAID also leverages outside funding through matching requirements. The Agency frequently requires that its funds for a particular purpose be matched by financing from other sources, including the recipient institution itself. In FY 2005, $27.6 million in USAID funds generated an additional $9.2 million from other sources. Sources of matching funds can encompass private donations, multilateral funding, commercial and concessional borrowing, savings and program income.
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More than 690,000 clients received enterprise support services through USAID-funded institutions. In Africa and Asia in particular, these institutions implement programs that aim to increase the productivity and profits of smallholder farmers through access to more and better inputs, improved practices, value-added processing, and access to higher-value markets.
An example of this work can be found in the USAID-supported KenyaBDS (Kenya Business Development Services) project. This project focused on helping Kenya avocado producers enter the seasonal avocado market during the time of year when producers in South Africa and elsewhere do not meet demand. While KenyaBDS was able to identify a market in the United Kingdom with growth potential, the value chain for avocados in Kenya was unorganized, and farmers needed to upgrade their operations to improve the quality of their produce and provide exporters with a consistent supply of exportable avocados.
One of KenyaBDS's most significant accomplishments was to help farmers organize into producer groups, and link them, as groups, to exporters. Initially, there was little trust on either side: Exporters doubted whether farmers could deliver the quality and quantity they needed to meet the demands of the UK market, and farmers were not sure that exporters would be trustworthy buyers and give them a fair price for their upgraded product.
Ultimately, though, KenyaBDS's experiment paid off. As farmers learned about the power of organizing, upgrading and delivering on time, exporters learned that small suppliers could provide the quality they needed and the quantity they were unable to access without these small suppliers. As the success of KenyaBDS's pilot spread, more and more exporters sought to partner with small avocado farmers. Most recently, these Kenyan exporters have been able to gain access to supermarkets in London—a clear indication that KenyaBDS's strategy has benefited both exporters and small farmers.
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USAID also worked in FY 2005 to assist members of particularly vulnerable groups. Fifteen missions with microenterprise programs reported a relationship between poverty and race/ethnicity in their countries.(see footnote 1) Clients benefiting from microenterprise funding in these countries constitute a significant share of all clients benefiting from USAID microenterprise funding: they are 38 percent of all loan clients, 44 percent of all savings clients, and 10 percent of all enterprise development clients.
Moreover, $15 million of USAID's microenterprise funding in FY 2005 assisted victims of trafficking in persons and women who are particularly vulnerable to other forms of exploitation and violence.
Poverty measurement tools
The Microenterprise for Self-Reliance Act of 2000, as amended, mandated that half of all USAID microenterprise funds benefit ''very poor people'', defined as those living on less than $1 a day (adjusted for purchasing power parity), or those in the bottom 50 percent of people below their country's poverty line. The lack of widely applicable, low-cost tools for poverty assessment had made it difficult for USAID to determine whether it was meeting these mandated targets. Therefore, the 2000 Act also required USAID to develop and certify at least two tools for assessing the poverty level of its microenterprise clients.
In FY 2005, USAID completed work on the development of two new tools to measure the poverty status of clients of USAID-assisted microenterprise institutions and better gauge our service to them. We are also collaborating with our partners to develop country-specific tools that may achieve greater accuracy.
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The Microenterprise for Self-Reliance Act initially set October 2005 as the deadline for USAID-assisted microenterprise institutions to begin implementing the tools; subsequently, the Microenterprise Results and Accountability Act of 2004 extended that deadline to October 1, 2006. A rigorous effort involving methodologists, academic advisors and practitioners has led to the completion of the development, testing and certification of two tools that can be implemented by partners beginning October 1, 2006. While USAID and its partners had hoped that these two tools that have been developed and certified for use at a regional or international level would predict client poverty status with acceptable accuracy, this has not proven to be the case. The testing process stipulated in the Act has yielded results that indicate that tools tailored to specific country (and even sub-national) characteristics will achieve significantly better accuracy. Practitioner organizations selected on a competitive basis have received funding to field-test country-level tools to ensure that these instruments meet the law's practicality standard, i.e., that the diverse range of practitioners with which USAID works can comply at reasonable cost.
By October 1, 2006, country-specific tools will be available or in development for many countries, including some of those with the largest microenterprise development programs. USAID will continue to work in partnership with researchers and the practitioner community to develop and/or certify country-specific tools for other countries in which USAID operates microenterprise programs. More complete information about the process of developing, testing and certifying the tools can be found online at www.povertytools.org.
Performance goals and indicators
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USAID also established and measured quantifiable performance goals and indicators in FY 2005. These appear in Table 1, appended to this statement.
On a worldwide basis, USAID and its implementing partners substantially met or exceeded all targets except that for the percent of funds benefiting the very poor (for which results are inconclusive). Performance was particularly strong in the number of clients served (44 percent above the target of 4.5 million) and financial strength of microfinance implementing partners.
USAID can state with confidence that, in FY 2005, 37 percent of financial services funding, and 18 percent of enterprise development funding, benefited the very poor. USAID assumes that a significantly larger share of microenterprise funding benefited very poor clients but cannot validate that assumption due to the poor fit between the mandated poverty loan proxy and the services that enterprise development institutions deliver to their clients.
FY 2005 is the last year for which the regionally-adjusted loan size proxy serves as the yardstick for measuring the extent of service to very poor clients. Beginning with the FY 2006 MRR report, progress toward targets will be determined through use of improved client poverty assessment tools currently under development by USAID. The loan size proxy has proven increasingly problematic in estimating service to very poor microenterprise and microfinance clients. Many microfinance clients are gaining access to financial services other than loans, such as savings, insurance and affordable remittance services, limiting the relevance and utility of a metric based solely on loans. For those benefiting from diverse enterprise support—access to better markets, improved technologies—the loan size proxy is clearly not relevant, which contributes to the low enterprise development percentages shown in Table 1. As the share of funding for enterprise development activities has grown, this bias has in turn lowered the overall estimate of funds benefiting very poor clients, a trend noted over the past several years.
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Another factor that affects the estimate of the extent to which USAID and its partners serve very poor clients is the geographic composition of microenterprise funding worldwide. The share of the population that meets the statutory definition is very small in some countries that have large microenterprise development obligation levels, such as Ukraine.
With the phase-in of the poverty measurement tools, USAID expects to have a better basis on which to determine the extent of service it provides to very poor clients for the full range of microenterprise development activities. This in turn will provide a better basis for identifying opportunities to prescribe specific actions to improve performance.
USAID is already taking steps to increase the extent of service to very poor clients. For example, the MD office has focused its competitive grant programs specifically on identifying and supporting program models that promise to improve both the extent of service and the impact of that service on very poor microfinance and microenterprise clients. Intra-agency working groups are identifying, testing and disseminating interventions that work for specific client segments that have a higher incidence of poverty, such as youth, refugees and internally displaced persons, and residents of conflict-affected zones, remote rural communities, and areas with high HIV–AIDS incidence.
RELATIONSHIPS WITH MISSIONS AND PARTNERS
USAID continued to provide program guidance to field missions in FY 2005, extending the impact of support through ensuring mission access to expert technical assistance in microenterprise development. The Microenterprise Development office continued its intensive work with field missions on designing, implementing and assessing programs that apply the knowledge of how best to serve the very poor that is emerging from this focused experimentation and applied research. Through collaboration, USAID's technical experts in microenterprise development can help missions apply best practices to their microenterprise programming. For example, extensive technical assistance to the Afghanistan mission resulted in a major new rural finance program that will extend credit, savings, and other financial services and support to tens of thousands of smallholder producers and rural families that have extremely little access to finance and are likely to be poorer than those benefiting from other USAID programs on the ground.
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To comply with the new statutory requirement that the Microenterprise Development office concur in strategies of USAID missions and bureaus that include microenterprise and microfinance components, MD staff has engaged with regional bureaus and missions to conduct thorough reviews of proposed strategies and activities. MD staff has been proactive as well in meeting the related provision in the law, i.e., that the office provide support and technical assistance to missions in developing new strategy elements and components. In the past year, for example, the MD staff has provided on-site assistance to missions including Afghanistan, Pakistan, Indonesia, Mexico, Haiti, Brazil, Albania, the Central Asian Republics, Azerbaijan, Serbia, Morocco, Egypt, Jordan, India, Sri Lanka, Sudan, Liberia, Uganda, Tanzania and South Africa. The staff has also provided extensive virtual technical support in both strategy and activity design for diverse missions, including Iraq.
Also, in June 2006, USAID held its first learning conference on microenterprise development. We convened more than 300 partners and other practitioners in the microenterprise field in order to alert them to changes in the U.S. Government approach to foreign assistance, engage them on the key strategic questions currently facing the microenterprise development field, and enable all of our grantees and contractors to learn from each other about the USAID-supported work they're doing, the discoveries they are making, and the successes they need to be replicating.
NEW FUNDING MECHANISMS
We continue to work closely with our partners through our new funding mechanisms as well: through our Leader With Associates mechanism, which links a diverse consortium of partners directly with USAID missions; and through other grant programs, such as the Implementation Grant Program (IGP) and our Grants Under Contract mechanism.
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Financial Integration, Economic Leveraging, Broad-Based Dissemination (FIELD-Support) Leader with Associates
The Agency has begun implementing a new microenterprise FIELD Support Leader with Associates (LWA) mechanism. This LWA has been designed to mobilize the expertise of the nonprofit community and strengthen their relationships with, and relevance to, USAID missions. FIELD-Support will operate through FY 2010, with a possible five-year extension through 2015.
The LWA is designed to implement innovative, comprehensive, and integrated approaches to sustainable economic growth with poverty reduction. This includes building more inclusive financial systems, improving the competitiveness of industries in which micro and small enterprises participate, and enhancing the overall policy and regulatory environment to enable broad-based economic growth. FIELD-Support is also designed to respond to the economic security needs of special populations, such as families hurt by civil conflict and natural disaster, and communities hit hard by HIV/AIDS and other health issues; as well as address the livelihood and enterprise needs of difficult-to-reach clientele such as the poor in remote rural areas, youth, women, refugees, and internally displaced persons.
The FIELD-Support LWA was competitively awarded by USAID's Microenterprise Development office to a team of 27 highly qualified organizations, led by the Academy for Educational Development (AED). The team, comprising 10 core members and 17 resource organizations has a proven track record in reducing poverty and promoting sustained, equitable growth through microenterprise development, microfinance, value chain development, institution and human capacity-building, and the promotion of other market-based approaches. Experiences include supporting micro and small enterprises' access to market opportunities, strengthening and deepening financial systems, promoting sustainable livelihoods and improving the national and local enabling environment. Sustainable livelihood work increases poor household assets and strengthens their coping strategies, while enabling environment work focuses on both the national and local levels to boost productivity, earnings, and competitiveness.
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The LWA—which has an overall ceiling of $350 million over five years—is off to a strong start, with initial Mission associate awards in the pipeline. By the end of this fiscal year, the Microenterprise Development office expects to obligate a cumulative total of $2 million for the base ''leader'' agreement to implement pilot projects that address these objectives throughout the world. In addition, USAID missions are showing great interest in utilizing the FIELD Support LWA to address regional needs. By the end of FY 2006, USAID expects missions to enter into ''associate'' cooperative agreements totaling approximately $60 million, nearly 20 percent of this mechanism's ceiling.
USAID Missions and USAID/W offices and operating units are able use the LWA over a five-year period. The LWA provides a streamlined procurement mechanism for missions to partner with NGOs and PVOs to meet growth and poverty alleviation goals, as an attractive alternative to working with contracts and for-profit firms. Design and implementation of the LWA is one of a number of steps USAID has taken to ensure that it has access to the best possible combination of partners with which to implement its microenterprise programs.
Implementation Grant Program (IGP)
The FY 2006 Implementation Grant Program will include awards to both financial services and enterprise development institutions. The Financial Services grant round, focused on ''Access to Financial Services for the Very Poor,'' attracted fewer responses than anticipated, but assessments of those that are the top contenders indicate strong programs involving a range of financial institutions (banks, NGOs, multi-sectoral programs and specialized microfinance institutions) working to integrate a variety of clients into the financial system (including youth and rural and agricultural producers as well as traditional clients who are poor or very poor).
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The Enterprise Development grant round, ''Linking Economic Growth to Poor Households,'' focuses on approaches that foster the competitiveness of industries in which large numbers of very small firms participate, by improving microentrepreneurs' access to the finance, business services and knowledge they need to compete in growing markets, while ensuring that the poor who operate these very small firms benefit from participating in growing markets.
Awardees will collaborate through a learning network with a structured learning agenda to share with each other and the larger industry those strategies, products and services that show promise in reaching and retaining very poor clients.
The combined funding for these worldwide grant competitions is $10 million. Awards will be made by the end of the fiscal year.
Grants Under Contract (GUC)
The Agency also continues to implement its grants under contracts program, which provides targeted grants to key implementing partner organizations. These grants are used to help institutions address key implementation and institution building issues which would normally not be funded by donor programs. The program emphasizes joint learning and the sharing of results, so that the impact of these grants can be leveraged across a broader swath of implementing partners, rather than accruing just to the benefit of the grantee. The total value of this program is $2.86 million.
In 2005, the Agency, in collaboration with a number of implementing partners, determined an industry-wide need for institutional support to develop or reinforce learning and knowledge management capacity. Institutions had repeatedly requested that USAID provide assistance to institutionalize frameworks that will help them to learn from current operations and apply the knowledge they gain to benefit future programs. In December, the Agency made six awards totaling $650,000 to increase recipient institutions' capacity to learn from their activities, apply their learning in order to adapt their activities and generate new ideas, and share their new knowledge with the broader industry.
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In early 2006, the Europe and Eurasia Bureau identified the need to develop approaches to increase the incomes of historically marginalized populations by improving or creating access to markets and financial services. In late spring, the Agency released a request for grant applications for programs supporting these hard-to-serve populations. These programs will develop channels to integrate the targeted populations into the broader economy, and to build a knowledge base of successful tools for integrating poor people into the markets and financial systems from which they have been excluded. The Agency expects at least some of the applicants to be non-traditional partners, including youth-serving organizations or health programs. Grant applications have just been received with about half coming from international PVOs and half coming from local NGOs. Only proposals for integrating these populations permanently into markets will be selected for awards totaling $500,000. Recipients will be required to collaborate through a ''learning network'' to share the knowledge they gain reaching hard to reach populations. Proposals have been received; awards will be made by the end of fiscal year 2006.
In the remainder of FY 2006, the Agency will release two more requests for grant applications, with one targeted to rural and agricultural populations (this may be combined with an information technology focus), and one to test the cost-effectiveness of newly developed poverty assessment tools.
Sub-obligations, cost-effectiveness, sustainability
In FY 2005, the amount of funds obligated directly to all non-profits was approximately 37 percent of total microenterprise support, which included funds to U.S.-based PVOs (16 percent), local NGOs (16 percent), cooperatives (2 percent), credit unions (2 percent) and research and educational institutions (1 percent). The amount obligated to consulting firms was 51 percent of total funds, an increase from 38 percent in FY 2004.
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USAID is working to supplement data on direct obligations with better data on the (often substantial) portions of funding that are sub-obligated, usually from consulting firms to non-profits. Sub-obligations are a key aspect of large ''umbrella programs,'' which are sometimes used by missions to accomplish a range of activities without adding to their management burden. Missions often use umbrella programs in countries where local capacity is limited, and comprehensive, multi-level interventions are required for program success. In these programs, a single awardee (either a consulting firm or a PVO/NGO) carries out a broad range of activities to boost economic opportunities for microenterprises or expand financial services for the poor. While managed by a lead implementer or ''prime'' recipient single entity, the umbrella program in most cases is carried out by a consortium of partners that bring distinct expertise, given the breadth of skills required by the program, and that receive a portion of the funds obligated to the ''prime'' through sub-contracts or sub-grants. Microfinance umbrella projects generally aim to reduce dependence on donor funding and subsidized technical assistance by addressing the market-level constraints to mainstreaming microfinance for the poor. These constraints often take the form of lack of services on which microfinance institutions rely. Umbrellas address these constraints by building locally available supporting services, and strengthening the policy, regulatory, or legal framework for microfinance.
In FY 2005, the Agency completed a study on umbrella mechanisms in an effort to better understand the use of these agreements by USAID missions, their relative cost-effectiveness and that of other mechanisms, and their role in USAID's microenterprise development support. Many of this study's findings apply to umbrellas but also more broadly to other agreements with for-profit and non-profit partners. This study was recently reviewed by the advisory group, comprised of non-profit and for-profit practitioners, other donors, and researchers; release to the general public expected this summer.
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The study's findings indicate that USAID-funded microfinance programs have been implemented successfully as both umbrella projects and as single-purpose projects by both for-profits and not-for-profits. Detailed analysis of the cost structures of not-for-profits and for-profits offers no evidence that these programs have been implemented inefficiently. Likewise, there is little evidence that either for-profits or not-for-profits are more cost-effective in achieving project results. This study found that it is extremely difficult to directly compare cost-effectiveness between organizations and projects across countries, and virtually impossible to draw broad, general conclusions about relative cost-effectiveness.
Recent refinements to USAID's microenterprise data collection and reporting system allow umbrella institutions to include more details on the various forms of assistance that may be transferred to local organizations via the umbrella institution. Analysis of the database of microfinance umbrellas compiled for the study indicates that since 1997, nearly 47 percent of total funding for microfinance umbrellas was sub-obligated; most of these sub-obligations go to not-for-profits and their local affiliates. In addition, although for-profits served as primes for the majority of the umbrella programs, not-for-profits and their affiliates received much of the in-kind technical assistance and training, as well as funding, associated with these programs.
Sub-obligations, usually made by a for-profit managing a program to non-profits in the form of subcontracts and sub-grants, are often a central component of microenterprise umbrella programs. Additional detail on the subcontracts and sub-grants will eventually aid in providing a more comprehensive picture of the allocation of USAID funds. For FY 2005, the majority of umbrella awardees with agreements signed late in the fiscal year showed much of their funding still in hand at the time of reporting. Most of these funds will eventually be channeled to local organizations, but are not reflected in the data captured for FY 2005.
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To enhance our understanding of the portion of funds that get sub-obligated, and who the ultimate recipients of funding are, USAID in FY 2005 requested additional information on the amounts allocated to local institutions through umbrella agreements, apexes or other types of wholesale institutions. The amount of detail provided by the direct recipients considerably understates the amounts that will benefit local organizations. The data on funding flows between for-profits (primarily consulting firms) and non-profits (primarily PVOs and NGOs) is also likely to be incomplete. This is the first year for which USAID has attempted to collect data on sub-obligations for technical assistance as well as direct obligations. The data collection exercise and analysis proved far more difficult than anticipated. Reasons that the data is incomplete are many, and are explained in the Annual Report to Congress. USAID has adapted the data collection process for FY 2006 to capture more accurately the portion of funding that is intended for eventual sub-obligation even if the sub-obligation is not completed during the fiscal year. We expect this change to yield more accurate data on the breakdown of USAID microenterprise funding by institution type.
The microfinance umbrella study also addressed the issue of sustainability. The study found that, for umbrella and other USAID programs, the instrument is not a factor in determining sustainability. USAID uses contracts to procure goods or services to implement its own program, and cooperative agreements or grants to support or stimulate the recipient's program. The sustainability of the program is the result of sound analysis that ensures that benefits continue well beyond program subsidies. Umbrella programs are usually implemented under contracts rather than grants, as USAID perceives the need to exercise greater control over these large and complicated public investments. USAID staff have more control over the direction of programs implemented under a contract.
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The amount of USAID support specifically for microfinance that flowed through umbrella agreements between FY 1997 and FY 2005 was less then 30 percent of new USAID obligations for microfinance, indicating that most USAID support for microfinance is still distributed through single-purpose programs, which are generally grants directly to not-for-profits. The share of microfinance funding programmed through umbrella programs during this period seems to have peaked at 37 percent of total USAID funding for microfinance in FY 2002, while just 10 percent of FY 2005 funding was obligated through umbrella programs.
Finally, the study also addressed the issue of sustainability. It found that, for the cases studied (which included institutions assisted through umbrella programs as well as those assisted through single-institution programs), nearly all of the institutions assisted experienced increased financial sustainability and growth. The form of assistance program—whether an umbrella program or a single-institution program—did not influence the sustainability of the institution(s) involved in the program. However, the form of assistance program did influence the sustainability of the broader financial sector. That is, the study found that programs focused at the level of a single institution cannot be as effective as umbrella programs at creating a financial system that permits greater and more sustainable access to financial services. Ultimately, the ability of umbrella programs to work with a range of institutions on a variety of interventions at multiple levels of the financial system results in a more sustainable financial system in which poor people are more likely to enjoy the benefits of economic growth.
Thank you Mr. Chairman. I would be happy to answer any questions you may have.
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APPENDIX 1:
Mr. SMITH. Thank you so very much for that testimony. Mr. Tancredo?
Mr. TANCREDO. No. I have nothing.
Mr. SMITH. Thank you. I will ask a couple of opening questions.
You just mentioned a moment ago how the tools tailored to a specific country or even sub-national characteristics will achieve significantly better accuracy than tools certified for regional and international use. You said that by October 1st many of these will be available. Can you give us any sense of how many countries will be ready by the October 1st deadline and how many will be a work in progress at that point?
Ms. SCHAFER. I don't have the exact number of—I don't think we really know yet the exact number of countries, but it will represent a good portion of our microenterprise development program worldwide. So I think we will be able to get a good indicator of whether these are in fact as we expect that they will be.
Mr. SMITH. You noted in your testimony that there was little evidence that either for-profits or not-for-profits are more cost effective. In evaluating who gets Federal funding, is that a surprise? Is that something that you didn't expect to be the case, and how will that be factored into further distribution of funding?
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Ms. SCHAFER. There is so much variability in the nature of the programs on a local basis that I guess it is not too surprising that the ability to compare program to program is difficult but this study, you know, made an effort to look at it in a variety of ways and found that this cost effectiveness issue, most programs try to be cost effective regardless of how they are designed but they are of quite great diversity in the nature of the programs on the ground, and that not one nor the other type of activity or type of approach proved to be more cost effective than the other.
Mr. SMITH. Let me say that we deeply appreciate your leadership, but I have concerns about the vacant Director position in the Office of Microenterprise Development. Is that person to be named soon?
Ms. SCHAFER. That position isn't quite vacant yet. That person who has led this office for I think 8 years now is with us until the middle of next month, and then I will be looking at what we might do. We certainly will have somebody in the office working in the interim and then we would conduct a search or make some arrangement to find a successor. Meanwhile, we have a very fine staff that is doing this work on the ground with our partners in missions around the world, and I expect that work will continue at its pace without any hitch or delay.
Mr. SMITH. So you see a seamless transition?
Ms. SCHAFER. Yes, I do.
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Mr. SMITH. That is good. Because so often, and this is regardless of the Administration, when somebody leaves and they have done a good job, sometimes months, even years pass before we get somebody back in. So hopefully that won't be the case.
Ms. SCHAFER. We will find an interim leader if that is necessary in order to make sure that we don't lose the momentum that I think we have gained in implementing these programs over the past few years.
Mr. SMITH. Do you know if the search is already on for that Director?
Ms. SCHAFER. No. It is not yet.
Mr. SMITH. Just to encourage you.
You note that there are over 5.8 million loan clients and 6.4 million savings clients. Is it your sense that clients in the developing world benefit more from saving services or from microloans, or is there a balance there?
Ms. SCHAFER. We are finding that many people who require financial services who are very poor actually value having a savings instrument that they can rely on and others will borrow money. Some will do both. What we want to have is a variety of services that are available and tailored to what the actual demands are by people who need these very small loans. Some people are just reluctant to borrow money at a point in time and other people will borrow money from more than one financial institution. So it really depends on what the demands are for the individual. We are trying to make services available to the whole spectrum of people.
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Mr. SMITH. When we had our last hearing on this subject on September 20, 2005, Acting Administrator James Smith testified, and this is something for which Congress, I think, is to be blamed, perhaps Administrations past and present, as well, that USAID technical staff—and I know that Administrator Natsios has complained about this, as does our current Administrator, Ambassador Tobias—that as we cut technical staff at USAID it becomes harder and harder for you and your counterparts at other USAID-assisted programs to do their work. Mr. Smith said that they were down to about 200 officers in the field at that time.
Has anything changed? Are we doing anything to try to build up that technical capability, or is that still a problem?
Ms. SCHAFER. USAID was able to bring in two classes of new entry professionals which have technical expertise in a whole variety of technical subject areas, including finance. So we are trying to rebuild our foreign service capability. We are also able to use non-operating expense instruments to bring in technical expertise and we have a considerable number of those in my own office.
We could never run the program just on our own staff basis alone. That is why we have implementing partners throughout the world. The program is large and the demand is very great.
What I tried to do is make sure that we have the right mix of technical people who can give the value of their expertise to our missions that have microenterprise development programs. An example of a skill set that we have been trying to recruit for is in the remittances area where we know that there are a lot of opportunities for investments in host countries by people who have sent remittances home that will advance the development of that country. And having someone with good knowledge in that area is one of the things that we are trying to recruit for.
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So my goal is to have a skills mix that actually is needed for the program so that we can provide the technical leadership for the missions and work with our partners to actually get the impact throughout the world.
Mr. SMITH. That is a tremendous goal. Have you been able to achieve that?
Ms. SCHAFER. As I said, we have got a pretty strong staff in our Microenterprise Development Office. Now we are always trying to make sure that we get the right mix, and I was giving an example of one that we are trying to recruit for now.
Mr. SMITH. If there are ways that we could be helpful, either our Committee or, you know, Congressman Frank Wolf is a close personal friend and obviously the foreign aid appropriations cycle and State Department cycle is something that we discuss often. If there are specific requests that you think would enhance the program, don't be a stranger. Please let us know because we can work to achieve that. We have done that on a number of instances, most recently with the Trafficking in Persons Office. There was a need for more personnel, and we went and worked with Mr. Wolf in this case, and we were able to beef up the number of people for next year. So let us know if there is a need and it has gone unmet.
Let me ask you two final questions. You stated in your testimony that the financial services grant round of the Implementation Grant Program attracted fewer responses than anticipated. I wonder if you can elaborate as to why that is the case, and is it your view that focusing on the very poor limited potential responses from agencies which might have otherwise implemented successful programs?
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Ms. SCHAFER. I am not sure that it rose to the occasion or rises to the occasion of being concerned that we don't have good candidates because we do. Our staffs are in the final rounds of looking at the various projects and programs that are competing for that money. So I think we are going to have a good strong award in that area. But the idea that—the difficulty in reaching the poor is not something that everyone feels like they are ready to be able to tackle that technical problem. But the proposals that we do have to tackle that technical problem are strong ones, and we think we are going to have a good outcome from that competition.
Mr. SMITH. You describe in your testimony the problem of accounting for sub-grants and sub-obligations and umbrella programs administered by USAID. Why is it that grant and contract lenders were not previously required to report to USAID regarding their sub-grants and subcontracts? Will more detailed information on such sub-obligations be provided to the Congress in subsequent USAID reports on microenterprise?
Ms. SCHAFER. We began to require that last year. And we posed the question. The information that we got as a result when we actually looked carefully at it appeared to us to seriously underreport the sub-contracting. Partly we often do not make our awards until very late in the fiscal year, but we started collecting the data at the beginning of the following fiscal year. The subcontracts often are not made until several months, if not longer, into the overall contract period.
So there is a lag in getting the information to catch up to be able to report it to you in the time frame that you requested. Sub-obligations have grown in importance in recent years, and that is why we are now trying to require them in the report, and we think that in fiscal year 2006 we are giving them some better tools to make that report and we should have better information so you know who was ultimately getting the benefit of those funds.
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Mr. SMITH. As you know, Ambassador Tobias serves as both head of USAID and as Deputy Secretary of State for Foreign Assistance. Do you see any positive impact coming from that very strategic dual position that he holds?
Ms. SCHAFER. The Ambassador has really, as a Director of Foreign Assistance, really taken personal control of the reins for developing a transparent foreign assistance framework by which the Administration will be making its request for foreign assistance to the Congress.
The first thing that he and the Secretary want to show is that we are doing things that will allow us to meet the overall foreign assistance goal of the United States, which is helping to build and sustain democratic, well-governed states that will respond to the needs of their people and conduct themselves responsibly in the international system.
The framework subdivides the various countries that we provide foreign assistance to into rebuilding countries, developing countries, transforming countries, and sustained partnerships, and we are arranging our various programs under categories that fall generally broadly under peace and security, governing justly, and democratically, investing in people, economic growth, and humanitarian assistance, and you will be able to see and you will be able to make trade-offs once you see how much money has been proposed for a country and how that arrays itself underneath these categories, and you will be able to make trade-offs among programs to have the maximum impact for development assistance.
Mr. TANCREDO. If you don't mind, I do have a couple of questions as I listen, and I am sorry, I was not able to be here for the bulk of your testimony so some of this may be asking you to say things that are redundant and I apologize.
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Could you help me understand the process a little bit in terms of how, exactly how the entrepreneur, him or herself, makes contact with the subcontractor. Which way does it flow? Is it a proactive sort of involvement on the part of the subcontractor to go out and find people who actually would be eligible that have some sort of criteria that they have established or is it the other way around? They sit there and somebody comes to then and say I need a loan?
Ms. SCHAFER. The people who work in the developing world that have been involved in this program, and this is now almost 30 years old, have a good understanding of what the demand is. They live there. They work with the community, and they are trying to develop tools that will be beneficial to the people who——
Mr. TANCREDO. How do they actually connect right there on the ground? How does it happen? Who comes where? Do you come to a little office and he says I would like to——
Ms. SCHAFER. People in the community, word gets around on whether an institution that is set up—I had an opportunity to visit a slum in Uganda not so long ago, with a microfinance institution, and it was teeming with people using the microfinance institution. So I am not sure what the origins of it were, but once you are out there providing a service that people need, people will come and take advantage of it.
They make applications, there is information developed that showed that they are able to repay loans or have bank accounts, savings accounts that they can draw on. But exactly how it began 30 years ago, I am not sure I can describe to you.
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Mr. TANCREDO. A person who comes in to take advantage of this opportunity, do they have any idea where the money is coming from? Do they know that it is USAID essentially supporting the activity or in conjunction with other nongovernmental organizations?
Ms. SCHAFER. As I mentioned in my opening statement, a case that I am familiar with was a lady I met in Mexico City who has been a customer of FinComun, which is a USAID-assisted microfinance institution. She was very aware that this finance institution was being helped by the United States. She appreciated the services that were provided to her and she was able to create jobs for a number of people who were hired to work in a very small business sewing school uniforms.
Mr. TANCREDO. How do they know that? Is that simply a matter of word of mouth or do we actually—when someone does apply and they obtain the loan, is there something that tells them here is where it comes from?
Ms. SCHAFER. In the first instance I suspect that they know they do their business with the financial institution. More recently we have required that all of the groups that we work with, and many grantees have complied with this as well, brand their activities so that people realize that the United States Agency for International Development is helping to support them. But I think it is well known that at least by the people that I have had an opportunity to deal with that the U.S. is at least one of the donors that is helping to create these institutions.
Mr. TANCREDO. And if a loan goes bad, who has been primarily responsible and takes the hit for it, I guess? Is it the contractor the subcontractor?
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Ms. SCHAFER. The finance institution is going to have, you know, a certain number of bad loans and that would be absorbed as part of the costs of doing business but what we are finding is that very, very few of these loans fail to be paid back. There is an extremely high success rate in this program.
Mr. TANCREDO. Do you know the percentage?
Ms. SCHAFER. It is well above 98 percent, I believe. If I am wrong about that, I will correct it for the record.
Mr. TANCREDO. Thank you very much. That is all.
Mr. SMITH. I have some additional questions. One is on the issue of financing. Have we appropriated sufficient money? I think it is about $211 million for this fiscal year for microfinance. Is that enough? Is there a significant unmet need that we should be doing more about? I would say that one of the bills I had put in would have bumped it up to $225 million at some point. But the powers that be thought that was too much. What could we do with more money and is it enough that we have now?
Ms. SCHAFER. A couple of things. One is of course there are a number of well-run programs that really are demanding, competing for the limited development assistance dollars that overall we can provide, and that is always going to be the situation. This program since 2001 has increased from about 156 million to 211 million, so there clearly is a demand out there for this program that has been responded to by the Congress.
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The other thing that you should be aware of is that the private sector has invested in microfinance institutions more and more. There is something like $2 billion of capitalization out there by the private sector. They have discovered that this is a money making operation and are willing to invest in it. And people that are in this business have told me that hundreds of millions of dollars, even through raising that money through bond issuance, are pouring into microfinance institutions which can then be loaned to these very small but needy customers.
So this is catching on and this is real sustainability. This is what the program, you know, has wanted to do and aimed to do from the outset and the evidence is mounting that this is happening.
We have also been able to leverage our program somewhat. We have something called the Development Credit Authority, which provides partial credit guarantees to local financial institutions that will actually lend money in local currency in the country. And my testimony points out that we have been able to leverage hundreds of million of dollars with very few million dollars in development assistance funds that will also help capitalize the microfinance institutions. So we have a program ourselves that the private sector is increasingly discovering the benefits of lending in this sector.
Mr. SMITH. Yesterday I hosted a meeting, and many of my colleagues were there, with Salva Kiir, who is, as you know, the First Vice President of Sudan. He is also the President of Southern Sudan. I remember meeting him when he took that position in Khartoum a year ago. We talked about what is needed to rebuild Sudan in general and Southern Sudan in particular, and microfinancing was something he mentioned as being important.
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I understand that we are spending some $2 million in microfinancing for Sudan, and I am wondering if there are any plans to significantly ratchet up that money. Is that being spent in Southern Sudan currently? It is just important to me that—I mean for people who have lost everything. As you know, there were 4 million people displaced, 2 million dead in Sudan, and Darfur has its own set of equally egregious problems. Is this a priority for this mission to look at Sudan and see how we might help in the south in rebuilding?
Ms. SCHAFER. I am not familiar in detail with all that they are doing, but I did have a briefing on it last January. We do have a new head of USAID in Sudan now who is probably taking a good comprehensive look at everything that they are doing.
There are so many areas that Sudan needs help with. Education is a particularly big one. Just basic human needs. But to improve the economy there is something that is going to require lots of components and microfinance and microenterprise development work in coordination with other activities, such as agricultural sector development, creating markets for and creating job opportunity for people. So I see this as a tool that would be used by any program for rebuilding Sudan, which is a big enterprise that we will be undertaking in the foreseeable future.
[Additional information follows:]
ADDITIONAL WRITTEN INFORMATION RECEIVED FROM THE HONORABLE JACQUELINE E. SCHAFER TO QUESTION ASKED DURING THE HEARING BY THE HONORABLE CHRISTOPHER H. SMITH
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SUDAN
The USAID Mission in Sudan is obligating $2.45 million in FY 2006 to fully fund the current microfinance program, which is a five-year $10 million program focused on Southern Sudan. The project has had a good track record in setting up the first microfinance institution in the difficult operating environment of Southern Sudan. This year, the project is supporting the establishment of a second microfinance institution to target other areas of Southern Sudan. The project has also established a Microfinance Forum for parties interested in good practice in microfinance in Southern Sudan. In addition, a number of NGOs have programs with small grants and revolving funds and are looking to transition to sustainable micro-finance programs.
Rapid expansion in Southern Sudan is difficult for several reasons: lack of banks and common currencies; continuing insecurity in some areas; limited development of markets; low understanding of financial services; limited human resource capacities; and lack of other institutions. USAID's Mission in Sudan intends to remain engaged in this sector and promote expansion as rapidly as conditions and funding allow.
Mr. SMITH. I know Mr. Tancredo notes that he did make an appeal for lifting sanctions on Southern Sudan, that at this point they are counterproductive because it is hurting the victims of that most recent war.
I have two final questions. How can microfinance be integrated and mainstreamed throughout all foreign aid, for example, natural resources and AIDS. I travel a lot, usually going to places where there are grave humanitarian and human rights problems, and when there is a crisis—like during the tsunami, for example, I went to Phuket, and in each of those meetings microcredit was high on the agenda. So there it seemed to be very much front and center, but is it being sufficiently integrated into other areas of aid? Do our missions understand how important this is?
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Ms. SCHAFER. I think the program has been increasing, the example I gave of after we have a large program in Iraq that is under way. I think that even in cases where the country is rebuilding and that category coming out of a crisis, there is a demand and a utility for microfinance for so many of the people whose jobs really depend on microenterprise. These are small individual entrepreneurs that don't have a big, you know, Ford Motor Company factory to go to work at. This is where their jobs are. So there is a demand for it and we are seeing our missions use it all over the world. The other question that you posed was the integration with the other programs. I mentioned here that in my testimony also that we are working with our women development program to make microfinance available to women who are recovering from being victims of trafficking of HIV/AIDS. We are working closely with the programs that support that sector with, you know, opportunity for recovery that could involve the kind of assistance that the Microenterprise Development Program gives. And the better—I mean, we would be much better off if we integrated all of our programs to improve the economy so that people can—so that the economy can grow and bring people out of poverty.
I do want to stress that one of the most important elevators of poverty is economic growth itself, and scholars have found we need about a 2 percent annual growth rate in order for people to really grow out of poverty. And so integrating what we need and to make sure that everybody gets to benefit from the growth as well, so that is what the microenterprise program does. It helps broaden the reach of the economic growth programs that a country would pursue.
Mr. SMITH. With regard to amounts and allocations, Africa gets about 20 percent, and it has a disproportionate share of HIV/AIDS victims and general poverty as well. Is there any sense of trying to enhance that, and again, would more resources enable you to do that? There was $32 million for Africa. I would just say, and I congratulate USAID on this, on another trip recently to Ethiopia, I went to a human trafficking shelter where there must have been in excess of 40 women who had been trafficked, mostly into the Middle East, who were the lucky ones that came back and were rescued. They were learning skills and some of them were hoping to get microcredit loans courtesy of the U.S. Government. These women were just amazing. They were making shoes and learning skills, including computer skills, that were extraordinary. They were putting out some very high quality merchandise. And it struck me that it was great, but not enough of it.
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Ms. SCHAFER. In Africa we do have several programs. The Microfinance Program I think is smaller than the Microenterprise Development Program. And that is partly because it is so difficult for the African people specifically who live in the rural areas that are so remote from the markets. The costs for them to do business is very, very high. So we are trying to help them develop their businesses as well as the ability to finance the trading of the products that they produce into a local regional store and in some cases international markets.
I went to Kenya in January on a trip and encountered a business development program there that found a market for local avocado growers who get into Europe on a seasonal basis when the trees weren't producing in Southern Africa. And so they found East Africa to produce in the off season. And originally there was a bit of skepticism by the people who are going to import and whether they could actually get a reliable high quality product and this program helped those people develop that reliable high quality product. It was sent to market on a timely basis, but a lot of things had to happen before they were actually able to earn additional income, including improving the quality of the fruit on the tree through grafting and the right kind of pruning and sprays. And I created several industries that supported these farmers as well that were experts in different parts of the productivity chain. Previously those trees were being cut down for firewood.
So the people that understand how to make these market lines work are an important part of the overall economic development and microenterprise picture in Africa. In this case also we did some household level surveys and found that a very large percent of the people that were actually benefiting from this particular program were very poor people, which might not have otherwise been shown in the way we measured very poor people, but when we did this on a household level basis we are finding that they are reaching a lot of people.
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So these programs have multiple aspects to them. They are balanced and overall many of them are meeting with real successes that I think we can be proud of.
Mr. SMITH. Thank you so much.
Mr. TANCREDO. The longer that you sit there and talk about it the more questions that keep popping up.
But you mentioned earlier the degree to which you were involved with the remittances and trying to use that in this process. Considering the fact that there are now seven countries, I believe, have more than 10 percent of their GDP made up of remittances from their nationals working in the United States, it amounts to a huge sum of money flowing out of the country, $20 billion to Mexico alone.
How do you interact with that? How does this become part of a business program?
Ms. SCHAFER. The case I am familiar with is in the state of Zacatecas in Mexico, where the treasurer of that state has told us that. We have been working with them to try to be able to raise money in the private sector for infrastructure to build schools and roads and water and waste water facilities, and he has told us that the remittances that come back into his state account for about half of the ability that he has to raise money to pay off the loans that—and the bonds that he has been issuing.
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So we are working with them technically to help tap this resource as a development tool. It is larger than official development assistance. Flows up remittances as a percent of the total flows of U.S. capital overseas has now outpaced development assistance in the last 5 or 10 years.
Mr. TANCREDO. Thank you.
Mr. SMITH. Ms. McCollum.
Ms. MCCOLLUM. Thank you, Mr. Chairman.
One of the things that I have been asked and I have been especially in Africa traveling is where we have AIDS projects a lot of women have been widowed and that are looking to supplement their income and they can be very resourceful with very small amount of money. We have our big programs like the dairy, the dairy that we do—that is not microenterprise but a lot of the women in particularly have said that it would be very helpful to have access to more microenterprise. Is there any synergy between trying to make sure that more in-country—that we are working on HIV/AIDS if there is an opportunity to kind of seize this as an opportunity to get some microenterprising moving forward and, if so, can you give me some examples of what I should be taking a look at?
Ms. SCHAFER. What USAID has done to make use of the microenterprise program to help people afflicted with HIV/AIDS falls into several categories. The first is research so that we better understand what the needs are of the HIV/AIDS affected clients. We are also trying to innovate new approaches to reach the affected populations. An example of that would be in Zimbabwe, where it seems very simple but it is actually very effective. We are supporting honey production and marketing of what is really a low labor but high return activity for the target group so that the effort needed to actually earn income from this particular agricultural activity is commensurate with their ability to do the work.
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Another example is in Ethiopia, where urban household gardens will yield not only better nutrition for patients but also some cash that will help them out. So these are a couple of examples of where we are trying to help.
We also have a policy of including HIV/AIDS clients in main, straight microenterprise programs such as the Opportunity International Bank that is doing this particular work with us. A community focus is needed. HIV/AIDS impacts entire communities. So members of the community——
Ms. MCCOLLUM. If I may. Ms. Schafer, I have been in the communities. I understand. You are doing research? You are taking the microenterprise dollars that are allocated and doing research with them? Did I hear you correctly?
Ms. SCHAFER. Our partners are. Part of the work that they are doing with us is to make sure that we understand what the needs of the HIV/AIDS affected clients are and I call this research, but we are basically trying to identify who those clients are and what they need.
Ms. MCCOLLUM. Could I get a breakdown in Africa of dollars going directly toward individual families versus how much in microenterprise is going toward identifying—I mean, I think the identification after this many years being in Africa working on this issue should be kind of self-evident. If you could get that to me.
And a little more on your new approach. I think what you are doing in Ethiopia sounds very exciting, but I would like more examples of how those dollars are being spent out of the total dollar amount.
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Thank you.
[The information referred to follows:]
WRITTEN RESPONSE RECEIVED FROM THE HONORABLE JACQUELINE E. SCHAFER TO QUESTION ASKED DURING THE HEARING BY THE HONORABLE BETTY MCCOLLUM
MICROFINANCE AND HIV/AIDS
Funding for microenterprise programs specifically designed to assist HIV-affected households and communities was approximately $5 million in each of FY 2004 and FY 2005. This amount captures programs that focus on innovations to address the impact of HIV on microfinance institutions and their clients, and to curb HIV transmission. It does not capture the resources going to programs such as FINCA Uganda's microfinance work or Opportunity International Bank of Malawi—programs that work in communities with high rates of HIV/AIDS and can count many HIV-affected people among their clientele.
Early work in microfinance illuminated the hazards of directly targeting people with HIV/AIDS because it so often results in stigma. It also made clear that not just individuals but whole households and communities suffer the effects of high rates of HIV infection. This is why we work in a number of ways to mitigate the impact of HIV on households and communities, and on the financial institutions that serve them. The work we support includes research, which I'll describe, and other methods as well.
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One method is what I've discussed, that is, identifying and promoting income generating activities for HIV-affected households. Low-labor, high-return activities such as honey production and urban gardening are particularly suitable for families in which adults' productivity may be compromised by illness.
Another method we support to meet the needs of HIV-affected communities is the method of combining life skills training and behavior change communications with microfinance services. In Tanzania, for example, the Private Enterprise Support Activities Project runs a training program, in conjunction with its rural outreach efforts, that integrates training in sustainable agricultural practices, nutrition, HIV/AIDS prevention, and skills for living with HIV. And in South Africa, USAID has supported the integration of HIV/AIDS prevention activities into all microenterprise and market linkage programs in order to begin to mitigate the wide-ranging economic problems fostered by the disease.
A third method we use to support HIV-affected communities is through developing financial products to meet client needs. In Rwanda, for example, the World Council of Credit Unions conducted research on the amount of money households spend on health care in order to determine what kinds of savings and insurance products and services are appropriate for those communities. They are testing a credit product to help families smooth out payments for health care premiums, which is intended to ease the burden on families but can pose risks for the microfinance institutions, since premium payment is not a productive activity—although it can help enable an infected household member to get the health care they need to continue working. We also support research in other countries on demand for microinsurance in order to assess whether such products, which are riskier in Africa than in many places, can benefit communities without compromising the stability of the microfinance institutions that offer them. This research also supports development of microinsurance products that could cover opportunistic infections, which most microinsurance products developed to date do not cover; and it has contributed to established guidelines for microinsurance products that can aid MFIs that are assessing whether and what types of microinsurance they may want to add to their offerings.
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Finally, in recognition of the ways that microfinance institutions can be affected by illness among their staff as well as among clients, who may default due to medical care costs or their inability to work, we support a training called Defining Options, which helps MFIs assess and plan for the impact of HIV/AIDS on their institutions. This training is designed for managers of microfinance institutions and focuses on working with HIV/AIDS-affected clients, forming strategic alliances with local HIV/AIDS support organizations to better serve clients, monitoring the financial impact of HIV/AIDS on an institution's portfolio, refining products to meet the financial needs of a changing clientele, changing workplace policies to address HIV/AIDS, and handling internal staff issues. In addition, we support the provision of technical assistance to MFIs that have undergone the Defining Options training and have created action plans for their institutions. Trainings for staff have been conducted in Ethiopia, Kenya, South Africa, and Mozambique. Trainings for trainers have been conducted in Uganda, Kenya, South Africa, Zimbabwe, Zambia, Mozambique and Ethiopia.
So, in response to your concern about research, I would argue that the research as well as the product development, institution strengthening, and life skills and behavior change activities that we support all benefit HIV/AIDS-affected families and communities.
Mr. SMITH. Thank you. Ms. Schafer, thank you so much for your leadership. Thank you for being a tremendous witness and we look forward to working with you going forward.
Ms. SCHAFER. Thank you very much, Chairman, Members of the Committee.
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Mr. SMITH. I would like to now welcome our second panel, beginning with Mr. Joe Mwangi-Kioi, who is the Director of Monitoring and Evaluation for the Grameen Foundation. He has over 20 years of experience in commercial banking and microfinance. Before joining the Grameen Foundation, he worked in finance for 15 years at the Commercial Bank.
We will then here from Gary M. Woller, who is President of Woller & Associates, an international development consulting firm specializing in microfinance and public policy analysis.
A former academic, Dr. Woller has published numerous articles and scholarly articles on development. He is the co-founder and editor of the Journal of Microfinance.
And then finally, we will hear from Ms. Susy Cheston, who is Senior Vice President of Policy for Opportunity International, advocating greater access to microfinancing and AIDS programs to help the poor. She is also Co-Chair of the Microenterprise Coalition. Ms. Cheston co-authored Empowering Women Through Microfinance and has written a number of articles on women and microfinance.
Mr. Mwangi-Kioi.
STATEMENT OF MR. JOE MWANGI-KIOI, DIRECTOR OF MONITORING AND EVALUATION, GRAMEEN FOUNDATION USA
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Mr. MWANGI-KIOI. Mr. Chairman and Committee Members, good afternoon. I am humbled by the honor given to me to testify on behalf of the Grameen Foundation and the Microenterprise Coalition, and I am grateful for both the opportunity to speak to you today and also to thank you for your past support for microfinance and microenterprise.
I hope that I can add emphasis to the united voice of the microfinance industry for increased support in response to the unheard ''silent screams'' of the poor in Africa and around the world who are crying out for our help.
Mr. Chairman, I would like to summarize my statement and highlight the important role of microfinance in fighting poverty and the great need for all of us to continue concerted efforts to allocate increased resources and action in support of microfinance.
In this respect, Mr. Chairman, I would like to share some of my personal experiences in microfinance. Eight years ago when I transitioned to microfinance from commercial banking, I was very impressed with the incredible impact of microfinance in transforming the clients' lives.
I remember clearly a poor kiosk operator who was a borrower in the SunLink project of Pride Africa in Nairobi, Kenya, my homeland. He was invited to the launch of another branch to share his story of how he had benefited from a loan of only $50, as new clients were getting their first loans of $50 each.
The man was so happy to share his story and he came smiling broadly from ear to ear and literally bouncing on his toes as he came to the podium. He eagerly narrated how his loan of $50 enabled him to purchase stock for his kiosk which he turned over many times in that month and he was able to repay his loan within 1 month and also increase his stocks and sales.
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He advised the new clients to utilize their loans well and emphasize that with his good record he qualified for a second loan of a hundred dollars.
The next story I recall is of a tea kiosk lady who also borrowed $50 in the same project. Within 18 months she had expanded her small shop and even opened a second location through increasing her loan size to $2,500 and investing in and growing her business for her family's future.
These real cases demonstrate the power of microfinance to increase the income generation capacity of the poor and confirm that microfinance is ''a hand up, not a hand out.''
Mr. Chairman, these are only two of literally millions, and I repeat, millions of success stories of microfinance in Africa and worldwide.
Unfortunately, these successes are but a drop in the ocean of poverty, and there is a compelling need to do more to expand access to microfinance by the poor.
Another example of the power of microfinance is Grameen Foundation's collaboration with the Lift Above Poverty Organization, or LAPO, in Nigeria. With the support of a grant of 1.3 million from USAID over a period of 3 years, Grameen Foundation assisted LAPO to build its capacity for expansion. This was done through institutional strengthening, covering operations, MIS, financial controls and training.
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I was the lead consultant on the LAPO assignment and must say I was impressed with their capacity to learn and to serve their communities.
In 3 years they were able to double the number of branches to 36 from 18 and increase outreach to 44,000 borrowers from 18,000.
LAPO currently has 56 branches with plans to further expand and reach 220,000 poor borrowers by 2008. This kind of success, Mr. Chairman, would not have been possible without USAID's support.
In addition to the traditional microfinance business that its clients operate, LAPO is also offering a farming loan product. This is especially important in Nigeria where 75 percent of the people work in agriculture. Today LAPO is the most robust successful microfinance institution in Nigeria.
As for impact of microfinance, Mr. Chairman, research such as Grameen Foundation's white paper titled ''Measuring Impact of Microfinance,'' published in December 2005, clearly shows that microfinance generates strong financial benefits and impacts the entire family of the borrower including increasing income for expenditures for housing, health care, nutrition and education.
Today the Grameen Foundation is working with 52 microfinance partners in 22 countries around the globe reaching 2.2 million borrowers and impacting 11 million people. Our strategic target is to reach 5 million new clients by 2008, impacting 25 million people.
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In addition to LAPO in Nigeria, the Grameen Foundation also works in Uganda and Rwanda. As part of our strategy in Africa, we plan to partner with at least 5 additional MFIs by 2007 and then add more by 2009 with plans to reach at least 1 million new clients in Africa by 2010.
To accomplish this goal and to enable all the Microenterprise Coalition members to impact poverty, significant resources will be required. For that reason, Mr. Chairman, I would like to respectfully encourage the Committee to ensure that at least 50 percent of USAID funding is targeted for the very poor, as specified by the act and that not less than 50 percent of the funding shall be directed toward nongovernmental organizations providing services directly to the poor.
In conclusion, Mr. Chairman, I would like to stress that microfinance is a very powerful poverty alleviation strategy. Recent statistics reveal that, by December 2004, 3,194 microfinance institutions reported serving more than 92 million who were poor when they joined their programs. Of these, 67 million were listed as poorest clients. This outreach of poorest clients is a dramatic increase of 776 percent, nearly 800 percent, Mr. Chairman, above 7.6 million poorest recorded to have been served in 1997. This is massive and very impressive progress and needs to be supported in every way possible. But even with these impressive numbers, we are only scratching the surface of global poverty. The current goal is to reach 175 million by 2015 and to do so will require significant resources. For this ambitious goal to be achieved, congressional leadership and support and collaboration with microfinance practitioners and networks like ours for continued focus on providing services to the poor and the poorest is essential. I conclude my remarks, Mr. Chairman, my verbal remarks and thank you very much for the opportunity to testify before you today.
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[The prepared statement of Mr. Mwangi-Kioi follows:]
PREPARED STATEMENT OF MR. JOE MWANGI-KIOI, DIRECTOR OF MONITORING AND EVALUATION, GRAMEEN FOUNDATION USA
Mr. Chairman and Members of the House Committee, good afternoon. I am truly humbled by the honor I have been given to appear before you on behalf of Grameen Foundation and the Microenterprise Coalition and I am grateful for the opportunity to testify today. I hope that I can add more emphasis for increased support for microfinance in response to the united voice of the microfinance industry and the unheard ''silent screams'' of the very poor that we serve in Africa and worldwide through microfinance.
Mr. Chairman and Ranking member Payne, I am excited to have this opportunity to testify as I wish to share some real-life and wonderful experiences to illustrate the key contribution microfinance is making toward poverty alleviation in Africa where there is perhaps the greatest extent of poverty and need for action. Furthermore, I would like to highlight the work of Grameen Foundation and similar microfinance networks in poverty alleviation and to thank you and the Committee and also USAID for the outstanding past support you have given to microfinance and to underscore the importance of further collaboration to ensure full implementation of the Microenterprise Results and Accountability Act of 2004.
Mr. Chairman, I would like to express to you and the Committee our deep gratitude for the leadership that you have shown not only in support of microfinance but also to develop initiatives to address the related human rights and the HIV/AIDS crises. These efforts are benefiting the poor by giving them hope of shaking off the yoke of poverty thereby realizing a life of dignity and freedom. I am sure I speak for all when I say that the microfinance industry would like to do everything possible to ensure success of the cause you are promoting.
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Eight years ago, when I transitioned to microfinance from a career in commercial banking, I wondered how an organization could sustainably lend to the poor who did not have collateral and could therefore not qualify or even be able to participate in the formal financial sector. But I learned quickly that not only are the poor bankable, but that lending to them employing microfinance methodologies proved them to be better customers than traditional commercial bank borrowers. This was evidenced by the high rates of repayments of up to 98% in the microfinance sector compared to between 60% and 70% in the commercial bank sector. And within three months, I was convinced that this is a sector I wanted to participate in and especially so when I saw the joy and gratitude of the clients at just being given a very small loan of even as little as $50 which they appreciated for opening the door of enterprise for them.
The first real-life story and experience of a client that I want to share with you is of a borrower who was operating a small kiosk selling miscellaneous provisions such as bread, milk, maize meal, small bottles of Vaseline petroleum jelly, etc. Being a second loan level client of the SunLink project of PRIDE AFRICA in Nairobi, Kenya, he was invited to the launch of one of our other branches where new clients were getting their first loans of $50 each. He was asked to share his experience with the loan of only $50 and how he utilized it in his small business.
I must say I had never seen someone look so happy at being given the opportunity to tell his story. He came with a broad smile from ear to ear and was so excited to share his story that he was literally bouncing on his toes as he came up to the podium. He narrated how he had utilized the amount of the loan to buy a carton of Vaseline. He explained that within two days his carton was all sold out and with the proceeds he invested in another carton. And he explained how turning that loan amount over and over within the month he was able to earn more than enough to pay for the loan and also increase his stocks. He related how he was so grateful to PRIDE AFRICA for having given him the opportunity of a small loan when no bank would. He even advised the new loan recipients to utilize their small loans well to benefit like he did. And he added emphasis to the fact that when his loan was repaid because he was prompt in his repayments without missing his installments he was able to qualify for the next level loan of $100.
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The next real-life story also is from Kenya where, as a part of the same project, a tea kiosk lady also borrowed $50 to support growth of her small business. She narrated how with that loan amount she was able to purchase supplies so that she could serve a larger number of patrons during the tea and lunch breaks. She too was able to utilize that first loan to achieve higher earnings and then when she paid off that loan she immediately qualified for the next loan level of $100. She utilized her loans well and expanded her kiosk to its maximum capacity; but she was not satisfied to stop there. She found another place where she could open another kiosk and did so. By the time I left PRIDE AFRICA one and a half years later, she was applying for a loan amount of $2,500. This case clearly demonstrates the power of microfinance to improve a poor borrower's earnings by moving her from capacity for only $50 to an amount fifty times more within a period of 18 months. I would say that is quite impressive.
These are just two of the literally millions, yes millions, of success stories of microfinance clients across Africa and around the world getting the opportunity of improving their earnings and lifting themselves and their families and indeed their communities out of poverty permanently.
Unfortunately these success stories are but a drop in the ocean of the poverty that has devastated many in the African continent. Recent statistics published by the World Bank reveal that Africa receives only 6% of the total dollar investments of donor funds although the recipients comprise 21%. There is therefore a compelling need to do more in the continent through microfinance which has been proven to be an effective solution to alleviating poverty, generating powerful returns beyond income and employment including increased expenditures for housing, health, nutrition, and education that supports transformative development at the household level. Our Board of Directors, which includes one prominent African and many others who are deeply concerned about Africa, has indicated strong interest in us applying the microfinance strategy more broadly on this continent as part of our response to the poverty crisis there.
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To this end we at Grameen Foundation have formed a task force as a first step towards increasing and enhancing our work in sub-Saharan Africa. We already have a successful partner in Nigeria, the Lift Above Poverty Organization or ''LAPO'', an indigenous NGO. Our work with LAPO was funded by USAID under the IGP grant program which spanned three years from 2003 to 2005. Living in Kenya (my home country) at the time, I served as the lead consultant for Grameen Foundation on this project and was able to see a major transformation in the performance of LAPO over the course of three years. (Towards the end of this project I joined Grameen Foundation as director of their global monitoring and evaluation unit.)
Thanks to USAID's support, GF was able to achieve specific targets related to institutional strengthening, automation, outreach, operational and financial self sustainability, portfolio at r