Creating an Enabling Environment for Microenterprise Development

Madame Chairwoman, honorable ministers, distinguished guests, thank you for this opportunity to present our report on "Creating an Enabling Environment for Microenterprise Development." I applaud the very able leadership of our host, the Government of Mexico, and in particular the National Institute of Women, in placing microenterprise on the APEC agenda. The commitment of President Fox to promoting microenterprise as a tool to share the benefits of globalization, enrich the lives of those less fortunate, and empower women, should spur us all to action.

APEC’s decision to create a permanent Subgroup on Microenterprises in the Small and Medium Enterprises Working Group will help us toward this goal. It demonstrates a commitment to economic prosperity for all people in APEC economies. A very high proportion of enterprises in developing economies are microenterprises, and the vast majority of these are owned and operated by women. It is noteworthy that the world’s economic leaders are giving serious consideration to this significant sector of economic activity. By bringing this vast sector into the formal economy, the door will be opened for millions who would otherwise be excluded from economic progress.

The United States Government shares this commitment to enhancing the role of women at all levels of the economic spectrum -- from microenterprises run by just one woman to large corporations that employ thousands. Enabling women to succeed in the business world is a priority for us both at home and abroad. From greater access in education to educational exchanges to encouraging corporate best practices that give women an equal opportunity for success, our support for women is steadfast. Microenterprise development is just one component of our overall vision for empowering women, but it is on that point that I would like to focus today.

According to World Bank estimates, 90% of the population in developing economies has no access to formal financial services. About 2.8 billion of these people live on less than $2 a day and rely on unstable sources for credit, savings, and remittance services. Moneylenders charge them a service fee to hold their savings, and as much as 20 percent a day interest for loans. In recent years, non-governmental organizations, governments, donors, and others have been promoting microfinance for this informal economy because of the significant promise it shows for poverty alleviation. My own government is so persuaded of the benefits of microenterprise development that we have been supporting such programs for more than two decades. Over the last several years, our annual investment has topped $150 million, with close to $26 million in microcredit programs funded in the APEC economies last year alone. I am especially pleased to note that women are consistently at least 70% of the clients for USAID’s microenterprise development programs.

Microfinance organizations extend small loans and technical assistance to the poor for self-employment projects that generate income, allowing them to care for themselves and their families. Microlending organizations operate worldwide, providing services to clients who are typically women and who cannot meet traditional collateral requirements. Although the loans are as small as $50, microfinance is good business because repayment rates have consistently exceeded 90 percent over two decades of operation.

But numbers do not tell the whole story of the promise of microenterprise development. Before I summarize the conclusions and recommendations of our report, I’d like to take a few minutes to talk about how development of the microenterprise sector is impacting individual lives and why I believe that it is an important issue for all APEC economies. I want to share a story about a microentrepreneur that members of my delegation met here in Mexico a few weeks ago, followed by a story from my own country.

Isabel lives in Cuernavaca, Mexico. She is 43 years old, a single mother, and the sole support for her two children and a nephew. Isabel runs a tiny food stall on a sidewalk adjoining a taxi stand near her home. Before starting her microenterprise, she worked in factories where she paid almost half her income in transportation costs to get to and from work. After an illness left her homebound, she began cooking for drivers from her neighborhood taxi stand. Without savings or collateral, her only option was to borrow working capital from a local moneylender who charged her 10% interest per day. As a result, her daily profits never exceeded the minimum wage. Then Isabel learned about the Foundation for International Community Assistance, better known as FINCA, a non-governmental organization that provides microloans to impoverished women around the world. Since joining a FINCA Village Bank, her daily sales have tripled, and her capital costs have declined. She now makes double the daily minimum wage, has been able to purchase assets to sustain her business and -- most importantly for her family’s future -- she has started a savings account.

But access to financial services is not just an issue for people like Isabel. In the United States, over 700 microenterprise development organizations provide loans and technical assistance as part of an economic development strategy for low-income communities. In 1991, the U.S. Congress authorized a Microloan Program within the U.S. Small Business Administration to serve individuals without access to formal financial institutions. This program has since provided loans and grants to 170 community-based, non-profit organizations that have in turn made more than $180 million in microloans.

One of the individuals who benefited from these programs is Jeanne from Cleveland, Ohio. Jeanne was an unemployed single mother relying on government assistance to feed and house her and her two small daughters. She wanted to start her own business but had no cash, collateral, or business track record, and was unable to access bank financing because of poor credit. What she lacked in qualifications, however, she made up for in tenacity and entrepreneurial spirit. Building on the experience she had gained in caring for her elderly parents, she decided to start a home health care agency and was able to secure a $3,200 (U.S.) loan to start her company. After 8 years in business and a few more loans, Jeanne’s company is now housed in its own office complex and employs over 50 people. Jeanne is now financially secure and has purchased her first home.

What we see from these stories is that success is largely about access -- access to the resources individuals need in order to grow their businesses and become productive members of their communities. It’s about linking these individuals to financial systems and business development services that level the playing field for them. It’s about shared prosperity in a globalized world. But, in order to get there, we need to build capacity in the institutions that serve them.

By creating an institutional home for the microenterprise issue, APEC officials have reaffirmed their commitment to a more inclusive world economy where all people have an opportunity to succeed. This decision is the culmination of a yearlong effort to demonstrate the significance of the Microenterprise Sector to economic growth and trade in APEC. The purpose of the technical paper that we have tabled is to summarize the lessons learned, conclusions, and recommendations derived from these five major APEC events. The paper was developed in partnership with the Mexican chairs of 5 high-level APEC meetings that featured microenterprise this year.

The first section of the technical paper on "Small Business in Trade in the APEC Region" identifies opportunities and constraints for microenterprises engaged in trade. It is based on a series of case studies from developed and developing economies, including Australia, Japan, the United States, Malaysia, Mexico, and the Philippines. A second section on microbanking discusses the importance of providing appropriate risk-based regulation and supervision of financial institutions so they can provide credit, savings, and remittance services to the vast numbers of people who are currently outside the formal financial system. A third section on the outcomes of the High Level Meeting on Microenterprises highlights the fact that microenterprises represent a significant share of the economic activity in APEC economies and identifies the need for capacity building and technical assistance for the emergent Microenterprise Sector.

In the fourth section, the Women Leaders Network explores the important roles of the government, the commercial sector, non-governmental organizations and microfinance institutions in advancing the field of microfinance and recommends that all women in APEC economies have access to formal financial services. The final section explores the link between sustainable development and commercial microfinance that was established in a technical paper presented at the Small and Medium Enterprises Ministerial Meeting.

The paper concludes that microlending benefits not only borrowers for whom loans provide a key to financial independence, but also lenders who enjoy a stable source of revenue from such transactions. When real interest rates are used and borrowers transaction costs are included, it is normally far less expensive to borrow from a commercial microfinance institution than from a moneylender. Low-income households, when provided access to commercial microfinance, credit, savings, and other financial services are often able to expand and diversify their business enterprises and, gradually, to increase their incomes. When this occurs, benefits extend to the entire family -- children eat more nutritious food and are often able to attend school, a room is added to the house, medicine is provided for an elderly parent, and self-confidence increases.

Moreover, financially self-sufficient, microfinance institutions -- including, and in some cases led by, those in APEC economies -- have proven for nearly two decades that providing large-scale financial services can be both economically and socially profitable. It has been amply demonstrated that even in exceptionally severe country and regional economic crises, commercial microfinance institutions that operate on a commercial basis can continue to serve millions of poor clients while remaining solvent and profitable.

But unfortunately, the demand on the emerging microfinance industry currently far outstrips the supply. Today, institutional and capacity constraints limit microlending so that it reaches only 2%-5% of those who need a microloan to start or grow their business. In order to reach the millions of people who need microloans and other financial services, microfinance organizations must transition to commercially viable institutions that can mobilize savings, access commercial finance, and achieve full cost recovery through appropriate interest rates. They must become integrated into the formal financial sector.

Here, APEC economies have a substantial role to play toward creating an enabling environment for private sector-led microenterprise development. Therefore, our report lays out some recommendations to help countries facilitate the expansion of their microfinance sectors. We encourage governments to review and revise where necessary the policies and regulations that will facilitate the development of regulated commercial microfinance. Additionally, microfinance development can be spurred by the provision of incentives to private banks and other financial institutions for learning and entering the business of microfinance, training managers in commercial microfinance, developing products and services appropriate for the microfinance market, and opening locations in areas with substantial unmet microfinance demand. Microfinance subsidies should be limited to activities that build the market infrastructure for a sound financial system, disseminate information about commercial microfinance, that develop financial tools, that train managers and staff, and that provide capacity-building initiatives for the most promising institutions entering the microfinance market.

Moreover, disseminating information widely about the underlying principles, international best practices, and specific tools and techniques of successful commercial microfinance institutions are important contributions that governments can make. Finally, to make these recommendations work, it is pivotal that high-level political will required for the development of large-scale commercial microfinance be maintained.

In closing, I would like to quote an old Mexican saying that, "An ant on the move does more than a sleeping ox." I think we do well to remember that proverb here. Though the size of microentrepreneurs may be small, their potential is great -- to better their lives and the lives of their families and ultimately to improve the life of their country. But the key to reaching that potential is the level playing field that microenterprise support provides. I encourage all APEC members to facilitate microenterprise development so that all of their citizens -- but particularly their female citizens -- may reach their full potential.