FROM THE OFFICE OF PUBLIC AFFAIRS

Good evening.

It is my pleasure to join you tonight on the topic of microfinance, and to share with you my own observations, as I’ve witnessed the use of microcredit in developing nations around the world.

I like to consider microfinance in the context of a vision of a world that works better -- a world where people everywhere enjoy a rising standard of living -- higher incomes that come from good jobs for everyone who wants one.

As I have traveled the world over the last quarter century, both as a leader in the private sector and in the public sector, I have been struck by two things.  First, it is clear that human beings everywhere, with the proper education, training, and a stable social environment, can and do perform value-adding work at world-competitive levels.

That means they can earn compensation that gives them the capacity for independence and allows them to pursue the good life for themselves and their families.  Human beings everywhere have in them the capacity to create a high standard of living.

My second observation is this: in spite of a common potential for achievement, the disparity of living standards among the world's people is so vast it is beyond anything we could imagine.

Why is it, if all people have the capacity to create a good life that so many billions live today with little hope for what we know is possible?  I believe this is the question for us and our time.  It is a question we can answer.  It is a problem we can solve. 

I know that those of you attending this summit share my conviction.  I know you also agree that on a fundamental level, sustainable systems for forming capital and supplying it to individuals with the enterprise to put it to work for their families and in their communities, whoever and wherever they may be, is part of that solution.

If you examine the economic history of the last 300 years it is easy to conclude that there is no absolute limit on world economic product.  That is, economic prosperity is not rooted in some people getting more by taking someone else's share.  Rather, the world economic pie is limited only by our imagination.  Human beings applying their imaginations within a framework of social institutions, infrastructure and resources create value. 

A necessary ingredient  for value creation is a means of  providing capital to those who seek to make new ideas into reality.  That is, to entrepreneurs.  It doesn’t matter if the new idea is building a satellite-linked data processing center in Accra, or a putting a dairy cow in an empty barn in Kosovo. 

In developing economies, and even in the more developed world, microfinance plays a crucial role in delivering seed capital to these entrepreneurs.  What is more, microfinance institutions add value well beyond the money they contribute.  They provide essential advice on how to start and operate a business – information that is difficult to come by in communities that are predominantly agrarian, and just beginning to enter modern capitalism.

Microfinance organizations have extensive knowledge of basic business practices, management, local regulations, and the key factors in past business successes (and failures.)  And as I have said, economic growth is first and foremost about the deployment of ideas.  Microfinance, at its best, is about deploying ideas about how to start, manage, and scale-up micro- and small businesses and to help those in poverty become self-employed.

As these new entrepreneurs succeed, they diversify the local economy.  Often businesses such as restaurants, general stores and clothing-makers are the first non-agricultural employers in their communities.  They are the seeds for local economic independence, specialization, comparative advantage in trade, and long-term growth.  They create jobs that keep young people at home, where they would otherwise move to over-crowded cities – or other countries – in search of work.  They launch a virtuous cycle of growth and employment.

I have witnessed the success of these programs in recent visits to developing nations, and the real world results are inspirational.  For example, in Uganda I met a woman named Lukia Ssemonobe, who opened a restaurant with micro-credit funding and a lot of hard work.  Lukia lost her husband a dozen years ago, and had to feed four children without income.  Indomitable, she borrowed $50 from the local branch of a microfinance NGO, and used that and subsequent micro-credit loans to build two businesses – a restaurant and then a tailoring shop.  Now she employs about a dozen of her neighbors, supports her family, owns a home, and has become a leader in the community. 

Small-enterprise lending, in amounts a bit larger than micro-finance, has also proven successful in bolstering entrepreneurship and job creation.  In fact, one goal of microfinance is to see the self-employed become small business owners, employing neighbors and creating greater prosperity.  I’ve seen the growth of small enterprises that have benefited from these loan programs.  In Bucharest, Romania, I visited a furniture factory employing 50 people.  The company took a $35,000 loan from the European Bank for Reconstruction and Development last year and used it to purchase productivity-enhancing equipment.  The owners expect the company to grow by 40% this year.

In Russia, ongoing free market reforms necessary to enter the World Trade Organization are creating a more welcoming environment for entrepreneurs, investors, and employment.  In the Russian city of Nizhny Novogorod, I toured a modern printing plant that could compete with any in the world.  Founded by two brothers and a sister, with help from the EBRD’s small business development program and other micro-credit funding, the company employs 120 people and supplies most of Coca-Cola’s labels in Russia.

The success of the EBRD program proves that with adequate capital and the right training in lending techniques, new financial institutions can profitably serve small businesses.  This model can be extended to other parts of the developing world.

With this goal in mind, we have been working with the World Bank to create a small business lending program for Africa.  The program would make investments in and loans to existing local African banks and would sponsor the creation of new local banks, creating a pool of capital these banks would then lend to small businesses.  The program would also provide training to local bank staff, so that they have the knowledge and skills to serve small businesses profitably.  The loans generated by the program will allow African small businesses to expand their operations, invest in capital equipment, and finance imports and exports.

Lukia, the woman I met in Uganda, demonstrates what’s possible with micro-credit support.  As she has grown her enterprises, she’s become a small business owner, and a small business development lending facility in Africa will ensure that she and others like her will continue creating jobs in their communities.

Whether in the world’s largest economies or in the smallest, in an industrial conglomerate or a small-town tailoring shop, jobs are created and lives are changed one at a time, person by person.  Micro-credit programs enable individuals to lead that change, make a difference in their lives, their communities, and ultimately, their economies.  In fact, I believe that programs that target small businesses can often make a much bigger difference than investments in giant projects, because small businesses are homegrown, and develop the skills and talents of local people.

Access to capital and good business advice are not the only elements required for economic development.  Lasting economic development also requires a stable social environment that includes the clear rule of law, enforceable contracts, and protection from extortionists and other forms of capital thieves.   It requires a government – a leadership – that rules justly, encourages economic freedom, and invests in its people.  It requires clean, reliable water supplies, effective, broad-based education, and good health care practices.  For a truly vibrant economy these conditions are not discretionary. They must be the center of attention for sovereign governments and for any serious development agency or effort.  President Bush has established a new foreign assistance program – Millennium Challenge Account – that will reward nations who are taking positive steps to create an atmosphere where their people can succeed.

With the understanding that microfinance is only one important element in this mix, the United States Government, under the leadership of President Bush, has made a commitment to promoting microfinance as a means of private sector-led growth and poverty reduction.

Our ongoing experience with microfinance has produced certain best principles for success, and as we work with all of you to expand these programs and extend their reach, we intend to abide by these principles.

Foremost is that microfinance programs must become sustainable.  Microfinance institutions should grow to stand on their own, without continuing donor support.   There is a range of institutional models that can be used -- ranging from NGOs to commercial banks -- but all should have accountable governance structures and sound business plans, with transparent reporting and oversight. 

One example of a microfinance institution successful along these lines is a dedicated microfinance bank in Ukraine, established by the European Bank for Reconstruction and Development in 2001, which I recently visited.  The U.S. contributed $4 million to the operation, $2 million of which has supported the establishment of the bank and training for loan officers.  In 18 months, the microfinance bank extended loans totaling $111 million.  By the end of 2003, the Donetsk branch alone plans to make 7,500 loans totaling $55 million.

From a broader perspective, the success of individual microfinance institutions depends heavily on the leadership, financial, regulatory, and business environment of the countries and communities where they operate.  Entrepreneurs seeking capital to invest in their ideas are best served by a diverse and competitive financial sector, of which micro-finance is a small but critical part.  Healthy banks are also crucial, both to gather savings that can be a source of new investment capital and to serve small enterprises as they grow beyond the means of micro-finance institutions.

Successful development programs are those that help unleash the potential present in all human beings, and allow them to drive economic growth through private enterprise.  Microfinance is one of the most promising grassroots innovations in developing economies because it does just that – it gets capital directly to individuals who are ready to turn good ideas into real value.  Just as important, it gets real-world business knowledge and wisdom to people who can use it to succeed. 

Person by person, microfinance can raise the quality of life for families in communities that for too long have been denied the fruits of the modern global economy.  The United States is committed to supporting the best practices in microfinance around the world. 

Thank you.