MICROCAPITAL STORY: US Secretary of State Designate Hilary Clinton Refers to Obama's Mother, Ann Dunham; Implies Microfinance Would be an Important Part of her Agenda

At a confirmation hearing before the United States Senate Foreign Relations Committee, US Secretary of State designate Hilary Clinton, while speaking briefly about President-elect Barack Obama’s mother, Stanley Ann Dunham, implied that microfinance would be an important part of the Obama administration’s agenda. Senator Clinton noted that Ann Dunham had worked on microfinance in Indonesia and that she had been scheduled to attend a microfinance forum at a United Nations conference in Beijing in 1995, which Ms. Clinton attended. Ms. Dunham, however, could not make it to the conference as she was diagnosed with cancer that eventually claimed her life few months after the conference. MicroCapital recently reported on Ann Dunham’s work as a researcher and practitioner of microfinance in Indonesia and her philosophy on the empowerment of women as a means to address poverty. Hilary Clinton also expressed similar sentiments at the hearing where she stated how, through her work on microfinance around the world, she had ‘seen firsthand how small loans given to poor women to start small businesses can raise standards of living and transform local economies’.

To analyze the United States’ involvement in microfinance, one has to factor its efforts both within the country and abroad. According to the US Agency for International Development (USAID), the United States Government (USG) has had a long history of engagement with civil and business communities in promoting microfinance for the past nearly 30 years. The USAID, an independent federal government agency headquartered in Washington D.C, is the principal agency through which the US Government extends aid and assistance to several developing and under-developed countries across the five regions of Sub-Saharan Africa, Asia, Latin America and the Caribbean, Europe and Eurasia and the Middle East. The US Government’s microfinance programs support a diversity of partners numbering over 500 in more than 50 countries. Partners include organizations like commercial and state banks, credit unions, non-governmental organizations, non-bank financial institutions (NFBI), agricultural input suppliers and retailers. USG microfinance efforts primarily work with the private sector, engaging global corporate organizations such as Hewlett Packard, Visa, Citibank and Deutsche Bank. In recent years, through USAID, the United States Government has been providing more than USD 100 million per year in grant funds. In 2007, USAID had a foreign assistance budget of USD 24.7 billion and provided USD 193 million in funding for microenterprise development through 184 new and existing grants, cooperative agreements, and contracts in 61 countries. Overall, the US Government has invested over USD 2 billion in microenterprise development up to the year 2004, as per the latest cumulative data available. This includes a total investment of USD 636 million in microfinance with USAID-supported MFIs serving nearly 5.6 million loan clients.

Comprehensive data on microfinance inside the US as a whole is scare with many US MFIs measuring and tracking their own performances, according to a statement by the Federal Reserve Chairman, Ben Bernanke. In a speech at the ACCION Texas Summit on Microfinance in the United States, he says, ‘Credit is only one part of the microfinance package in the United States’. Explaining the reason why, he states that several factors like the complexity of the US markets for financial services, licenses and zoning laws for even very small business lead to the need for greater financial management skills than are typically needed in developing countries. Further, the presence of other alternatives to microcredit in the US such as credit cards, etc reduces the need for a central focus on microcredits. Hence, US MFIs focus more on offering education, training and other services to nascent entrepreneurs than providing microcredits. Nearly 60 percent of the US small businesses sector is comprised of enterprises supported by microlenders.

In October 2007, United States President-elect Barack Obama was quoted as saying, “We need new approaches to help people to help themselves. The United Nations has embraced the Millennium Development Goals, which aim to cut extreme poverty in half by 2015. When I’m president, they will be America’s goals.” In this regard, Obama has pledged to double (p2) the US Government’s annual investments in foreign assistance to USD 50 billion by 2012 to ‘help the world’s weakest states build healthy and educated communities, reduce poverty, develop markets and generate wealth’. In addition, Obama also said (p4) that his administration would provide initial capital for a Small and Medium Enterprise (SME) Fund ‘building on growing evidence that microfinance works’.

According to a World Bank report, governments play a critical role in the functioning of the microfinance sector: by setting policy for the microfinance industry (most frequently through interest rates), providing grants to local and foreign NGOs/ MFIs and lending directly to individual beneficiaries, groups or nations. The report states that the nature and degree of government involvement should evolve with the changes in the microfinance sector, otherwise the government’s involvement could lead to negative effects. It says that ideally, governments should exit (p9) the microfinance sector, failing which they should at least lend only at commercial interest rates providing full disclosure of all their microfinance activities and budgets. This would eliminate any unfair competition from public institutions. The World Bank calls for prudent government supervision of MFIs which take deposits from its borrowers, leaving the non deposit-taking MFIs to be ‘disciplined’ by the market. The World Bank also emphasizes (p10) on the need for governments to refrain from placing interest rate caps, stating that the net result of such caps is a contraction of financial services available to the poor. Some best practices for government involvement in microfinance have been chalked out by the World Bank. Governments should focus on macroeconomic stability (p18) and overall growth of the economy. Inflation should be kept to a minimum as high inflation makes it difficult for MFIs to mobilize resources and expand service. Further, MFIs should also be required to provide full disclosure (p20) on their use of public funds.

By Bharathi Ram, Research Assistant

Additional Resources:

New York Times: Clinton pledges tough diplomacy

Microcapital.org:

Nov3, 2008: Barack Obama, Roots in Microfinance

World Bank: Impact of Government Regulation on Microfinance

Ben Bernanke speech at the ACCION Texas Summit on Microfinance.