Growth in Women’s Businesses: The Role of Finance

The time is ripe for a wider discussion on gender and finance: evidence of the gains from economic empowerment of women is mounting rapidly - households, firms, farms, communities, and whole economies perform significantly better when women have opportunities to raise their productivity. It is practically tautological that growth will accelerate when half the population is more productive. The fundamental question at this point is: what factors are holding women back? It is surprising that we have so few empirically well-grounded answers.

To kick-off this blog series on gender and the role of finance, I will focus on women entrepreneurs for three reasons. First, because of their importance—economies cannot afford the underrepresentation of women entrepreneurs among small- and medium-sized enterprises (SMEs) that we see around the globe. Second, because there is good reason to believe that access to financial services matters for the fate of women’s business start-ups and performance. And third, because women’s entrepreneurship is a focus of our recently launched Women’s Economic Empowerment initiative, through which we are testing finance, training, and market access interventions to see which combinations of products and services best enable women to reach their full economic potential. We are excited to share some early findings of the initiative here.

A woman works at her small tofu shop

The global entrepreneurship gap

Across the globe, the share of women who become entrepreneurs is significantly below that of men. According to 2012 Global Entrepreneurship Monitor (GEM) data, women entrepreneurship rates equal or exceed male rates in just seven countries. Interestingly, the size of the gaps is not correlated with regional income levels. The highest gaps are in Europe, Middle East and North Africa, and Asia; the lowest gaps are in Sub-Saharan Africa and Latin America and the Caribbean (LAC).

In LAC, the data suggest that women are strongly motivated to start businesses. According to GEM data, 60% of women in LAC believe they have the right skills to start a business, compared to 34% in OECD countries. Twenty-three percent of women in LAC intend to start a business in the next 3 years, compared to 7% in OECD countries. Fear does not hold LAC women back: fear of failure attitudes are not correlated with women’s nascent entrepreneurship rates. Nor should one conclude that necessity drives most women to start businesses - in all 13 countries in the LAC sample, a majority of women start businesses to respond to opportunity.

Why then do relatively few women-owned businesses emerge from the microenterprise level to become SMEs? Searching for the answer to this question led us at the Multilateral Investment Fund (MIF), in collaboration with the Economist Intelligence Unit, to launch a new country scoring tool in July 2013: the Women’s Entrepreneurial Venture Scope (WEVentureScope) examines and ranks 20 countries in LAC based on the environment for women entrepreneurs as they start and grow businesses: (1) the business environment, (2) macroeconomic and security risks, (3) access to education, (4) access to social services, and (5) access to finance.

It was a surprise to us that, for a region with relatively well developed capital markets, the biggest regional weakness was access to finance, particularly formal financial products. In most countries, less than one-third of women had saved money in a financial institution in the past year or made monthly deposits and withdrawals. On average, banks finance only about one-fifth of working capital and equipment needs of women-owned SMEs.

It’s not all about credit

Strong emphasis is now rightly placed on savings as a critical tool for households, particularly women-headed, to weather shocks and fund core services like education and health. But we are also seeing evidence from our projects that more access to savings would have a material impact in helping women start and grow businesses. In a study of 6,000 beneficiaries of a MIF project in Colombia, for example, we find that men relied more than women on savings to start their business. Forty-five percent of men used savings to start their business, compared to only 28% of women, consistent with other evidence that low-income women have lower levels of savings than men. Thirty-four percent of women received a loan from family or friends to start their businesses, compared to 17% of men. The implication is that the size and growth of women’s businesses are hobbled from the start by the necessity of relying too much on credit.

We know that women business owners have unserved and underserved credit needs, but we do not know how much of the credit problem is on the supply side and how much on the demand side. We observe that some women are reluctant to walk into the bank because they doubt they will be treated as valued customers once inside. Bankers, such as the members of the Global Banking Alliance for Women, tend to focus on more effective marketing strategies that target a potentially profitable underserved market. But there is also evidence that women are disproportionately disadvantaged by traditional credit scoring models that rely on credit history and collateral. The MIF and the Structure Corporate Finance Group of the IDB are together supporting LAC banks that are testing a radically new credit scoring model, psychometric testing. This model analyzes ability, intelligence, and character traits to assess creditworthiness. Evidence from Africa suggests that it generates significantly fewer rejections of credit worthy women business owners than traditional models.

Finally, we are seeing some evidence that there may be a case for special credit products for women in particular circumstances. For example, take the results of interviews with men and women rural clients that Women’s World Banking and Fundación delamujer conducted in Colombia with MIF support. They found that gender differences in ownership of assets impacted women’s ability to access credit.

Generally, men own the land and focus on farming, while women tend the livestock and generate income by producing milk and cheese. By understanding these differences, Fundación delamujer was able to develop products tailored to women’s specific needs and available collateral.

The challenges faced by women entrepreneurs are a key piece of the puzzle that need to be considered when looking at the wider context of economic empowerment of women and the role that finance can play. I hope that this blog series will highlight new ideas, insights and approaches to the bigger questions around how to make financial inclusion work for half of the world’s population.

------Nancy Lee is General Manager of the Multilateral Investment Fund (MIF) at the Inter-American Development Bank Group