Author: International Finance Corporation
Site of publication: International Finance Corporation
Type of publication: Report
Date of publication: October 2011
Chapter 1: Contributions of Women Entrepreneurs in Economic Development
Women entrepreneurs make significant contributions to their economies. In many developed economies, women are starting businesses at a faster rate than men and are making significant contributions to job creation and economic growth. In the United States, for example, women-owned firms are growing at more than double the rate of all other firms (23 percent and 9 percent respectively) and have done so for nearly three decades. They contribute nearly $3 trillion to the U.S. economy and are directly responsible for 23 million jobs. New data projections also suggest that future job growth in the United States will be created primarily by women-owned small businesses. In Canada, women own 47 percent of small enterprises and accounted for 70 percent of new business start-ups in 2004. Women’s significant contribution in these developed economies exemplifies what many developing countries can aim to achieve by increasing opportunities for women entrepreneurs.
In many developing countries, women are also making a significant economic contribution. It is estimated that there are about 8 to 10 million formal SMEs with at least one women owner in developing countries. These businesses are contributing to economic growth and poverty reduction. For example, a survey of 1,228 women businessowners in the Middle East North Africa (MENA) region found that women are running well-established businesses that are generating revenues well over USD $100,000 per annum, comparing favorably to the number of women-owned firms in the United States generating similar amounts. Although the average growth rate of women businesses in emerging markets is significantly lower than that of men, their growth potential is becoming evident. In East Asia, for example, women-owned SMEs have shown a consistent growth trajectory and in some countries are growing at a faster rate than businesses owned by men.
Entrepreneurship also provides another means to generate income and reduce inequalities among men and women. In transition economies, characterized by limited growth in employment (even during high-growth years), entrepreneurship is important from the perspectives of job creation, private sector development, and wealth creation. Women’s participation in entrepreneurship can help expand these economies while also leading to less inequality in society. For example, in Japan it is estimated that if the country’s 60 percent female employment rate in 2009 could match the 80 percent rate among men, the country would have 8.2 million more workers to replenish its rapidly aging population and raise its gross domestic product by as much as 15 percent.
Economically empowered women are major catalysts for development, as they usually re-invest their money in their children’s health, nutrition, and education. Reducing gender inequality in resources and improving the status of women is thus “smart economics.” There is mounting evidence to show that women’s economic activity results in better bargaining power in the home. More bargaining power for women not only benefits the women but also results in greater investments in the health and education of children, thus promoting human capital of the next generation and therefore improving the potential for economic growth.
External financing and, in particular, the availability of business loans is especially relevant for women’s new ventures as they have less access to property or resources such as employment. On the other hand, empirical evidence shows that providing better financial access to the non-poor small entrepreneurs can have a strongly favorable indirect effect on the poor. Gender differences in access to financial services can thus potentially have negative repercussions not only for women entrepreneurs but for the overall economy.
Economically empowered women are major catalysts for development, as they usually re-invest their money in their children’s health, nutrition, and education. Reducing gender inequality in resources and improving the status of women is thus “smart economics
Although these numbers are impressive, women entrepreneurs are constrained by barriers such as limited access to finance, which impedes both growth and development. Women entrepreneurs are more likely to cite access to finance as the first or second barrier to developing their businesses. In addition, women tend to have less access to finance and other resources than men, and face issues of rights and voice. Such differences create a distortion and often result in a situation where women’s economic activities are under-resourced and undercapitalized, reducing the overall aggregate output and inhibiting economic growth.
Chapter 2: Non-Financial Barriers to Expanding Women’s SMEs
Legal environment
Smart regulation is key to enabling women to start and operate their businesses. The World Bank study Voices of the Poor asked 60,000 poor people around the world how they thought they might escape poverty. The answers were unequivocal: women and men alike pin their hopes on income from their own business or wages earned in employment. But in these economies, up to 80 percent of economic activity takes place in the informal sector. Firms may be prevented from entering the formal sector by excessive bureaucracy and regulation. Where regulation is burdensome and competition limited, success tends to depend more on whom you know than on what you can do. But where regulation is transparent, efficient, and implemented in a simple way, it becomes easier for any aspiring entrepreneurs, regardless of their connections, to operate within the rule of law and to benefit from the opportunities and protections that the law provides.
A fundamental element in encouraging entrepreneurship is the right to access and control property. This has been recognized in the literature since the time of Adam Smith. It provides the incentive to exert effort, make investments, and innovate as it creates the expectation that one can reap the rewards from these efforts. However, gender gaps in property rights exist in many countries — both de jure, in statutes, and in practice, through more limited access to the justice system.
Women’s formal property rights are not always as secure as men’s. Over 136 countries now have explicit guarantees for equality of all citizens and nondiscrimination between men and women in their constitutions. However, the constraints in effectively using and controlling the property remain common. This is particularly true for married women, as often husbands legally control the assets of the marriage. Of the 136 countries, only 20 do not have legal gaps in the economic rights for women and men.
Women are particularly disadvantaged in financial markets due to their lower asset ownership and property rights. Women generally have fewer years of work experience and less control over their earnings, and typically earn less than men. This directly affects their ability to save and build assets. Assets are also inherited or acquired at marriage. Inheritance and property rights often apply differently to men and women, in ways that tend to disadvantage women in many countries. Not surprisingly, gender disparities in access to physical capital and assets remain large and significant.
Cultural environment
Culture can constraint the opportunities women pursue. Women can face additional barriers related to custom, have less time available due to the prevailing gender division of labor, or have lower intra-household bargaining position and consequently less control over their earnings. For the women entrepreneurs who are looking to achieve scale and further develop their enterprises, such constraints may reduce the incentive to grow businesses and thus their ability to access financial services.
Time available for entrepreneurial activitities
The greater time demand on women for household and child care activities affects their market time allocation, duration and type of experience, learning and, consequently, the sector and choice of activity. Overall greater demand on time has the effect of limiting women’s labor mobility and burdening them with disproportionately higher household responsibilities. Combined household and micro-firm data from Mexico points to child care obligations as the main restriction on the growth of female-owned firms. The data show that the differences in size and profits between female- and male-owned firms are larger for women who live in households where children under the age of 12 are present. The presence of children accounts for about 30 to 40 percent of the size and profit difference between female- and maleowned firms. Additional results from Mexico and Bolivia also show that female-owned firms are two to three times more likely to operate inside the owner’s home than are male-owned firms. This suggests that household obligations could restrict location, size, and industry choices for female business owners, possibly leading to performance differences. Research on Tanzanian women’s economic activities suggests that reducing time burdens of women could increase household cash incomes for smallholder coffee and banana growers by 10 percent, labor productivity by 15 percent and capital productivity by 44 percent.
Consequently, flexibility in self-employment is often a big motivating factor for women with families to become self-employed, while this is not always true in the case of men. The gender gap in time demand may also affect the duration and types of work experience men and women have and thus be a significant reason why they are in formal and informal businesses.
Infrastructure
Poor infrastructure impacts women entrepreneur’s ability to grow their businesses. Evidence from the road project in Peru, for example, showed that an unintended positive impact was the increased economic activity of women. Improved infrastructure can potentially improve women’s ability to physically access institutions, including financial institution. Branchless banking, Information Communication Technology-led solutions, mobile technology, and banking agents operating beyond brick and mortar branches together constitute a way forward for women lacking such access.
Unreliable or poor infrastructure can also be a binding constraint for financial institutions that serve SMEs. A financial institution’s outreach can be greatly impacted by poor infrastructure. Thus, electricity shortages that are cited as a major constraint by both men and women entrepreneurs also impact financial institutions’ outreach and consequently access to finance. The need for generators, for example, may increase the costs of physical outreach for banks.
Governance
Weak governance can hurt small firms. Bribes, or payments made to “get things done,” can be fixed costs, representing a proportionately higher cost for smaller firms. Those firms that are not compliant with regulations can be particularly vulnerable. Officials may see women as soft targets who face less recourse from their demands for payments. Indeed, when asked which types of business environment constraints may be greater for women, both female and male respondents in a five-country study reported that corruption and harassment from the police were two of the three areas where women faced greater constraints. The third area was access to finance.
Chapter 3 : Access to Finance a Key Barrier for Women-owned SMEs
Women-owned SMEs are an underserved segment
Women-owned SMEs are a financially underserved segment. They are less likely to obtain formal financing and often pay higher interest rates. Financial constraints at start up as well as access to basic banking services are some of the most discussed topics in literature. In addition, women entrepreneurs in some regions and sectors receive smaller loans. These are also cited as the reasons why their businesses grow at a slower pace than businesses owned by men. A recent survey from the Gallup World Poll looking at data from Latin America and Sub-Saharan Africa shows significant differences in access to financial services for women and men-owned businesses in developing countries. On average, women have less access to basic banking services such as banking and saving accounts. In addition, they are more likely to rely on internal and informal sources of funding such as their own savings, or loans from family/ friends, church, Microfinance Institutions (MFI), etc, to start a business.
The response to women’s lack of access to finance has largely been focused on increasing women’s access to micro-credit. While microfinance has increased women’s access to finance and has served to improve welfare and consumption, smoothing growth-oriented women entrepreneurs may require access beyond microfinance. The number of women reached by microfinance has grown exponentially from 10.3 million in 1999 to nearly 69 million in 2005, an increase of 520 percent. However, there is an increasing recognition that the growth and start-up needs of business women go beyond micro-loans. The problem is particularly acute for women who want to grow sustainable businesses and for those who want to start new micro, small, and medium-sized enterprises: “Some women have extremely good business ideas requiring larger loans, but they face discrimination in accessing such loans, with the result that their businesses collapse because they are forced to purchase inferior equipment or materials.”
On average, women have less access to basic banking services such as banking and saving accounts. In addition, they are more likely to rely on internal and informal sources of funding such as their own savings, or loans from family/ friends, church, Microfinance Institutions (MFI), etc, to start a business
Furthermore, while many NGO MFIs have transformed to become banks or have graduated their clients to larger individual loans, women often hit a glass ceiling in microfinance and are largely confined to group loans. As small loans are known to be less profitable,98 it is likely that as MFIs grow and transform into profit-oriented institutions, the number of women benefiting from microcredit could progressively decline.
Financial institutions are not lending to women-owned SMEs
Financial institutions’ portfolio of loans with womenowned SMEs tends to be significantly lower than the share of women-owned SMEs in their target markets would suggest. The reasons for under-serving this market segment are not very well studied. Anecdotal evidence points to a variety of factors, including the various limitations for and characteristics of womenowned businesses noted in this report, but also a perception of higher risk and cultural bias amongst loan officers is often reported by local banks when they set up and grow specifically targeted lending programs for women-owned SMEs. Such targeted programs, where combined with financial literacy training for women entrepreneurs, have shown to result in growing numbers of loans to this market segment, despite its concentration in smaller, service-oriented, often home-based and often part-time businesses.
Chapter 4: Exploring Various Finance Models for Women MSMEs
All sectors have a role to play in order to increase women’s participation in developing the private sector in emerging markets and developing countries. As a complement to the literature and evidence review undertaken in this report, a comprehensive collection of successful financial models specifically geared towards women-owned MSMEs has been compiled. These models have proven to be successful both for the creditors and their expanded female clientele. Although not too many of these examples exist, the ones featured in the report have shown positive results and can be scalable, replicable, and adaptable by other institutions while taking cultural accounts into consideration.
Some of the best practices collected have been developed by members of the Global Banking Alliance for Women (GBA), a membership organization of institutions around the world who lead women’s wealth creation through innovative programs that provide women’s business enterprises with vital access to capital, markets, education, and training. The GBA was founded in 2000 by Bank of Ireland, Fleet Boston Financial/Bank of America, Westpac Banking Corporation, RBC Royal Bank of Canada. all recognized as leaders for their programs for women. The GBA now comprises 30 member institutions, including leading global banks and national banks like Access Bank in Nigeria. GBA’s network serves as a connector of people, information, and resources. Through a collaborative system and the Annual Summit, financial institutions and experts in the field exchange information as they start or enhance their services to women enterprises.
A total of 35 approaches of women MSME finance interventions were identified and analyzed. Twentynine of the models are private sector approaches and six are government approaches/ public support schemes covering the following:
Private sector models suited to provide sustainable financial services to women-owned MSMEs;
Legal and regulatory interventions that enable women-owned MSME access to finance; and,
Public support mechanisms to foster MSME financing
Chapter 5: Suggested Actions and Policy Recommendations
At the G-20 Seoul Summit in November 2010, the leaders of the 20 member-countries endorsed the “Financial Inclusion Action Plan” and the creation of the “Global Partnership for Financial Inclusion (GPFI).” The leaders’ declaration states the following as the rationale behind the creation of the group:
“To promote resilience, job creation and mitigate risks for development, we will prioritize action under the Seoul Consensus on addressing critical bottlenecks including infrastructure deficits, food market volatility, and exclusion from financial services.”
One important dimension of inclusion within the broader agenda is gender. With access to finance a significant barrier to SME growth, particularly for women-owned businesses, expanding financial inclusion is an important policy goal. Women continue to be underserved by financial institutions. The impact of more limited access to finance not only impedes women’s ability to grow their businesses, it can also restrict the types of businesses they begin in the first place and thus their future potential.
On average, women have less access to basic banking services such as banking and saving accounts. In addition, they are more likely to rely on internal and informal sources of funding such as their own savings, or loans from family/ friends, church, Microfinance Institutions (MFI), etc, to start a business
To ensure that women entrepreneurs’ access to finance is given due attention within the broader SME finance agenda, a three-fold action plan is set out here for G-20 leaders :
- Endorse a set of recommendations for policymakers in the developing world to establish a supportive enabling environment for women entrepreneurs to access financial services in their respective countries.
- Lead efforts to identify, evaluate, and support the replication of successful models for expanding financial services to women entrepreneurs.
- Lead efforts to gather gender-disaggregated data on SME finance in a coordinated fashion by establishing a platform to consistently collect crosscountry data.
The recommendations largely focus on direct measures to facilitate women’s access to finance; most of the non-financial barriers discussed in Chapter 2 are beyond the scope of this report. However, there is one exception. The issue of women’s legal rights, while going beyond just the financial benefits for women, clearly has implications for women’s ability to operate a business, to control collateral that could be used for a loan, and to enter into contracts, including opening a bank account.
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