Giving credit where it’s due

In this instalment of the Financial Sector Spotlight (FSS), guest columnist Alan Goodrich, the Financial Clearing Bureau (FCB) managing director, makes the case for more systematic approaches to lending to women, whom he argues make for good risk since they are typically reliable borrowers with strong repayment records.

Financial Sector Spotlight

Investing In Women: A high return opportunity
As a wide range of economic studies show, investing in women is one of the highest return opportunities available in the developing world. Research has demonstrated that bringing more women into the labour force can significantly boost per capita income and GDP growth.

Equally, women’s higher propensity to use their earnings and increased bargaining power to buy goods and services that improve family welfare can create a virtuous cycle: female spending supports the development of human capital, which fuels economic growth in the years ahead.

Barriers to Entry for Women-owned SMEs
Women-owned small and medium size enterprises (SMEs) face barriers to entry and business growth that include limited access to education and training, legal and cultural barriers and infrastructure-related challenges.

Access to finance is typically identified as a critical constraint. While financing is almost always a challenge for SMEs, the difficulties are often intensified by gender-related factors, including women’s lack of collateral, weak property rights and discriminatory regulations, laws and customs.

The International Finance Corporation (IFC) estimates that up to 70% of women-owned SMEs in the formal sector in developing countries are unserved or underserved by financial institutions.

Therefore, one may imagine that the situation is even worse in the informal sector.

Closing the credit gap
Closing the credit gap for women-owned SMEs across the developing world as a whole could boost income per capita growth rates by over 1,1% on average.

While eliminating the whole gap is a tall order, the impact on growth could be dramatic.The IFC has been a leader in this space to date. Its goal is to ensure that in the coming years 25% of its own loans provided to SMEs through financial intermediaries go to women-owned businesses.

The IFC’s Banking on Women programme brings together financial institutions and women entrepreneurs, using its investment capital to help institutions expand their portfolios while helping entrepreneurs strengthen their businesses with new forms of financing. Community banks, cooperatives and chambers of commerce are used as non-traditional models for increasing the reach to women-owned SMEs in need of finance.

The Financial Clearing Bureau (FCB), the leading credit reference bureau in Zimbabwe, saw over 1,5 million searches made by over 40 credit providers in 2014. With such a sizeable pool of available data, FCB participates in and provides statistical inputs to IFC and World Bank Research.

The sad truth is that the evidence in Zimbabwe is not good regarding access to credit by women. The ratio of 2:1 for searches made on men compared to women in 2014 reinforces the gender gap that still exists in our economy, i.e. only one third or (33%) of FCB searches conducted by credit providers were on female applicants.

Approaches to Credit: Women vs Men
It is well-documented that there are significant differences in the ways women and men SME owners approach, access and use credit to start and grow their businesses.

In light of these differences, it should be a priority to incorporate women-specific solutions into the frameworks for improving credit access in the SME sector. So, what can the credit providers in Zimbabwe do to redress the gender lending imbalance and help stimulate economic growth? Here are just a couple of ideas from research institutions to consider.

More suitable credit terms. Offering loans with terms that are more aligned with the actual risk that women represent, rather than perceived risk, would make bank credit more attractive to female business owners. Offering alternative options to fulfil collateral requirements, as well as longer-term loans for investment purposes rather than shorter-term loans to manage working capital, could also prove beneficial.

Better assessment of credit risk. Contrary to (some) common belief, the experience of lending to women in developing countries through microfinance and other more traditional methods suggests that women are reliable borrowers with strong repayment records. New credit scoring models, based on psychometric testing, are being developed and tested by the Multilateral Investment Fund (MIF) (a member of the IDB Group) and Harvard’s Entrepreneurial Finance Lab (EFL). Evidence suggests that the new models generate significantly fewer rejections of creditworthy female business owners than traditional models.

As part of its “Your Economic Empowerment starts with Your Financial Identity” and “SME Rating Programme” initiatives, FCB is also collaborating with EFL in Zimbabwe to further extend the availability of this type of scoring and assessment to lenders in the SME sector and, as a result, to encourage the credit gender gap to be closed.

Against the backdrop of a weaker growth trajectory in emerging markets, the substantial growth premium that can result from investing in women-led SMEs should matter deeply to policymakers, corporates and asset owners in Zimbabwe.

Alan is available on alan@fcbureau.co.zw for feedback, which you can also copy to omen.muza@gmail.com

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