Interventions that reduce bias in loan approvals, promote asset-based financing and enhance women's control over income and assets can effectively expand credit access for women.
Limited access to capital is a major barrier hindering women from fully participating in the economy—be it through entrepreneurship or other productive activities—and can also significantly impact their overall quality of life. Many, unable to open a bank account or access credit, are dependent on informal loans from relatives, friends, or money lenders. They face higher barriers to entry in male-dominated, capital-intensive sectors due to limited access to capital, prompting them to opt for sectors characterised by smaller and less efficient businesses. In low- and middle-income countries, only 21% of women obtain loans through formal channels or mobile banking, compared to 25% of men. This disparity translates to a staggering $1.7 trillion financial gap for women entrepreneurs. Addressing one of the most critical challenges to gender equality, women’s credit gap, will help make sustainable development possible.
These challenges include social and cultural barriers, lack of collateral, and insufficient credit history, making it harder for them to secure formal loans compared to men. Potential solutions include expanding their access to finance and larger loans, leveraging digital and other tools for refined targeting of credit products and mitigating social and cultural barriers. Gaps still remain however, and more research is required in these areas. A comprehensive review by Innovations for Poverty Action of over 20 studies on financial innovations, addressing the barriers women face in accessing and using credit, provides four valuable insights into what works—and where more research is needed—to empower women in their entrepreneurial journey.
1. Removing bias in loan approvals and screening
Firstly, evidence shows that it is important to remove biases in the loan approval and screening process to enable more women to access credit. Despite having similar income and education levels as men, women struggle to access credit due to traditional financial institutions’ reliance on credit history, financial statements, and legal status. Standard lending practices and credit scoring models often overlook gender-specific factors like women’s limited borrowing history and gender disparities in property rights. Credit scoring models that use unconventional data, such as psychometrics and mobile phone records, show promise in increasing credit access for women. A study conducted by IPA and researchers in the Dominican Republic used a gender-specific credit scoring model based on mobile phone records and machine learning, approving one-third more women who would have been rejected by traditional methods relying on credit histories, property rights, and formal earnings.
2. Promoting collateralised and asset-based financing options
Secondly, traditional financial institutions often require asset ownership as loan security. Due to socioeconomic factors, gender disparities, or legal limitations, many women struggle to meet this requirement. To fix this problem, financial service providers may consider using collateralised and asset-based financing options that allow women to use a wider range of items as collateral. In Pakistan, IPA’s research showed that offering microcredit clients the chance to finance business assets worth four times their previous borrowing limit, using these assets as collateral, improved their business outcomes. Clients were more likely to run a business and had larger assets, better management practices, higher profits, and increased monthly income.
3. Targeting credit at women entrepreneurs
Thirdly, women entrepreneurs often face more challenges in securing funding than men. These challenges stem from factors such as limited credit history, lack of collateral, disparities in education and formal earnings, as well as prevailing social and cultural norms. Consequently, when women do secure funding, they often receive less funding and pay higher interest rates potentially due to their perceived risk by lenders. Targeting credit—especially to those with an entrepreneurial drive—may close the credit gap, promote responsible lending practices, and improve business performance. IPA and researchers in Egypt found that giving larger loans to high-scoring entrepreneurs on a psychometric test led to higher profits, increased wage bill productivity, and higher household expenditures. Conversely, low-scoring entrepreneurs saw decreased profits, employee losses, and reduced wage spending.
Additionally, economic decisions in women-run businesses are often influenced by household dynamics. Findings from IPA’s work in Ghana, India, and Sri Lanka, found that in households with multiple businesses, women's funds were often redirected to their husbands' businesses when provided with credit or cash grants. Providing funds directly to accounts controlled solely by women and digitising loans and payments can offer them more privacy and reduce pressure to share funds.
4. Targeting borrowers with loan products that match their borrowing experience
Finally, targeting experienced and educated borrowers with flexible loan repayments terms can encourage risk-taking, boost returns on investment, and enhance business outcomes. However, such flexible loan repayments may not be appropriate for first-time borrowers. Evidence from a study in Colombia conducted by IPA and researchers found that allowing first-time borrowers to defer principal payments increased overall default rates without affecting revenues or profits, likely due to their low financial discipline and the ease of postponing payment. Standard credit contracts and personalised reminders via text or phone can be more effective in reducing defaults among first-time borrowers and those with low financial discipline.
Boosting credit access for women entrepreneurs
It is critical to build on this evidence and steer clear of a “one size fits all approach” for credit products for women by addressing the unique challenges they face in borrowing, especially for their businesses. Countries seeking to drive sustainable development must help women in entrepreneurship by investing in and scaling up evidence-based interventions, such as those that increase women's control over income, ownership of productive assets, and decision-making in the household.
References
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