Bridging the Finance Gap for Women Entrepreneurs

6. Facilitating access to start-up funding through microfinance

Abstract

Microfinance is an important tool for helping entrepreneurs that face difficulties accessing traditional banking and lending markets, including women entrepreneurs. This type of finance can be an important source of capital for women entrepreneurs who lack personal capital, credit history, collateral or guarantees as well as those operating in the informal sector.

Providing finance to hard-to-reach communities

What is microfinance?

Microfinance can play an important role in supporting entrepreneurs from under-served and hard-to-reach groups and communities. Microfinance depends on microcredit, which is a collateral-free loan that is designed for people who are generally excluded from traditional banking services because they have a low or unstable income, or lack sufficient collateral and credit history (Hermes and Lensink, 2007[1]; Kono and Takahashi, 2010[2]; Rosenberg, Gonzalez and Narain, 2009[3]; Rosenberg, Gonzalez and Narain, 2009[4]). Within most OECD countries, microcredit is generally considered to be loans up to EUR 25 000, but some offers can be as much as EUR 50 000. These small loans can be used for personal or business reasons. When used by entrepreneurs for their business, they are typically bundled with other non-financial services such as training and coaching. This package of microcredit and non-financial services is known as microfinance (OECD/European Commission, 2021[5]).

Microfinance can be offered by a wide range of institutions and organisations, including traditional and co-operative banks and business development banks (OECD/European Commission, 2021[5]). However, most microfinance products for entrepreneurs are delivered through specialised microfinance institutions (MFIs).

The main advantage of microfinance relative to other loan products is that it is designed to provide access to small amounts of debt financing to those who face significant obstacles in securing loans. Another rationale for offering microfinance is that it can help entrepreneurs build a credit history so that they can have improved access to mainstream financial products in the future. However, it must also be recognised that clients may face social stigma attributed to microcredit clients by mainstream financial institutions. In addition, MFIs are unlikely to become self-sustainable given the higher risk profiles of their clients.

Does it work?

Despite the lack of consensus regarding the type of impact microfinance has on women’s empowerment (Pervin, Ismail and Md Noman, 2023[6]), microcredit remains a prominent poverty alleviation tool (Parmanand, 2021[7]). The microfinance industry is worth USD 60-100 billion globally (World Bank, 2015[8]), and accounts for around 200 million clients. It is, therefore, not surprising that many government institutions include microcredit programmes as an integral part of their development strategy (Parmanand, 2021[7]).

MFIs play a role in providing financial services to many hard-to-reach communities that would otherwise be excluded from formal banking institutions. However, in many developing country contexts, women entrepreneurs’ access of microcredit is hampered by societal norms and cultural constraints (see previous discussion in Chapter 3). For example, studies indicate that microcredit can alter relationships between women and their families as well as the wider society in both positive and negative ways. Some studies highlight the positive impact access to microfinance has on women’s participation to major decision-making (Pervin, Ismail and Md Noman, 2023[6]), while others highlight conflicts with spouses and harassment from creditors as women borrow loans to meet family needs (Parmanand, 2021[7]). Achieving greater financial inclusion necessitates addressing these gendered barriers prevalent in different sectors and investing in social norm changes (Arnold and Gammage, 2019[9]).

Role of public policy

Overall, governments often support MFIs in various ways to boost financial inclusion. This can include providing interest rate subsidies and partial guarantees to reduce the risks and costs of administering these small loans (Drexler et al., 2020[10]). These types of public support are less common in developing countries, resulting in above-market interest rates on microfinance since the MFIs typically assume the full risk of offering these uncollateralised loans.

Even though the primary aim of microfinance schemes is to provide funding to micro-enterprises, many of these initiatives are gender-blind, and tend to be risk averse to lending money to micro-enterprises due to information asymmetries. As a result, microcredit is more likely to be accessed by salaried employees with regular incomes rather than disadvantaged entrepreneurs, or those located in rural areas.

Public policies that focus on addressing gender inequalities in accessing microcredit are therefore address this challenge. This could include interventions aimed at supporting microfinance institutions increase their geographic coverage to better reach under-represented communities, while also providing incentives such as interest rate subsidies and/or loan guarantees to reduce their level of risk in serving micro-enterprises. In addition, governments could directly – or indirectly through the use of incentives – increase the supply of funding available for microcredit loans and provide technical support to MFIs to increase the quality of services offered.

Collaborative efforts to raise awareness of financial products and services are important. Such efforts need to be accompanied by policies that provide a clear plan of support for women entrepreneurs accessing microcredit. The regulation of microfinance institutions’ activities is also vital to avoid financial exploitation and violations of women entrepreneurs, as has occurred in contexts where a comprehensive policy framework is missing resulting in limited oversight.

Lessons from the policy cases

Three country-level policy insight notes have a focus on microcredit issues. They highlight both the demand-side challenges faced by women entrepreneurs in accessing microcredit, and the supply-side challenges faced by microfinance institutions in providing financial resources to hard-to-reach communities (Tanzania). Collaborations with these financial institutions that result in focused interventions aimed at allocating credit to women entrepreneurs are also necessary to achieve greater financial inclusion. However, the need to establish comprehensive policy frameworks and regulations that ensure adequate oversight is equally stressed (Sri Lanka). The key lessons from the notes are:

1. Ensure adequate oversight and monitoring systems are in place to ensure client protection at all levels. Providing support to microfinance institutions, for example, through staff training, to ensure that they are adequately equipped to serve their clientele in a sustainable manner and in line with international human rights standards.

2. Establish targeted gender-specific interventions in collaboration with microfinance institutions in order to address existing gender gaps in accessing microcredit. This could include offering specialised products that meet the specific needs of businesses launched by women entrepreneurs and non-financial services that address common skills and knowledge gaps. In addition, incentives can be offered to microfinance institutions to increase lending to women entrepreneurs, including for example interest rate subsidies or loan guarantees. Another possibility is to use tax incentives to attract more lenders into the market to increase the supply of finance available.

3. Raise awareness of the availability of financial and capacity building resources for women entrepreneurs through joint campaigns with other stakeholders within the ecosystem.

References

[9] Arnold, J. and S. Gammage (2019), “Gender and financial inclusion: the critical role for holistic programming”, Development in Practice, Vol. 29/8, pp. 965-973, https://doi.org/10.1080/09614524.2019.1651251.

[10] Drexler, B. et al. (2020), Microfinance in the European Union: Market analysis and recommendations for delivery options in 2021-2027, Publications Office of the European Union, Luxembourg.

[1] Hermes, N. and R. Lensink (2007), “The Empirics of Microfinance: What Do we know?”, The Economic Journal, Vol. 117/517, pp. F1-F10, https://doi.org/10.1111/j.1468-0297.2007.02013.x.

[2] Kono, H. and K. Takahashi (2010), “Microfinance Revolution: Its Effects, Innovations, and Challenges”, The Developing Economies, Vol. 48/1, https://doi.org/10.1111/j.1746-1049.2010.00098.x.

[5] OECD/European Commission (2021), The Missing Entrepreneurs 2021: Policies for Inclusive Entrepreneurship and Self-Employment, OECD Publishing, Paris, https://doi.org/10.1787/71b7a9bb-en.

[7] Parmanand, S. (2021), “Regulating motherhood through markets: Filipino women’s engagement with microcredit”, Feminist Review, Vol. 129/1, pp. 32-47, https://doi.org/10.1177/01417789211040506.

[6] Pervin, S., M. Ismail and A. Md Noman (2023), “Does Microfinance Singlehandedly Empower Women? A Case Study of Bangladesh”, SAGE Open, Vol. 13/2, p. 215824402210961, https://doi.org/10.1177/21582440221096114.

[3] Rosenberg, R., A. Gonzalez and S. Narain (2009), “Are Microcredit Interest Rates Excessive?”, Consultative Group to Assist the Poor, Washington DC, https://www.cgap.org/sites/default/files/CGAP-Brief-Are-Microcredit-Interest-Rates-Excessive-Feb-2009.pdf (accessed on 23 March 2021).

[4] Rosenberg, R., A. Gonzalez and S. Narain (2009), “The New Moneylenders: Are the Poor Being Exploited by High Microcredit Interest Rates?”, Consultative Group to Assist the Poor, Washington DC, https://www.cgap.org/sites/default/files/CGAP-Occasional-Paper-The-New-Moneylenders-Are-the-Poor-Being-Exploited-by-High-Microcredit-Interest-Rates-Feb-2009.pdf (accessed on 23 March 2021).

[8] World Bank (2015), Does microfinance still hold promise for reaching the poor?, http://www.worldbank.org/en/news/feature/2015/03/30/does-microfinance-still-hold-promise-for-reaching-the-poor (accessed on 25 September 2024).