Women’s Share of SME Lending

Friday 13th June 2014

GBA Newsletter

Women's share of SME lendingThe IFC has led the DFIs in supporting banks to offer a comprehensive value proposition to women. Their latest research examined the portfolios of a sample of their client banks to understand how well they were doing in lending to women-owned SMEs. Patience Marime-Ball, Chief Investment Officer responsible for their ‘Banking on Women’ program, explains the survey’s results and gives her insights on the underlying drivers and what must be done to get women-owned SMEs equal access to finance.

GBA: You head up the investment side of IFC’s program to support banks offer comprehensive value propositions to women-owned SMEs. Can you tell us the origins of IFC’s Banking On Women Program and your value proposition to banks?

Patience Marime-Ball: In 2006, we noticed that while there was a high percent of women clients in our microfinance portfolio (the IFC is the 2nd largest investor in the microfinance sector worldwide), there was a huge trail-off when it came to women-owned SMEs. Our colleagues on the Advisory side of the IFC noted that female entrepreneurs said that they faced several barriers in growing their businesses including lack of capital, business skills and networks as well as access to markets. When we started to have conversations with senior bankers about the Women’s Market opportunity many of them said that “we don’t have a sign that says we don’t allow women and we want to do it but we don’t know how”. So had to come up with an Advisory Services Value Proposition that would help them offer all these elements to their women customers. This has been going on for several years.

More recently, on the investment side, we developed financing options that would encourage financial institutions to target women-owned SMEs. Our finance not only brings capital to their balance sheets, but the ability to bring in other investors. That is our second pillar. Our third pillar is capacity building to the women entrepreneurs themselves, through the banks, enabling them to create a strategic platform in non-financial services-for example, basic training around cash flow management; H.R. management; networking with peers and building potential access to markets.

GBA: How does the IFC define a woman-owned SME?

Patience Marime-Ball: As we went through defining it, with senior IFC management, what was clear was that we wanted to promote women’s ownership. Our definition creates as large an umbrella as possible while ensuring ownership. So the entity must either be 50% owned by a woman or be 20% owned plus the woman has to be either the CEO or the COO.

GBA: This baseline study you have just completed gives a good picture of where the banks in your portfolio are at in terms of percent of SME loans that go to women-owned businesses. Before talking about the findings, what motivated the IFC to do this study in the first place?

Patience Marime-Ball: In talking to many bank CEOs about the potential of the Women’s Market, many report that they do not have a ‘view’ of the number of women-owned enterprises in their market, and globally nobody had spent the time measuring it. In 2010 we retained McKinsey to size the market. This included leveraging data that had been collected by the World Bank through the Enterprise Survey. We found a $260B – $320B market opportunity. Our next step, which is this baseline survey, was to measure how much our partner institutions were participating in the Women’s Market. This has enabled us to figure out our strategy to fill the gap and complete the story around lack of access.

GBA: Gender disaggregated data is difficult for many banks to get hold of, tell us how you managed to get it?

Patience Marime-Ball: We looked at our 500+ financial institution relationships and pulled out the ones that were focused on the SME market or who had a significant emphasis on it. That was approximately 270. Then we asked our regional managers to pull out the ones that were either active in SME lending or had an SME investment from us and where we had a strong relationship. The relationship was important because we knew that we would probably have to go in and actually help get the data ourselves. Ultimately we ended up with 46 financial institutions.

We found that most banks could not disaggregate their SME portfolio by the sex of the owner, so as our teams had to go into each bank, download their entire SME loan book, randomly pick 100 files as a sample and run the analyses. It was a considerable effort.

GBA: The study finds that on average 16%-18% of SME loans went to women-owned businesses with quite sharp variances between regions i.e. 28% in East Asia and 6% in Middle East & North Africa. Can you comment on some of the drivers of these variances?

Patience Marime-Ball: The really interesting thing is that these regional averages are almost identical to how the trends are for other indicators e.g. participation of girls and boys in education, women and men in the labor market, percent of women in managerial and leadership levels etc. So if female participation rates are low in basic education and the workforce generally, they are low in enterprise ownership. We found that East Asia is doing relatively well with an overall average of 28% of the SMEs loans going to women-owned businesses, though there are still large gaps in many countries. South Asia and the Middle East and North Africa have the lowest at less than 10%.

GBA: What are some other drivers of the relatively low percent of loans going to women business owners?

Patience Marime-Ball: I think that there are cultural elements that impact whether a woman can own a business, own land or property, which is often required as collateral and whether they are allowed to have time to build a business, or indeed whether she is home bound.

There is also a market perception that women-owned businesses are a higher risk, many bankers believe this but may not want to say this. Some of this is reasonable and some is unreasonable. What is reasonable is that bankers know that women generally own smaller businesses than men, on average, and there is a time and cost associated with lending to smaller businesses. The part that is unreasonable is that they perceive women to be more risky.

There is then the issue that banks are not women friendly. This does not mean that they are actively discriminating against women. I don’t believe that is the case. They are not turning women away, but there is no welcome mat either.

GBA: Taking the issue of perceived cost associated with lending to women given their smaller firm size. What is your counterargument to banks?

Patience Marime-Ball: Overall I think banks are missing the point. Women may borrow less on average but if you control for firm size, as our study did, you see no gender differences in the amount borrowed. And women are profitable customers, even more so when you account for their higher saving propensities and their cross product acquisition, which is on average 2 times higher than men’s. We also know that women make the majority of choices about where a family banks. So there are many other ways that a bank can think about this. However, it is only when we quantify how profitable the women’s market is, that we will they get past this whole cost issue.

GBA: It is interesting that bankers perceive women as riskier when 30 years of experience with microfinance does not bare this out.?

Patience Marime-Ball: There is a strong data point from the microfinance on this, but the minute you bring that up, bankers say that it is group lending. In SME lending, we don’t actually have the data across banks to prove this one way or another at this point. Certainly some banks have analyzed this and have found that women are lower risk.

GBA: Do you think that if we got more granular, and really compared apples to apples, we would not observe differences in the risk profile of men and women?

Patience Marime-Ball: I think that that is probably where we will land. And I think that when circumstances for men and women even out and banks become better at assessing risk, that that is definitely where we will land in the aggregate. I also think that this whole issue needs to be rephrased. Women are not risk averse; women are risk ‘sensitive’ and very much care about biting what we know we can chew.

GBA: The study finds that the type of collateral required by banks is a big barrier for women trying to access loans. Can you elaborate on the ways that you have seen this resolved?

Patience Marime-Ball: Globally we see banks still requiring too much property and not the kinds of collateral that women are more likely to have e.g. moveable assets such as cars and also accounts receivable. We need collateral registers that are sophisticated, that can capture liens and operate across different regions in the country. In the Philippines for example, we have different registries in different regions, so this chills the system. This is where the public sector has a role to play, in building registries. I’ll give you an example. IFC did a secured transaction study in China, where we helped the government think through registries for moveable collateral, the study indicated that if moveables were allowed there would be a 20% increase in financial inclusion. These are things that not enough time is spent on but that really matter.

I think it is worth noting that many people think that it is the legal code that needs to be fixed in order to allow moveable assets to be used as collateral by banks. In fact, more than 90% of coded laws allow it, it is just there is no infrastructure to support it.

GBA: Your point that banks are not discriminating against women but rather are not ‘women friendly’ is interesting. Can you elaborate?

Patience Marime-Ball: In our observation, the client-facing personnel just want to make a sale, but we know that women tend to ask more questions. These questions make the RMs perceive more risk, which is not the case, but that is their perception. We find that many client-facing personnel in banks are not necessarily friendly and for the most part they tend to be men in suits. Additionally, most banks tend to be brick and mortar institutions that have working hours that don’t necessarily correlate to what women want. So it is hard to get to the bank and then the treatment is not necessarily respectful.

GBA: The report finds that the biggest gap is for ‘start-ups’? How does IFC define a ‘start-up’ and what are the workarounds you have seen banks doing to overcome this?

Patience Marime-Ball: Our definition of ‘start-ups’ is one that matches the banking sector generally: businesses less than 3 years old. Best Practice are banks that are more aggressive, and drive down to 2 years. Entities like Westpac and RBS that are willing to go in and test working with them. I don’t know what the outcomes of those efforts have been so far. TEB Bank in Turkey has some good features, leveraging grants from government and has funded 23,000 start-ups in their first year, and are realizing that they are getting deposits, so start-ups have money to save.

GBA: How has this report informed IFC’s Women In Business strategy going forward?

Patience Marime-Ball: In a number of ways. It has allowed us to really put some numbers to our strategic conversations internally, including with our Board of Directors. It has allowed us to educate our colleagues and more importantly to allocate resources somewhat differently and last but not least, it has allowed us to have really good informed conversations with our clients. They can rightly make the statement that they don’t discriminate against women, but if we can say that your regional average lending is X% and make the case that it is highly unlikely that your portfolio is going to trend that way, then we are starting to have a conversation about an opportunity that we can help you meet.

GBA: What needs to happen in order for widespread adoption of Women In Business programs by banks?

Patience Marime-Ball: All of us have to think about how we frame the business case. The realization that this is a highly profitable segment, will change the conversation greatly. Private sector actors will see the bottom-line, this is just as important for value chain companies as it is for banks. We need to frame the business case when it comes to smallholder farmers, the same across many different sectors. When we do this, the conversation will change. Then with the public sector, the IMF is talking about ‘inclusive growth’ for the first time and the difference it will have on GDP. To move this from a conversation level to action, we need to audit the models that work and how they can be replicated.

GBA: What role can GBA play in supporting this?

Patience Marime-Ball: I think you guys are doing a phenomenal job, I cannot be more complimentary. I think your thought leadership and mentoring of leaders in institutions is key. This is the ‘how’ and the Mentorship Program is pioneering and is really, really needed. You’ve already created a convening platform for peer learning and socializing the business case; you need to make sure that the platform becomes the next WEF, the next CGI. How do we make this platform rise to the next level, where people pay and spend top dollar to be part of the conversation? I think there is one more aspect, I think GBA is at a place now that even where a bank is not a member, that you create an Academy, where people can just pay fees to get a deep dive on specific topics, there is no one doing that, based on evidence, and the evidence you have, with the premier banks-be it a physical platform and on-line. This is your next big opportunity.

—As told to the Global Banking Alliance For Women