Giving Credit Where it is Due
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How closing the credit gap for women-owned small- and medium- sized enterprises can drive global growth
Investing in women and girls is one of the highest return opportunities available in the developing world, as a wide range of economic research shows. Our own work has demonstrated that bringing more women into the labor force can significantly boost per capita income and GDP growth. Our research has also shown that 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. Given these significant benefits, we look at the role of women-owned small- and medium-sized enterprises (SMEs) in raising labor force participation and boosting economic growth in emerging markets. Only one-third of the world’s SMEs in the formal sector are currently run by women, with a wide variation across countries and plenty of scope for growth. Women-owned SMEs face barriers to entry and business growth that include 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 estimates that as many as 70% of women-owned SMEs in the formal sector in developing countries are unserved or underserved by financial institutions – a financing gap of around $285 billion.
We assess the potential impact that closing this credit gap for women-owned SMEs can have on economic development, estimating the link between credit to SMEs and growth in income per capita. Our results suggest that closing the credit gap for women-owned SMEs in the BRICs and N-11 countries over the next few years could boost real income per capita growth rates in those countries by around 85bp on average. If the credit gap is closed by 2020, incomes per capita could be on average around 12% higher by 2030 across the BRICs and N-11, relative to our baseline scenario. Closing the credit gap for women-owned SMEs across the developing world as a whole could boost income per capita growth rates by over 110bp on average. While eliminating the whole gap is a tall order, the impact on growth could be dramatic.
Initiatives to expand SME financing exist, but few have a gender-specific component. As a result, targeting women-owned SMEs in the developing world represents a significant financing opportunity. Solutions should tackle both the supply side (such as policy bias, discrimination and misconceptions about female credit risk) and the demand side (such as women’s reluctance to apply for loans). Adding business training and mentoring will help to ensure productive use of capital. Because improved access to credit is most impactful when coupled with strong institutional environments, efforts should be made to establish more robust institutions and favorable business conditions.
Against a 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 around the world.