When Jessica Schnabel of the International Finance Corporation meets banks to discuss financing solutions for female owners of small businesses, she is usually referred to the corporate social responsibility department.
Servicing SMEs, particularly when the focus is on a disadvantaged group of society, is still seen largely as the responsibility of development organizations — or, where commercial lenders do get involved, that of the social responsibility department.
That may be part of the reason that women-led SMEs in Latin America and the Caribbean have some $8 billion in unmet demand for credit every year, according to a study by the IFC and McKinsey. In emerging markets globally, the demand is estimated to be around $300 billion every year. And these numbers do not include the many women-owned businesses that operate in the informal sector.
“[They] are not being treated as business owners, so some women have 25 credit cards, and that is how they are financing themselves,” says Schnabel, the global product head of the IFC’s Banking on Women program.
SMEs across Latin America and the Caribbean, regardless of whether they are led by women or men, encounter challenges in financing their businesses, but Schnabel says these problems are much more pronounced among women.
Women tend to find it more difficult to put up collateral for a loan because land and property tend to be in men’s names and because other collateral is often not accepted. They also tend to have lower literacy rates, which makes dealing with the documents that banks require even more onerous.
Gema Sacristán, chief investment officer of the Inter-American Investment Corporation, says 73% of women-led SMEs have unmet demand for credit — and that offers a great business opportunity for banks.
While commercial lenders usually understand the potential of this business opportunity, Sacristán says once they start to think about how to serve women-led SMEs better, they encounter obstacles.
Women are less likely to seek external financing for their businesses, so they are also less likely to have a credit history, she says. “Usually, they have less experience in, and knowledge of, finance — and, as clients, behave differently from men,” says Sacristán. “They require a different value proposition.”
Even though women invest half the capital that men do, Sacristán says their income is on average 20% higher. The likelihood that they will repay loans is 54% higher, and they buy 21% more worth of product than men.
Commercial lenders who know their customers well could bundle products and services together, and increase their own profits in doing so.
Yet while banking in Latin America is profitable, SME lending has been less so, says Jean-Werner de T’Serclaes, partner and managing director at The Boston Consulting Group in Bogotá, Colombia.
“Some banks have managed to serve it well, but for the large majority, it is an unprofitable segment,” says de T’Serclaes. That’s because lending revenues in Latin America are among the lowest in the world, especially where banks are servicing SMEs, but operational costs are high.
De T’Serclaes says part of the problem is high regulatory capital that banks need to hold, but also because they have limited themselves to lending and not diversified into other financial products for these customers.
Era Dabla-Norris, division chief for the fiscal affairs department at the IMF, says banks, many of which have traditionally not differentiated between women and men, need to better understand their clients. Additionally, countries should reconsider the regulations and documentation requirements for loans, and lenders should consider accepting other types of collateral for a loan, such as jewelry or even major appliances, she says.
“There can be a viable commercial, economic rationale for providing loans to women entrepreneurs,” says Dabla-Norris. “It is not just an issue of development banks; a case needs to be made for revoking those impediments that prevent women from having access to the formal banking system.”
There are some commercial success stories. Banco BHD León in the Dominican Republic, working with the IFC on a project designed for women, identified four specific segments of female customers who had unmet needs. It created a new women’s business line that yielded a 35% return. LF