By Carolyne Kirabo and Evalyne Ndirangu
In 2022, M-Kyala Ventures won a $50,000 grant from USAID and VISA Foundation to develop the Gender Smart Lending Toolkit, following our participation in a nine-month Gender Action Lab working group convened by the Aspen Network of Development Entrepreneurs. The Lab brought together gender-focused organisations to take a multi-faceted, problem-building approach to the systemic issues holding back women entrepreneurs across Africa.
And as you would expect, my team and I decided to focus on the challenge of access to finance. Our goal was to build a tool that any financial service provider could use to determine which elements of process and product design matter when developing financial products for women led MSMEs.
And so we set to work.
We began by keenly listening to 90+ women entrepreneurs about their typical journey to capital: what each stage of growth looked like, what they saw as barriers, what they credited for their success, and what they viewed as a good relationship with a financial service provider.
We then turned our attention to the other side of the transaction, the financial institutions themselves. We approached 21 financial institutions posing as female entrepreneurs and asked critical but ordinary questions: What products are available at different stages of business? What does the due diligence process involve? How much can we borrow? What collateral is required? What would we get from becoming a customer?
What did we learn?
Women don’t know gender tailored financial products exist
Among women entrepreneurs, 86.5% were unaware of existing gender-tailored financial products when they opened a business bank account, and 68.5% still didn’t know these products existed a year later.
Even where a bank advertised a women’s initiative or product, plenty of the women we spoke to either didn’t know it existed or had no idea how to access it. And those who were aware and approached their financial institutions often found the product barely different from the standard offering. They were wrapped in the same restrictions.
Financial institutions weren’t much help either. When we asked employees about gender specific products, they were unable to speak about them or direct us to the relevant person. They also couldn’t tell us what value, beyond holding a bank account, a female owned business would gain. Their focus was trying to get us to fill in forms and open accounts.
2. The products that do exist don’t fit
62.7% of women entrepreneurs could not find specific loan products suited to their needs and 57.8% sought out working capital as their priority.
We noted that women generally knew what they needed and were very good at understanding their cash flow and working capital needs. They could tell us they need about x amount every y months, but the problem was finding a reliable source of capital.
One entrepreneur, for example, informed us that when she needed anywhere between $5,000 to $10,000, she would take 50% from her SACCO (Saving and Credit Cooperative), 30% from her savings, and 20% from a fintech lender. The trouble here is that she would be paying a blended interest rate north of 20% which ate into her margin, the only advantage being not having to provide significant collateral.
When she wanted to grow her business, however, and needed more than $20,000, serious barriers and rejections would start for cited reasons including:
- Your current cash flow doesn’t look like it can cover this loan
- You do not have sufficient collateral
- You need to be a customer for at least 2 years before you qualify
Financial institutions on the other hand told us that women entrepreneurs had the tendency of asking for more money than they could absorb. “Women can be incredibly ambitious,” one officer told us, “and sometimes we have to tell them to calm down, because there’s no way they can absorb that amount of funding.” Credit officers also work within risk requirements, existing cash flows and collateral rules and for regulated institutions, certain requirements cannot be wished away.
3. The rules are the barrier
Among the women sampled, 39% had been denied a loan for not meeting the eligibility criteria, and 38% couldn’t access financing because they lacked collateral.
Much of this comes down to opacity. Many women lacked a clear picture of what the assessment process demanded, the eligibility criteria they needed to meet, who to approach, or even how to prepare for the process.
And even those with collateral ran into further surprises:
- They didn’t know the collateral needed to be more than 100% or more of the value of the loan requested.
- And if you were married, you needed spousal consent to put up the collateral regardless of whether your spouse was a documented co-owner.
Our research also revealed that:
- Teams designing products and services rarely consulted the credit officers who deal with entrepreneurs on a daily basis.
- The same credit officers were working to meet loan targets, and were thus not fully transparent to entrepreneurs on the full requirements since their goal was meeting quotas.
Further, as regulated entities, loans above a certain size are legally required to carry collateral, full stop.
The result is therefore a system in which everyone could be following the rules and the outcomes remain poor.
So what would have to change?
1. Finding financial products should not feel like trying to find a needle in another pile of needles.
Financial institutions should equip front-line staff with accurate and current information about women-focused products, rather than leaving customers to discover them by chance.
Product communication should also be based on a better understanding of women’s businesses and the stages at which different financial needs arise. This means institutions must improve the information collected through KYC, involve women in product design, and create clearer channels for communicating relevant products and services.
2. The menus must become wider
If women are repeatedly telling financial institutions that they need short-term working capital, then working capital cannot remain a footnote to the traditional term loan. Digital lending, overdrafts, invoice discounting and alternative credit scoring all offer possibilities.
Previous borrowing through mobile money providers or microfinance institutions, for instance, can provide useful information about a business owner’s credit behaviour. Financial institutions can also explore ways to make longer-term borrowing more attractive through structures that reward established repayment behaviour.
3. The collateral wall needs more doors
Unsecured credit products can work particularly well for women entrepreneurs in service-based businesses where conventional fixed assets may be limited. Credit associations and investment clubs offer another route: they can allow financial institutions to reduce their exposure while building a deeper understanding of the women entrepreneurs they serve.
This, of course, doesn’t mean ignoring risk. It means asking whether risk is being assessed with all the information available, or simply with the information financial institutions have historically been set up to collect.
The Gender Smart Lending toolkit doesn’t ask institutions to take a leap of faith or lower their standards. It points to what’s working and asks why more of the market hasn’t caught up. It also asks institutions to build products around a more accurate picture of who their customers are, and how their businesses run.
In the last 5 years, financial institutions in Sub Saharan Africa have received over $2.5 billion in guarantee financing to enable increased lending to women entrepreneurs. Limited access to capital still remains the number one challenge faced by women entrepreneurs in Sub Saharan Africa.
For financial service providers interested in designing or refining products for women entrepreneurs, particularly those that have received or are deploying DFI funding intended to reach women, get in touch with us to talk about the specific design choices, product features, credit criteria, communication channels, that determine whether that capital actually reaches them.