Development Solutions: Credit where it’s overdue

By Moa Westman and Sabine Kayser

Women are at the heart of the Ugandan economy. They own almost 40% of all registered businesses, giving Uganda the highest concentration of female-owned businesses in the world. But Ugandan women often don’t get the support they need for their businesses to thrive. Women-owned businesses only account for a sliver — 9% — of commercial credit issued in the country.

An international initiative, the 2X Challenge, aims to change that. Launched in 2019, the 2X Challenge represents commitments by the G 7 industrialised nations to mobilise billions to fund women’s economic empowerment in developing countries. As of July, the 2X Challenge had committed and mobilised $4.5 billion.

The European Investment Bank adopted the 2X Challenge criteria in October 2019 and at the same time announced, SheInvest, its own commitment to mobilise €1 billion of gender-responsive investments across Africa. Initiatives like SheInvest and the 2X Challenge are trying to fill an estimated $1.7 trillion financing gap worldwide for micro, small and medium-sized businesses owned and run by women.

In December 2019, the European Investment Bank signed the first loan under the SheInvest initiative—to the Uganda Development Bank (UDB). The UDB received €15 million, almost one-third of which will go to supporting women-owned and women-run businesses. To find those candidates, UDB will apply the 2X Challenge’s investment criteria on female entrepreneurship, leadership, employment and consumption.

It isn’t business performance that often curtails women’s access to credit. It’s discrimination. In some countries, that discrimination is codified in local laws. For example, a woman may need her husband’s approval before taking out a loan or may not be allowed to own property. In other countries, discrimination is rooted in social customs or norms, which leads to an unconscious bias on the part of lenders. 

Preventing women from establishing and growing their businesses limits their financial independence and leads to inequality across society. Female-owned businesses are traditionally big employers of women, which means that credit discrimination touches more than just female entrepreneurs—it limits the economic participation of all women.

There is another important aspect to this problem that is often overlooked. Promoting female-owned and led business pulls more women into the formal economy.

Women tend to be overrepresented in the informal economy, with its precarious employment and lack of a social safety net. Globally, nearly 40% of women in wage-earning employment do not have access to social protections such as unemployment insurance, pension or paid maternity leave. That figure rises to 63% in sub-Saharan Africa, according to the International Labour Organization.

Micro loans in Senegal

Baobab Senegal traditionally provides microcredit to small firms, such as artisans, sellers in local markets, craftspeople and restaurateurs. Often, the businesses run by women are so small that they fail to interest normal banks. Women also face obstacles to providing collateral. Family assets may not be in their name, or they may need their husband’s approval for the loan.

Traditionally, microfinance associations have circumvented these obstacles by providing loans to groups of women, which were later parcelled out to individuals, says Mamadou Cissé, chief executive of Baobab Senegal. In Africa, women often use these groups as a depository for their savings, allowing them to build up funds for weddings, funerals and children’s education, in accounts that simulate traditional banks. Loaning larger sums to the group solved two main problems: it cut down microfinance firms’ administrative costs and got around the difficulties women faced in providing collateral.

Many female entrepreneurs have one main goal: to feed their family. Cissé says that in many cases, the primary breadwinner, usually the husband, doesn’t earn enough to cover basic expenses. Tiny loans to women-owned businesses help many families weather difficult times or a sudden loss in revenue, such as during the coronavirus pandemic.  “It’s an activity that is close to our heart,” he says.

Tiny firms aren’t Baobab’s only clients, however. One entrepreneur started her beauty supply company with a €1 500 loan. Through a series of loans, she was able to expand her business and now has 21 employees that deliver beauty supplies throughout the country.

The European Investment Bank is supporting Baobab with a €7 million loan. Four fifths of that money will go to female clients. The funds will allow Baobab Senegal, which is part of the larger digital financial services company Baobab Group, to provide an estimated 17 200 loans to small-scale entrepreneurs.

Recovery with a gender lens

The 2X Challenge does more than just raise money for female businesses. The 2X criteria harmonises development institutions’ efforts by creating a global standard for gender finance.

The 2X criteria has provided the European Investment Bank with rigour and clarity in establishing what should count as financing for gender equality and, as such, supports the Bank’s own gender strategy. Applying the criteria also enables the European Investment Bank to better track our gender investments. Since January 2018, the Bank has provided over €430 million of financing inside and outside Europe that meet the criteria.

Rebuilding our economies after the coronavirus pandemic presents enormous challenges, but also a tremendous opportunity to support women’s economic participation. The 2X Challenge criteria should be incorporated into economic stimulus and recovery efforts to help promote female entrepreneurship and employment.  The pandemic could provide a unique opportunity for women-owned businesses active in health care and online education. It could also encourage small businesses to improve their digital and online marketing skills to address the disruptions brought on by COVID-19.

Lack of credit limits women’s ability to contribute economically and socially. It also hobbles a society’s ability to face enormous challenges like poverty, climate change, and health crises like the current pandemic. Support for women’s economic empowerment is key to helping countries develop and create wealth.

Moa Westman is a gender specialist at the European Investment Bank. Sabine Kayser is a senior policy officer.