$700 billion.
This is how much additional annual income banks and other financial service providers could generate if they offered women financial services to the same extent as men. By overlooking women, the financial industry is missing out on a business opportunity that could bring in revenues that could be more than three times Elon Musk’s estimated net worth.
As I explain in my book, There’s Nothing Micro about a Billion Women, nearly 1 billion women around the world are excluded from the formal financial system, although many exercise significant influence over purchasing decisions as household finance managers or business owners. Why is this happening? Financial service providers, particularly in developing countries, are slow to develop products that meet women’s needs, leaving a lot of money on the table.
This inertia is certainly not in the banks’ best interest. Women are loyal customers for financial services firms: A 2018 analysis found that in the US, 61% of women have stayed with a bank for more than five years, compared to 46% of men. The analysis also found that women typically had better loan repayment rates than men and were less likely to “fail” checks.
For the last 50 years, ‘banking the poor’ has largely been the domain of microfinance institutions – but digital technology has drastically reduced the costs that more established financial institutions have faced to serve this customer base. The expansion of financial services to unbanked and underserved women in developing countries represents an impressive untapped market opportunity: more than $2 trillion in new deposits and $65 billion in new net interest income and fees from mortgages and other retail loans.
There are an estimated 320 million registered micro, small and medium-sized enterprises or MSMEs in developing countries, contributing two-thirds of private sector employment and up to 40% of GDP in their respective countries. While a quarter of these companies are run by women, many of them are struggling to get funding – resulting in an unmet funding need of $1.7 trillion. Giving these women-led micro, small and medium-sized enterprises better access to credit and other financing would be a boon to their countries’ banks and economies.
The changes required to close the gender gap in small business access to capital are too complex and interrelated for any single actor to tackle alone. Governments need to shape policies that address disparities in women’s access to technology and financial services. For their part, financial service providers need to shed the blinders that keep them from seeing women as valued customers. A fairer financial system would not only mean a stronger global economy and more revenue for banks – it would mean more financial freedom for women around the world.
Revising laws to give women access to capital
Governments can use a variety of policy tools to expand access to capital for MSMEs. Data suggests that the main reason bank loan applications are rejected is that borrowers fail to provide acceptable or appropriate assets as collateral for a loan. If the company fails to repay a loan secured by collateral — which can range from real estate to receivables — the lender can seize and sell those assets to try to get the money back. While it doesn’t appear that women are more likely to be denied loans than men, they are are less likely to apply for a loan at all because of concerns about lack of collateral.
But what if the problem isn’t so much a lack of wealth as a legal framework that doesn’t allow for women’s wealth do to use as collateral? Land and buildings account for 73% of assets used as collateral by banks in developing countries. But about 40% of countries restrict women’s property rights in some way. Laws prohibit a woman from owning property or require her husband’s consent before she can borrow money—even if that property was acquired during the marriage or brought into the marriage by the woman. Other limitations include the inability to claim assets upon dissolution of a marriage and the lack of inheritance rights for surviving female spouses and daughters.
These discriminatory legal frameworks often reflect restrictive social and cultural norms, slowing down much-needed reforms. Meanwhile, more and more countries are allowing the use of corporate assets such as equipment or inventory (known as movable securities), opening the door to women who lack access to land or property to secure credit. Expanding the types of assets companies can use to secure finance can also lead to the development of a more diverse set of financial tools and the creation of institutions aimed at serving small businesses. For example, a farmer could fund the purchase of a tractor by using the tractor itself as collateral, through a traditional bank loan, or perhaps through a leasing company.
When evaluating a loan application, banks also look at a prospective borrower’s proven repayment history — how well they’ve paid off other debts, such as home loans, credit cards, or even utility bills. But in many developing countries, government-sponsored credit bureaus collect limited data, mostly on large corporate loans, leaving banks with little information when considering new loans for women-owned businesses. Many credit bureaus in developing countries exclude repayment information from microfinance institutions, which are often the only lenders willing to lend to small businesses run by women. Therefore, even if an entrepreneur has an impeccable track record of repaying loans to a microfinance institution, she needs to create her credit history from scratch when applying for a bank loan. For example, when the Afghan Credit Registry began collecting repayment data from microfinance institutions, banks were able to integrate this information into their loan approval processes. Loans to women, based on credit register data, rose from a negligible amount to 20% of all loans granted in just 18 months.
Fintechs can help bridge the gap…
Fintechs can break down many of the barriers women face when it comes to lending. Using alternative data sources such as phone and utility payments for credit decisions can be particularly helpful for women, as they can prove their creditworthiness without a Schufa. With access to potential borrowers’ smartphone data, digital lenders construct an algorithm to determine their ability to repay and decide whether to offer credit to customers who are unlikely to have traditional creditworthiness. After the borrower has repaid the first loan, she has a credit history on which later credit decisions can be based.
A fintech business model – online peer-to-peer lending platforms – is emerging as a faster and less cumbersome way than traditional banks to connect women entrepreneurs with lenders. Through these platforms, people can submit loan applications and provide information about their businesses and their plans for using the requested funds. Investors on the platform make lending decisions based on the information provided and then make money by paying interest on their loan.
Amartha, an Indonesian fintech company, is a good example of this model. It offers microcredit to rural women entrepreneurs through a peer-to-peer platform and a proprietary credit scoring system based on more than 90 parameters, including the women’s demographic information and their payment performance for other obligations such as utilities or school fees. Amartha assesses the borrower’s creditworthiness, assigns them a credit score, approves their loan application, and then posts the loan request to its online marketplace. Individual lenders then select a loan to fund based on the customer’s profile. Amartha handles the disbursement of funds and the investor-lenders receive weekly payments of principal and interest and can track the status of the loan online.
… but all financial service providers need to step up their game
When Kenya’s largest bank, KCB, decided to expand its portfolio of micro, small and medium-sized companies with a focus on women-owned businesses, its crucial first step was to evaluate companies by how much money they make, not how the borrower had a lot of collateral. It also expanded its popular business club for entrepreneurs to include networking opportunities and leadership training through a local business school. To equalize lending opportunities, the bank trained loan officers on the different financial needs and preferences of men and women.
These changes yielded impressive results almost immediately, with industries increasing loans to women-owned companies to an average of 50% of their portfolios, adding few “bad” loans in the process. Customers in the pilot program saw a 110% increase in customer satisfaction. The impact of the program was also felt outside the bank: companies that had received loans from KCB increased their headcount by an average of 113%, compared to the average increase of 40% for non-borrowers.
Emerging financial services firms like KCB are beginning to recognize that women-led businesses are a valuable, underserved segment of the market. A key difference is these banks’ understanding that non-financial services such as training and networking opportunities can win these customers’ business.
Financial service providers across the board — from traditional providers like banks and insurance companies to newcomers like fintechs and mobile money providers — have failed to serve women. As these companies grapple with the economic fallout of both the pandemic and a recession, it’s time they admit that a $700 billion annual revenue opportunity is too big to ignore.
Mary Ellen Iskenderian is President and CEO of Women’s World Banking and author of There’s Nothing Micro about a Billion Women.