Funding Empowerment: The Missing Middle, Women led SMEs, and the Assumption Trap

The Missing Middle
Small and Medium Enterprises (SMEs) are one of the key engines of job creation in developing and post-conflict states. The International Finance Corporation (IFC) documented that SMEs provide 45% of formal employment in developing countries and 29% on average in low-income countries including fragile, conflict and post-conflict countries. While SMEs are recognized as potential catalysts for economic growth, until recently, global financing (including donors and the banking system) has focused more on microfinance, larger (less risky) companies, and foreign direct investment. There is a far richer history of donor financed microfinance programs than for SME development. Similarly for commercial banks, small and growing enterprises are the last group of commercial actors they wish to lend to because of lack of collateral and higher risk of default.

There has however been an increasing recognition of the beneficial role of SMEs, especially over the last five years. Development Finance Institutions (DFIs), local actors and other donors have begun to intensify their efforts to engage with SMEs to provide more financing along with innovative tools for sustainability. However, financing for local businesses still largely misses SMEs or the “missing middle,” especially for women entrepreneurs.

Despite increased initiatives to support SME development, entrepreneurs in developing countries still face challenges in raising capital and access to markets. This is not entirely due to lack of financial support for SME development, but also because many entrepreneurs lack the requisite business skills to build viable and sustainable business plans. While entrepreneurs may have more knowledge of local actors and systems, they are unable to compete against larger companies even for local contracts. This problem is especially acute for women entrepreneurs not only because of cultural norms related to working women and an inequitable balance in household decision making, but also because of other financial and technical barriers; women entrepreneurs are more accustomed to working in the informal sector, have shorter histories of viable businesses, less mobility, and limited business networks. Most importantly, they often lack the land titles needed as collateral for loans. All in all, they are ‘riskier’ for financing and thus, more credit constrained. It is noteworthy that the IFC found no notable gap between male and female productivity in the SME sector, when all other factors were kept equal.

Empowering Women

Aid programs targeting women have not been immune from the recent trend in the development community towards using partial private-sector led solutions. Shrinking aid budgets and growing frustration with the effectiveness of traditional aid channeled through governments, have encouraged donors to partner with the private sector. For women’s empowerment programs, this has meant increased funding for women-owned businesses.

Financing women-owned SMEs has the potential to positively influence women’s lives in developing countries and contribute to economic growth through the formal economy. This is especially important in post-conflict countries where women tend to be the sole adult survivors when their male counterparts are killed or injured in conflicts. Similarly, women tend to actively participate less in conflicts, making them more trustworthy in their local communities. In the long run, there is also a correlation between female entrepreneurship and increased participation and empowerment of women in the political sphere, and more broadly in the formal economy. However, conflict and post-conflict countries have even larger barriers for women business owners beyond the typical obstacles faced in developing countries.

This makes programs to finance effective women-owned SMEs especially important. In order for programs financing women-owned SMEs to be successful, they must be based on systematic evaluation of the actual empowerment impacts on women recipients.

The Assumption Trap

There are lessons that can be learnt from the rich history of microfinance for financing women-owned SMEs, particularly because two-thirds of micro-finance recipients are women and in some countries this proportion is even higher. Microfinance has proven in many cases to be a cost-effective way of increasing women’s equality, including in household decision making, and economic independence. Certainly, as the focus pivots to provide more financing through innovative methods to women-led SMEs in developing countries, there are certain ‘assumption’ traps to be avoided which can be identified from evaluations of microfinance programs.

Recent studies tracking the effects of microfinance loans have found that in some cases there are limited effects on women’s equality and economic situation. The main flaw identified is that programs for women are not always designed using systematic evaluation of the actual effects of micro loans, but rather have relied on assumptions about what will empower women.

For example, a common form of microfinance gives group loans and relies on peer-pressure to enforce repayment. This method of loan distribution increases loan repayment, but in many cases has actually had negative effects on women recipients. The assumption is that high rates of loan repayment mean that programs are effective, when in reality women sometimes sell property or go into debt to other community members to repay loans. This assumption, in turn, is based on the stereotype that women pay back loans at higher rates than men because they are more responsible with money. Another assumption is that loaning to women increases their power within their communities and families. This is not always the case; male members may continue to control finances, while women continue to be responsible for repayment of loans.

The takeaway here is that making assumptions about women or about the effects of programs on female empowerment in the absence of systematic evaluation is dangerous for financing women owned SMEs.

Potential Solutions

There are a number of ongoing initiatives that have the potential to measure empowerment over time by explicitly building in metrics for empowerment.  However, measuring empowerment is easier said than done. Recently, USAID and the World Bank, in partnership with several NGOs, launched Women Leadership in SMEs (WLSME) to collect information on women-owned SMEs, with the aim of increasing aid projects to finance women-owned businesses. The two purported benefits—that funding women-owned SMEs is cost-effective and beneficial to the economy—are the “business case” for funding women-owned businesses. The business case is an important component of these programs. Donors need to know about the viability of financing women-owned SMEs.

However, tracking the effects of financing women-owned businesses on women’s empowerment, as well is equally important. Programs should clearly define how they hope to empower women (for example, by increasing women leadership in communities or women’s access to education). Gathering this information will help donors design programs to maximize benefits for women and avoid techniques that could negatively effect women’s equality and well-being. Having realistic expectations about the effects of programs will help donors know what other women’s empowerment programs should be paired with financing women-owned SMEs.

As WLSME type initiatives mature, they certainly will have historical data of their own to examine the empowerment gains. At present though, donors should allocate funds to use existing programs and their results to analyze empowerment gains. Naturally, this will differ in different countries but will provide a context specific benchmark.

Another way to empower women is to put entrepreneurial women role models in charge of assessing business plans, feasibility, and designing the appropriate loan structures in terms of interest and repayment schedules. Similarly, taking advantage of certain gender norms while designing loans or financing programs can actually provide short-term empowerment gains for women. External research has shown that in certain cases where women may be the borrowers but men direct the loans, women still feel more empowered particularly in household decision- making.

Private sector and civil society initiatives can also implement and track empowerment metrics. They can enter into public private partnerships for greater exchange of information for mutual benefit. For example, the Goldman Sachs 10,000 Women Initiative that trains women entrepreneurs on the operational side of doing business can provide country specific insights on risks and results from their own experience. In the same way, nonprofits such as Building Markets that focuses on business matching services, local sourcing and market access could share their expertise and experience on how their services provide empowerment.

The potential is staggering for programs funding SME development in developing countries to act as catalysts of change, foster innovation, increase jobs, and improve economic conditions. Supporting job-creating SMEs is particularly important for a number of developing countries that have large youth populations and can capitalize on demographic dividends – something that cannot be achieved without the inclusion of women.

Sadika Hameed is a fellow with the Program on Crisis, Conflict, and Cooperation (C3) at the Center for Strategic and International Studies (CSIS) in Washington D.C Julie Halterman is an intern with the C3 program.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Sadika Hameed

Julie Halterman