Moving Beyond Micro: Women-Owned Businesses

The next post in a new series in preparation for the XIV Inter-American Forum on Microenterprise (Foromic) in Costa Rica from 10-12 October. CGAP and the MIF are joining forces to argue about the key challenges in microfinance and distill the game-changing solutions for greater financial inclusion and stronger micro and small enterprises in Latin America and the Caribbean. These posts will also be featured on MIF’s Microfinance Blog in Spanish.

The profile of a woman business owner in Latin America and the Caribbean is as diverse as the factors on which her success hinges, yet the vast majority are microenterprises by necessity, not by preference, in informal service sectors. While women’s entrepreneurship rates have soared in the last decade in Latin America and the Caribbean, their business growth rates have been significantly lower than men’s for a number of reasons, including lower access to finance, less business education or work experience, confinement to slower growth sectors, and the burden of childcare and household management responsibilities.

Despite these barriers to growth, Latin American women are an important force for poverty reduction and economic growth as employees and new job creators with a positive impact on a country’s competitiveness, productivity, and growth potentials. Studies have shown that women’s entrepreneurship, particularly when focused on high-value-added activities, is fundamental to social and economic progress in developing countries; women are more inclined to use their income for the education, health, and well-being of their families and communities. While women micro-entrepreneurs generally suffer lower profits and higher failure rates than men, studies in the LAC region show that women-owned medium and large businesses are just as profitable as male-owned businesses. However, recent IFC/McKinsey research to be presented at upcoming 2011 G-20 meeting in Cannes this November suggests that globally, on average, women own 60% of microenterprises, 25% own small businesses and 8% own medium businesses, and the numbers in Latin America and the Caribbean are similar.

Women’s absence in SMEs raises two central questions:

• How can women develop larger businesses in more profitable sectors in Latin America and the Caribbean?
• What are women’s specific needs if they are to transition from microfinance to small enterprise lending?

Since the 1990s microfinance has been heralded by some as the “magic bullet for women’s empowerment.” But merely because women comprised the majority of microfinance clients did not mean that the social and gendered dimensions of women’s business growth have been addressed.

To the contrary, microloans to women are often not aimed at business growth or long-term business investment, and women micro-entrepreneurs tend to not graduate to larger individual or business loans in many microfinance programs in the region despite women’s excellent repayment records. Instead, small, short-term microloans have largely been used for consumption smoothing, although they have undoubtedly filled an important niche that has improved the social and economic well-being of borrowers and their families worldwide.

The overrepresentation of women in the micro sphere leads us to question whether women need a greater variety of (or simply enhanced access to) financial tools and human capital inputs to help them grow their businesses and why it matters if women entrepreneurs never grow to the SME level. Studies like the Women’s Economic Opportunities in the Formal Private Sector in Latin America and the Caribbean contend that microenterprises might be important in the short run from the point of view of women’s economic empowerment and consumption smoothing, but unless their natural progression to succeed and grow is enabled, their link to macroeconomic growth remains weak.

To determine where focused and targeted investments can deliver greatest impact for women’s business growth it is important to take a look at the financial and non-financial barriers that constrain women entrepreneurs. When looking at credit, data show that women entrepreneurs tend to apply for, access, and use credit differently from male clients. Women tend to use credit less often, have smaller loans, and rely more frequently on informal sources of credit. Also, female entrepreneurs emphasize the relative abundance of microcredit for women in comparison with the lack of credit of a scale and interest rate appropriate for SMEs. This finding calls into question if the main issue is the availability of appropriate credit products for the micro to SME business transition or gender-specific concerns. Moreover, women’s needs go beyond credit to a diverse set of financial services and products during the life-cycle of their business, including savings instruments, remittance transfers, credit insurance, and equity products. Which financial barriers are indeed gender-specific, and how we can better use MFIs and other financial institutions as channels to enable access to a broader range of financial products for women?

In addition to financial barriers, both male and female-run businesses face non-financial barriers to business growth, but many have been found to disproportionately affect women entrepreneurs. For example, women typically have lower human capital (education, skills, and work experience), higher contextual constraints (time, bargaining power, mobility), and lower or complete lack of property rights, assets, or collateral. However, despite the sex-based differences in non-financial barriers, we still find that differences between men’s and women’s businesses are more significant by formality, sector and size than by gender, yet we cannot determine to what extent gender differences in constraints themselves explain why women are more likely to operate smaller firms and to concentrate at the microenterprise level.

Moving forward, understanding barriers women’s businesses face and creating a climate that is conducive to increasing the share of women in larger businesses in more profitable sectors is necessary for countries in the region to further leverage the economic power of women for growth. Here’s a list of some issues I identified. What’s missing?

1. Identifying and addressing the specific constraints faced by women in accessing formal financial services, including savings, credit, insurance, and money-transfer services, and offering greater access to financial instruments;
2. Providing business skill training and advisory services as well as improving financial literacy and management training;
3. Facilitating networking and information-sharing among women entrepreneurs; and
4. Increasing women’s participation in advisory boards and other forums to contribute to the formulation and review of policies and programs being developed by financial institutions.