Women entrepreneurs make significant contributions to the global economy year after year, especially through innovation, job creation, and wealth creation. Still, there is critical room for improvement, as women currently make up 70% of the 1.3 billion people living in poverty. These women often face a lack of capital, which is one of the primary barriers to the full participation of women in the economy through avenues such as entrepreneurship.
Microfinance institutions can comprise an important piece of the puzzle by providing microloans to women entrepreneurs, and thus can claim to enhance women’s economic empowerment. The International Labour Office Director-General Juan Somavia asserts that “microcredit plays a critical role in empowering women [as it] helps deliver newfound respect, independence, and participation for women in their communities.” But to what extent do microcredit loans actually foster women’s empowerment worldwide? The answer is more complicated than it may seem.
Hurdles to Overcome
Women entrepreneurs must grapple with multiple factors, such as lack of access to finance, cultural barriers, and complications with industry sectors. Though women work more on average (as measured by proportion of work and hours worked) than men, the gender wage gap remains prevalent.
Women earn only 50-75% of men’s earnings and may not have collateral to secure traditional loans. This poses a challenge, as data collected in Turkey determined that access to human, financial, and family capital each positively relates to the likelihood of becoming an entrepreneur. Unequal access to these forms of capital based on gender therefore negatively impacts women’s entrepreneurship. Additionally, the prevalence of women’s involvement in the informal sector (74% of women’s work in Sub-Saharan Africa and 63% in South Asia) leads to their de-prioritization from commercial banks. A lack of access to finance has been noted as a primary barrier to women’s entrepreneurship by multiple Women’s Business Associations that partner with CIPE. This effect is particularly noticeable among impoverished women, as wealthy women have more options (such as turning to personal savings or family finances to start businesses). This is where microfinance comes into the picture.
Women make up the largest portion of microcredit borrowers.
Microfinance provides financially marginalized entrepreneurs access to capital through microloans that can range from just $100 to thousands of dollars. The practice is widespread: MIX Market estimates that in 2015, 125 million people worldwide received microcredit loans, valued at around $100 billion cumulatively.
The microloans are offered without collateral, although most microfinance institutions do collect interest on the loan. Repayment rates are impressive, reaching 98 to 99% for most microfinance institutions. Exact details vary between programs: some may offer group lending programs, weekly repayment schemes, or financial literacy programs. In addition to the microcredit loan itself, microfinance institutions may include savings programs, training courses, insurance plans, and more. These resources further compound the benefits of the microloan for financially marginalized groups.
Women make up the largest portion of microcredit borrowers. In 2015, 80% of borrowers were women. Microfinance institutions target women in an attempt to mitigate the aforementioned gender inequalities which make it difficult for women entrepreneurs to thrive. Moreover, women demonstrate higher repayment rates than men. They are considered less likely to default as a result of an assumption that women are ”more susceptible to group pressures to repay.” Measuring the extent to which microcredit empowers these women is complicated, to say the least.
Making a Difference
Examining poverty rates with regard to income before and after microcredit loans is somewhat inconclusive. World Bank economist Shahidur Khandker in a 2005 study tracked a microcredit program in Bangladesh for more than 10 years. Khandker found that poverty rates decreased by more than twenty percentage points among the earliest microfinance borrowers, and that this impact was stronger for female entrepreneurs. On the flip side, a 2015 roundup of randomized controlled trials of microloan programs in multiple countries found that borrowers did not significantly increase their incomes relative to the control groups. However, even if microfinance does not bring women entrepreneurs out of poverty, Simone Schaner, a Dartmouth economist, told NPR there is no evidence microloans are actually causing widespread reduction of incomes.
Whether or not one agrees that microcredit improves sustained income, microloans do enhance women’s economic empowerment through other avenues. Demonstrated benefits include helping women self-support, job creation in the community, greater control of monetary assets by women, and income smoothing.
A lack of access to finance has been noted as a primary barrier to women’s entrepreneurship by multiple Women’s Business Associations that partner with CIPE.
Studies also demonstrate reductions in domestic violence and improved family relations. The benefits of microcredit loans go beyond simply the borrower herself: for example, the International Labour Office Geneva contends that money earned by women as a result of microfinance programs is often re-invested into children’s education. They note that this particularly benefits young girls.
Even considering these benefits, it is important to note the concerns that microcredit loans may have an adverse impact on some women. For one, it is possible that male family members may take control over loans. Additionally, the International Labour Office Geneva notes that microcredit loans sometimes increase the amount of work for women within families, because of the responsibility for loan repayment. These problems provide insight into the considerations microfinance institutions should keep in mind when developing future microcredit loan models for women.
Discussing women’s economic contributions is uniquely important during Women’s History Month as the world strives to acknowledge the critical role of women in every facet of society. Overall, microcredit loans provide an innovative solution to the barriers women entrepreneurs face. Whether these loans have the intended effect on poverty is still up for debate, but they clearly do lead to gains in the quality of life for many women. Moving forward, microfinance institutions and development organizations should venture to improve upon microloan models and continue to foster women’s economic empowerment worldwide.