Microfinance and women in the literature

Back to Women and micro-finance in New Zealand Contents page
Social development perspective
Economic development perspective

The topic of women and micro-finance has been written about from the perspective of a number of different fields of study and/or practice, and therefore the first step for the researchers was to "scope out" the literature review in the context of these related areas. This exercise produced a list that included; micro-finance (or micro-credit) as a development "strategy"; gender and its impact on wealth, economic determination and business creation; and small business with micro-enterprise finance as a "tool" to stimulate the sector. The identification of these areas produced the conceptual framework for the review (as represented in Figure 2).

Identifying the broader context for the topic was important, as it became quickly apparent that there is a dearth of literature that deals specifically with women AND micro-finance in a robust way. By contrast, much of the literature deals with perceptions of what barriers exist and details the way in which different micro-finance programmes operate - particularly in the context of developing countries. The result is a sort of "received wisdom" that permeates the field at all levels. For example, Berger (1989, cited in Almeyda, 1996) summarises "what is known" by noting that:

• Women tend to have a lower debt capacity since their businesses are under-capitalised and in activities with low profitability.
• Women are more averse to risk and consequently demand fewer, smaller loans.
• Low-income women prefer other types of financing over debt for business purposes.
• Women own less property and consequently are less likely to meet collateral requirements.
• Application procedures can require the co-signature of the husband, which increases transaction costs.
• Women face socio-cultural constraints.
• Due to their multiple household and economic responsibilities women face serious time constraints and therefore are negatively impacted by transaction costs.
• Women have different sources of information.

While some of the points made here are clearly important in some countries, there is little research that demonstrates the impact of these constraints, or evaluates the effectiveness of various programmes that have been designed to minimise their impact.

Despite these caveats (that the literature is characterised by a lack of empirical research, and dominated by descriptions of programmes in developing countries), there was some information that was useful. This was either because it provided insights about finance and self-employed individuals that were general enough to be relevant to a group such as women, or because it was specific to women but potentially relevant in a number of different contexts. This literature has been summarised below under two main headings that reflect the two perspectives demonstrated in Figure 2: social development and economic development

Back to top

SOCIAL DEVELOPMENT PERSPECTIVE

Micro-finance as a "strategy" programmes operate  has received little focus in terms of the context of industrialised (or developed) countries. Instead the bulk of the literature focuses on micro-finance and micro-credit as development strategies to uplift the impoverished citizens of developing countries. Women are a specific target group of many strategies of this type. Most initiatives are modelled on initiatives such as the Grameen Bank, which has received considerable attention in the research-based and practitioner literatures.

The result is a significant amount of material relating to the formulation, maintenance and administration of such programmes (for example Almeyda, 1996). Whilst little of this may be transferable to a "developed" or "industrialised" context, it does suggest that there is a standard of "best practice delivery" - a concept that clearly is transferable (e.g. Fairley, 1998; Hollis & Sweetman, 1998; Woolcock, 1999; Metcalf, Crowley, Anderson & Bainton, 2000; Morduch, 2000). A New Zealand study (Walker, 1996) explored the common success factors for providers of micro-enterprise finance (target customers; service design and delivery; financial management; institution building; supplier relationships; and government) with a particular focus on Māori.

Some of the key points of these studies include:

• Much research on micro-enterprise finance centres on viability and outreach (principles that are essential to the development of sustainable financial systems) (Christen, Rhyne, & Vogel, 1994, cited in Almeyda, 1996).
• A distinction is made between micro-enterprise finance (which excluded households that were not linked to micro-enterprises) and micro-finance (financial strategies that facilitate the better management of households and enterprises) (Christen et al, 1994, cited in Almeyda, 1996).
• There has been a change in emphasis in the literature; away from discrete credit projects for women towards "institutional viability" and "systems development" in order to ensure the provision of a continuous supply of financial services for women (Almeyda, 1996).
• Multilateral development banks are embracing micro-credit as an opportunity to move from the capital-intensive "development as charity" model to the potentially profitable "development as business" model. Though it is still crucial to distinguish between the two types of micro-lenders - those whose aim is empowerment of the poor and those for whom profit is the goal (Singh & Wysham, 1997).
• There are three paradigms that underpin any debate on micro-finance and gender: the financial sustainability paradigm; the poverty alleviation paradigm; and the feminist empowerment paradigm (for more on these see Mayoux, 2001).

In recognising the importance of self-employment (as a developmental strategy) both governmental and non-governmental organisations around the world are focusing on credit programmes that extend micro-capital to small-scale entrepreneurs. Whilst these intermediary programmes vary in their target groups and structures, they suggest that women are good credit risks, and report that repayment rates are high for programmes that target women (Panjaitan-Drioadisuryo & Cloud, 1999). For example, "as conditions for successful microcredit loan operations become better established, research attention is shifting towards assessing the impact of credit on poor women. As everything about the informal sector is difficult to document, much of this research examines the impact on the household, rather than on the local or national economy" (Panjaitan-Drioadisuryo & Cloud, 1999, p.771).

The increasing visibility of micro-finance programmes is noticeable; "Ten years ago only aid workers had heard of micro-credit. The practice of lending small amounts of money, without collateral, to poor would-be entrepreneurs was on the fringes of international finance" ("From sandals", 1997, p.75). Latterly there has been a shift in terms of the focus of micro-finance initiatives to encompass their adoption in developed countries. Whilst still far from the financial mainstream it is seen as an area where public/private collaboration shows promise. This attitude is demonstrated by a number of commentators, and the following comment is typical; "the micro-finance movement exploits new contractual structures and/organisational forms that reduce the riskiness and costs of making small, uncollateralised loans" (Morduch, 2000, p.617). What seems to be occurring is a subtle shift in the way in which micro-finance is viewed: away from a simple view of micro-finance as a mono-dimensional strategy (either in relation to social change or economic growth) towards a recognition that micro-finance has the potential to act as a tool that can address social and economic challenges simultaneously.

This shift in the potential application of micro-finance as a paradigm is depicted in Figure 3.

Back to top

This shift in the way in which micro-finance is now viewed is demonstrated by an increase in the amount of attention devoted to its study by major institutions. For example, the International Labour Office has carried out significant work in the area of "social finance", and notably involves a number of developed countries (for example see ILO, 2000). The ILO is also an example of an organisation that possesses a body of knowledge comprehensive enough for it to produce training manuals in the area of micro-enterprise finance provision.

Other researchers have accumulated enough knowledge to be able to describe characteristics of effective micro-finance programmes. For example Orser and Foster (1994) concluded that an effective micro-finance initiative would be characterised by:

• Simplicity
• Risk assumption
• Accessibility
• Active solicitation
• Active participation
• Lending principles
• Interactive technology
• Government policy links.

Back to top

Figure 3: Different perspectives on micro-finance

Two examples of developed countries that have actively explored the relevance of micro-finance programmes are the UK (see Tucker & Lean, 2001) and the USA. In America, according to The Economist ("From sandals", 1997), there are 300 or so micro-credit programmes. This level of activity has resulted in a strong practitioner base that provides a forum for discussion on issues such as policy and good practice, and which provides a mechanism for lobbying government agencies. For example, in February 1999 there was a Micro-credit Summit in Washington shortly before the budget in which funding for micro-credit loan programmes administered by the Small Business Administration was doubled.

One of the key micro-credit programmes is the one that is operated by the SBA. This programme existed as a prototype until its continuance was confirmed in August 1998, and although it lends to all, women are particular targets. The theory underpinning the programme is that large businesses can be incubated from would-be entrepreneurs and in the process welfare dependence and unemployment is reduced (i.e. micro-credit is seen as a tool for social and economic development) (Peterson, 1999).

There is concern in some quarters about the prevalence of micro-credit programmes in the USA, where some believe they have always struggled (Buntin, 1997). This stems from the fact that micro-credit programmes in the past have flourished in places where the majority of the workforce is self-employed, the economy is informal and credit is the primary obstacle to founding - all of which are not characteristics of the USA (Buntin, 1997). Bhatt, Painter and Tang (1999) described the outcomes of micro-credit programmes in America as "decidedly mixed" and pointed out that outreach was limited (i.e. did not make many loans and had capital sitting unused) and overhead costs high (i.e. administrative costs outweighed the value of the portfolio).

Back to top

ECONOMIC DEVELOPMENT PERSPECTIVE

An alternative (although related) perspective on women and micro-finance comes from the literature that addresses micro-finance as an instrument in enabling women to become self-employed and establish businesses. In this context much of the research focus has been on women who are already in business, rather than on those who may be intending to be (i.e. often described as "nascent entrepreneurs"). The perceived barriers to women starting enterprises is an ongoing area of emphasis; in particular the issue of financial disadvantage (see for example Hilhorth & Oppenoorth, 1992). Whilst material that pertains directly to micro-finance is limited, a picture is presented that indicates that women may need access to micro-finance because of barriers to other more traditional capital sources. However, it should be noted that problems in "accessing finance" is a common complaint from the small and medium enterprise sector as a whole (i.e. it does not seem to be an issue that is specific to women).

A useful overview of this segment of the literature is presented by Carter (2000), who suggested that the majority of research into self-employed women and finance has focused on four areas:

1. The disadvantages women face in raising start-up capital.
2. The fact women are often unable to meet the guarantees required by lending institutions. For example in Australia Still and Timms (2000) found that the gendered distribution of wealth (e.g. access to finance and accumulation of assets) was a significant issue for women in small business.
3. That finance for ongoing businesses is less available largely due to the inability of women to penetrate formal and informal finance networks
4. The issue of whether women's relationships with bankers suffer due to sex stereotyping and discrimination.
   The relevant findings from some of these dominant areas are discussed in more detail in the following sub-sections of the report.

Back to top

Whilst the research into these areas presents similar conclusions, and often forcefully, the field as a whole is characterised by conflicting, and often contradictory, empirical evidence (Carter & Rosa, 1998). Some research finds supporting evidence and on that basis presents strong arguments to support the disadvantages women face. For example Carter, Williams & Reynolds (1997): "overt discrimination has been viewed as restricting women's access to critical opportunity structures and resources in the external environment" (p.129). Others (e.g. Buttner & Rosen, 1989; Tigges & Green, 1994, cited in Carter, Williams & Reynolds, 1997) report mixed findings in terms of the presence of discrimination and often directly challenge the validity of significant pieces of earlier research in the field. For example Buttner and Rosen (1989) suggested that the findings of Hisrich and O'Brien's 1982 study might not be valid. Indeed gender difference rather than disadvantage is often the conclusion drawn in relation to the consideration of financial issues (Carter & Rosa, 1998). In this context Buttner and Rosen (1989) found that the financial data in business plans was more influential than gender in determining the allocation and magnitude of start-up loans (but that the presence of detailed financial data was often associated with gender).

Back to top

The disadvantages women face in raising start-up capital
The focus on disadvantages faced at start-up has created a wealth of data, but perhaps at the expense of understanding the financial concerns of nascent entrepreneurs or whether disadvantages are resolved once trading commences Carter (2000). In fact Brush (1992) argued that financial problems of women-owned enterprises do seem to vary by stage of business development.

A significant amount of research suggests that women on the whole:

• face barriers accessing capital and mobilising start-up resources
• start businesses using less capital than men
• are less likely to use bank loans compared to men at start-up.

Those who argue for these points include a number of well-known international researchers, such as Hisrich and Brush (1984); Riding and Swift (1990); Brush (1992); Orser and Foster (1994); Coleman and Carsky (1996); Carter, Williams and Reynolds (1997); Carter and Rosa (1998); Inman (2000); Verheul and Thurik (2001). These arguments are also put forward by those considering the topic from the perspective of practice, e.g. the HUB Committee (1993); OECD (c1997); Borzi (1994).

This list of sources suggests that similar conclusions regarding the financial disadvantages women face at start-up have been made across a considerable time period and in a variety of countries (including Australia, USA, UK and Canada).

In the Australian context (as the situation most closely comparable to New Zealand), Still and Timms (2000) found that women in small business in Australia "suffered deficient access to debt and equity finance through networks, banks and the finance sector" (p.277). Women's under-representation or non-representation on small business decision-making bodies also meant their views were not necessarily represented in lobbying policy makers.

Verheul and Thurik (2001) made the point that the impact of gender on finance can be indirect (referring to differences between males and females with respect to types of business, management experience etc) or direct (i.e. an effect that cannot be attributed to such characteristics and is therefore related to gender). The authors' point about the indirect effect of gender raises the fact that women do have a tendency to enter industries or sectors in which start-up costs are lower, and that these choices are arguably as a result of financial disadvantage they face.

In researching the size determinants of women owned businesses, Carter and Allen (1997) found that "having access to financial resources and emphasising the financial aspects of the business overwhelm the effect of the entrepreneur's lifestyle intention or choice on their chances for having large businesses" (p.211). The authors concluded that access to financial resources and size (usually in terms of numbers of individuals employed) are correlated. The findings "help researchers to move away from the stereotypes that represent women-owned businesses by finding that the lack of financial resources, more than any deliberate or socially induced choice on the part of women, appears to be the primary deterrent to growth" (Carter & Allen, 1997, p.219).

In terms of sources of start-up capital Haynes and Haynes (1993) examined the debt structures of women owned businesses in 1987 and 1993 and found that in both data sets there was a higher probability that women would borrow from family and friends and use non-traditional or non-institutional lenders (which may mean women incur higher search and transaction costs).

Carter and Rosa (1998) studied 600 firms in the United Kingdom, and argued that the shortfall in initial capitalisation many women face could set them at a disadvantage in terms of the business's capacity for growth.

In response to the perceived disadvantage in terms of business growth identified in their research Carter and Rosa (1998) suggested that a training programme that addresses the weaker position of women (in terms of their attitude and experience) be created. This raises the issue of whether solutions of a targeted nature will be most beneficial for women.

Carter and Rosa (1998) found that some female respondents were dismissive of programmes that target women. However, all those who had specifically participated in all women initiatives were overwhelmingly supportive of them (Carter & Rosa, 1998). In contrast Still and Timms (2000) in an Australian context found that not all women in small business defined their experiences in terms of gender, and that in the experience of some small business agencies "quite a few women avoided women-only services and/organisation" (Still & Timms, 2000, p.276).

Back to top

Perceived barriers to women working with banks
Much of the research that has investigated the perceived barriers to women dealing with banks has focused on determining whether gender stereotypes and discrimination are the main causal factors. As a by-product of that relatively narrow focus there has been some information collected about the nature of the interaction between women and banks and perceptions of why the relationship is often negative.

Riding and Swift (1990) and Haines, Orser and Riding (1999) argued that the pervasive belief that women face greater difficulties obtaining bank credit than men is supported by the popular media, professional literature, lobby organizations and academic literature. However, there is significant empirical evidence that does not support the allegation of gender bias (e.g. Riding & Swift 1990 & Buttner & Rosen, 1992; Haines, Orser and Riding, 1999). Two reasons put forward to explain this conflicting evidence are that research results in the area are highly sensitive to the methodology employed and that the heterogeneity of women-owned businesses is not taken into account (Carter & Rosa, 1998; Haines, Orser and Riding, 1999). Indeed often studies are single gender in nature and would appear to rely disproportionately on anecdotal evidence, rather than on gender comparative empirical studies.

An example of findings from a comprehensive investigation of a gender-comparative nature are the points made about the difference between the finance experiences of male and female entrepreneurs made by Verheul and Thurik (2001). They conclude that:

• Female entrepreneurs are more likely to have less experience with financial management.
• Female entrepreneurs spend less time networking which may deprive them of important information concerning the acquisition of finance.
• Female entrepreneurs are more likely to work in the service sector, which is characterised by relatively small initial investments requiring a small amount of financial capital.
• Women are assumed to be more risk averse and risk aversion implies a reliance on equity instead of bank loans.

A fact that is not in dispute in the literature is that women business owners as a group (and growing market), have been under-served by banks (Morrall, 1993). It is widely recognised that there is a gap in the funding available to women, especially those who don't want large loans (Morrall, 1993; the HUB Committee, 1993). Research also suggests that women don't just want credit; they also want (and perhaps need) assistance and guidance as well (Morrall, 1993 & Van Auken, Gaskill & Kao, 1993). Credibility is seen as a significant stumbling block for women in dealing with banks, but more importantly their credibility is not always confined to just aspects of finance (Procter, 1994). For example in a study of bank loan officers by Buttner and Rosen (1988), women were perceived as being less entrepreneurial than men.

Indeed it would appear that as time has gone on, and more research has been carried out, there has been a shift from a perception of discrimination on the part of banks. Instead there now seems to be some research that suggests women often understand why they have been rejected for a loan better than researchers think, and that the reasons are often to do with competencies or experience rather than being related to gender. For example Carter and Rosa (1998) found in their research that banks were not guilty of discrimination; instead socialisation and the work-related experiences of women put them at a disadvantage compared to their male counterparts. Of the 600 United Kingdom firms involved in the research the authors found that women who had been rejected by banks for loans did not directly attribute this to gender discrimination, and few applicants of either gender blamed the lender for the refusal.

Part of this subtle shift in understanding is the realisation that whilst outreach is essential on the part of banks women also need to learn how to develop financial relationships and a support network (i.e. there is a dual educative process). Or as the HUB report (1993) suggested; women need to have a better understanding of what banks are there to provide and the processes by which their needs will be assessed by the bank. Indeed in investigating the micro-business sector in Australia (in which women make up a significant proportion of participants) the Micro Business Consultative Group (1998) pointed out that the problems facing micro-businesses in obtaining finance reflected a lack of understanding on the part of both the small business owner/borrower and the banker/lender. Indeed in 1992 Buttner and Rosen identified a complete lack of research that investigated the understanding of entrepreneurs of the funding process.

Back to top

Part of this continued "misunderstanding" on the part of both women and banks has been described by Orser and Foster (1994) as "discontinuity that is detrimentally affected by gender" i.e. "the lack of coherence between the evaluative criteria used in traditional lending models to determine the eligibility of business loan applicants and the characteristics of those seeking business loans" (p.11).

New Zealand research
In terms of research on women SME owner/managers and finance there is little empirically based literature on women per se (most appears gender neutral), and even less that is recent or comparative in nature. Often information about women in SMEs is gathered as a by-product of a broader research focus or they are treated as a group of interest within the SME sector as a whole. For example in their overview work of the New Zealand SME sector, Cameron and Massey (1999) devote a chapter to women. The authors argued that the small business "finance gap" has changed over the years (due to the emergence of new financial institutions and changing attitudes towards the sector). However, whilst loan finance is described as being more readily available there is still a lack of equity finance (especially of start-up capital and venture capital). Therefore, that situation exists for women as SME owners, or potential owners, as well as for men. A similar conclusion was reached by Williams (1987) who found that women faced no more difficulties obtaining finance than all other small business owners.

Potentially the most well known piece of research completed on women and their access to finance in New Zealand was completed by Fay and Williams (1993a & 1993b). Using a random sample of 200 branches of four major trading banks the authors found some evidence that women encountered credit discrimination in seeking start-up funding, but that the situation is not necessarily the fault of banks (Fay & Williams, 1993a & 1993b). Often women experienced greater difficulties than men in acquiring the skills and knowledge necessary to conform to the loan criteria of banks. Duff (1998) replicated the methodology of this work and failed to find evidence that supported the hypothesis that gender influenced the decisions of bank officers regarding loans.

Gray (1993) also focused on the specific needs of women, completing a series of case studies of New Zealand women business owners and describing how women face a lack of start-up capital (agreeing with Battell's 1988 conclusions). Another earlier study by Welsh (1988) made similar conclusions, but pointed out that women who had learned to "speak the banker's language" dealt with banks more successfully. Results of a study completed for the Ministry of Women's Affairs by Strategos Consulting (1990) found that respondents regarded being Māori and/or women made them more risky for lending organisations. Work by the NACEW (1993) had similar findings, as did research carried out by Simpson and Raumati (1991).

Back to top

These findings are consistent with some of the international literature: Research in New Zealand has signalled that whilst women do lack access to capital this disadvantage is either caused by or exacerbated by their corresponding lack of knowledge and training (for example work by NACEW in 1993). As a consequence of this women often enter industries or enterprises where entry barriers are low and prior experience or knowledge is not a prerequisite.

In addition to the research that has focused on women specifically, there have also been a number of studies that have attempted to find out if there is a SME finance gap in New Zealand. These include the Arthur Anderson New Business Financing Survey (1991), the Coopers & Lybrand Factors Affecting the Supply of Capital for Small Company Growth (1993), and the study by Austin, Fox and Hamilton titled A Study of Small and Medium Sized Business Financing in New Zealand (1996).

The aim of the Coopers and Lybrand (1993) study was to investigate the factors affecting the supply of capital to prospective, start-up or existing SMEs for growth or restructuring to exploit opportunities in the market place. They concluded that owners of small firms often:

1. Misunderstand the appropriate form of capital. Too often they believe debt is the appropriate form of capital when the risks require equity funding.
2. Are unable to present their case for funding due to the frequent lack of a comprehensive business plan. The search for debt and equity funding requires an SME to convince a third party that a strong management team is in place, the business risks of the SME are acceptable, and the financial outlook for the SME is positive.
3. Have unrealistic expectations of financial deals, particularly where equity capital is involved. Related issues are valuation of shares in private companies and the degree of control to be retained by owners.
4. Cannot afford the specialist financial advisory skills that could improve their chances of raising the required capital.
   

The report also found that the New Zealand capital market is relatively constrained in the number of sources for debt and equity funding. In 1993 only about thirteen banks regularly lent to SMEs and there were very few institutional sources of equity funding. However, the report also suggested that many of the difficulties experienced by SME owners in raising finance were largely caused by their own weaknesses, especially the lack of understanding of the needs of lenders and investors.

The Austin, Fox and Hamilton (1996) study was charged with three tasks. The first task was to identify the main factors inhibiting or helping the availability of capital. It found that the growth in the economy in the boom period up to 1995 increased the availability of external market funds for the SME sector. The general improvement in the economy also contributed to the growth of internal funds. These were in the form of higher personal savings (important for intending founders) and more self generated capital (retained earnings) in established businesses.

The second task was to assess whether the New Zealand financial markets were innovating and adapting at a rate that met the needs of the SME sector. The study found that there had been considerable beneficial changes by institutions supplying the capital market. In particular the main trading banks have been keen to increase their SME loan portfolios. New products and systems have been part of this change. The rapid adoption of new technologies has led to product development and the introduction of new systems intended to give the customer greater choice, faster service and more convenience.

Back to top

The third area of investigation was the extent to which managerial competencies within SMEs affects the availability of capital. Lack of management competence did not emerge as a major problem in obtaining capital. However, it is acknowledged that management incompetence, as reflected in poor performance and weak financial position, may prevent some firms from gaining access to needed funds. Of more significance may be the lack of a strong ambition to grow on the part of the majority of SME owners, which reduces the demand for development capital. The majority of firms surveyed appeared to be owned and managed by a "craftsperson" type who places a high value on maintaining his or her independence to operate (rather than "entrepreneurial" types who want to grow their businesses).

The Austin, Fox and Hamilton (1996) report also found that SMEs still had a strong preference for debt, rather than equity, funding. In addition most businesses had little difficulty in raising what funding they needed, so there was little incentive for SMEs to have to adopt innovative methods of searching for funds. The study also found that despite the improved provision of information and training provided to the SME sector by lending and investment institutions, deficiencies still remain. Presentations of business plans are an essential part of loan applications, yet it was found that only thirty-nine per cent of businesses had a written business plan covering all aspects of the business.

The lack of demand for equity capital is also constrained by the limited growth ambitions of SME owners. Ninety-three per cent of the Austin, Fox and Hamilton (1996) survey, especially the longer-established businesses, did not intend to grow the business. These results reflect the values of the craftspeople that constitute the majority of small business owners in New Zealand. Different demands could be expected if more entrepreneurial type SME owners emerge in the future. This in turn requires more training for SME owners in order to improve business performance and provide the confidence needed to grow the business. In general, SME owners see the trading banks as providing a satisfactory service. The vast majority (eighty five per cent) had remained loyal to their banks for the previous two years.

Austin, Fox and Hamilton (1996) concluded that on the whole SMEs in New Zealand were not being constrained by lack of funding. Loan finance was available from the trading banks, and one of the main constraints on the growth of bank lending to the SME sector was the SME owner's preference not to expand. The issue of growth potential applies even more so to equity capital. While there have been some institutional developments in this area since 1993 (e.g. the establishment of the Greenstone Fund and other more recent initiatives from Industry New Zealand) there will always be a gap in the supply of such capital in New Zealand for amounts less than about $250,000. The rationale for such a lack of equity or venture capital funding for SMEs is that the unsecured risks outweigh the potential returns.

Back to top

 [ Previous ] | Contents | Next ]