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Mining the gap: Financial inclusion and gender

26.02.2018Brittney Dudar, Master's Student, University of Toronto

This blog was originally published on Cenfri website

The 2014 Global Findex Report identified that in developing economies, women are 9% less likely to be formally banked than men, with 59% of men and 50% of women having bank accounts. 

The financial inclusion community is actively addressing this gap, but there is limited data available on the gender dynamics of financial inclusion that can offer insights into how to address it. However, there are some data sources that shed light on this problem and offer insight into which interventions, products and services may be particularly effective in improving women’s financial lives across the developing world, where sizable gender gaps in financial inclusion prevent women from full economic participation.

Starting with sub-Saharan Africa, this blog is the first in a series that explores financial inclusion and gender dynamics emerging from our research and the gaps that future research needs to consider.

Figure 1: Access to formal and informal financial services | Source: FinScope Kenya 2016, FinScope Rwanda 2016, FinScope Tanzania 2013, FinScope Uganda 2013

In sub-Saharan Africa (SSA), 70% of women are financially excluded. More women access informal financial services in SSA than men, with 26% of women saving informally versus 22% of men. Men access more formal services, with 13% of women saving formally compared to 18% of men.

FinScope data across Kenya, Rwanda, Tanzania and Uganda in Figure 1 below shows that women consistently have lower access to formal financial services than men. This gap is particularly pronounced in Kenya, where women’s access to informal financial services is 18 percentage points higher than men’s.

Saving informally is not necessarily a bad thing. However, there is evidence that the informal savings mechanisms that women have access to are not necessarily meeting their needs. A study in Kenya by Dupas & Robinson (2013) provided randomised access to non-interest-bearing bank accounts among two types of self-employed individuals in rural Kenya: market vendors (mostly women) and men working as bicycle taxi or boda bodas. Despite large withdrawal fees, the researchers found that a substantial share of women used the accounts, saved more and increased their productive investment and private expenditures. There was no impact for male bicycle-taxi drivers. These results suggest that extending simple banking services to women can have an impact on women’s financial inclusion at a low cost to financial service providers (FSPs), especially compared to offering credit. However, the sample size in this study was small, and more research is needed to explore beyond the two specific types of income-earners analysed in the study.

While savings and credit have been explored to some degree, there has been limited research on insurance and the difference in risk needs between women and men. One study that offers insights is from Delavallade et al. (2015). In the study, male and female farmers in Senegal and Burkina Faso were offered a choice of weather index insurance or three different savings devices:

  • An encouragement to save for agricultural inputs at home through labelling
  • A savings account for emergencies that was managed by the treasurer of a local ROSCA or farmers’ group
  • A savings account for agricultural input investments that was managed by the same treasurer

The study found a 30% stronger demand among men for weather insurance than among women, and among women a stronger demand for emergency savings. The demand for emergency savings could reflect the increased risk needs among women for health and childcare-related expenses. This, in turn, limits their demand for agricultural insurance coverage. For policymakers and/or FSPs trying to drive the uptake of weather index insurance products, a better approach for marketing may be to combine it with health or other emergency insurances.

One of the often-cited difficulties for understanding why women are less served than men is the available gender data. While more sex-disaggregated data is needed, it also needs to be relevant for the questions FSPs and policymakers have. For example, there are many studies on women, but for them to be relevant, behaviour needs to be compared across men and women to provide counterfactuals to interpret the insights.

Prioritising the collection and analysis of this data requires a behavioural change on the part of researchers and FSPs alike. Some central banks, such as the Bank of Chile, have already been focusing on collecting and analysing sex-disaggregated data to better serve clients and unlock new markets.

i2i is currently looking at what behavioural interventions are particularly effective in increasing the uptake and usage of financial services for women. Stay tuned for more on this work. 

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About the Author

Brittney Dudar is a second year student in the Master of Global Affairs program at the University of Toronto’s Munk School of Global Affairs. Prior to Munk, Brittney worked in the UK at a technology incubator where she led an educational program for female technology entrepreneurs. This past summer, Brittney spent her internship working at The Centre for Financial Regulation and Inclusion in Cape Town where she investigated gender differences in access to financial services. Her interests lie at the intersection of innovation, development and gender equity.

SMEs provide opportunity for Africa to grow its debt market

13.02.2018Kelsey Tanner, Senior Private Equity Analyst, RisCura

Investments into private firms in Africa are funded by a relatively low proportion of debt compared to equity, especially in contrast to developed markets, where debt is more readily available and affordable. This is according to RisCura’s latest private equity update of its Bright Africa report, released in October 2017.

With a relatively small value of assets under management, there is capacity for the development of the private debt market in Africa. The undercapitalisation of traditional lenders, such as banks, and the current uncertain economic environment have led to the development of alternative sources of capital. One such alternative is the private debt market where fund managers provide finance to private businesses seeking credit. These businesses, such as small and medium-sized enterprises (SMEs), which do not fit into the traditional financing paradigm, provide a pool for private debt funds to tap into. A funding supply gap exists because SMEs are not able to access finance through traditional channels and private debt fund managers have limited investment opportunities.

This gap is fast being closed by private debt funds that have taken on the role to provide the necessary capital to SMEs. African funds that are already targeting SMEs with this type of finance include Vantage Capital’s third mezzanine fund with a $280m commitment from investors in 2017, and the Investec Africa Credit Opportunity Fund 1 with a 2015 investor commitment of $226.5m. 

SME owners are largely unaware of private debt as a funding option, how to access it, and its benefits and risks. This problem is compounded as fund managers cannot easily identify businesses that require funding, and therefore rely on potential borrowers to approach them.

Private debt can be accessed through a number of strategies. Private debt funds such as mezzanine and credit opportunity funds are frontrunners in meeting demand from SMEs seeking growth capital and debt refinancing. Advantageous to SMEs is that private debt funds may offer them finance and management support, but often do not pursue a direct ownership interest. Credit opportunity funds have a broad mandate and may involve a range of debt instruments, allowing fund managers to provide solutions that are suited to each individual company. This is critical when deploying capital effectively in diverse business environments.

Research has shown that mezzanine and credit opportunity funds perform well during the contraction and early expansion phases of the business cycle. After two consecutive quarters of GDP contraction, South Africa emerged from recession in the second quarter of 2017. Renewed business confidence, albeit amidst low forecast growth of around 1% in 2018, could make this the opportune time for investment. South Africa’s over two million SMEs could thrive with an improvement to cash flow, working capital and management, thereby helping to realise the National Development Plan’s forecast that the sector will create 90% of jobs by 2030. Funds with dry powder – cash available for investment – can therefore provide liquidity in the early stages of economic recovery when traditional lenders are unprepared and uninterested. This market also offers investors the opportunity to diversify their fixed income exposure away from government bonds and listed credit, to high-yield investments. Mezzanine and credit opportunity funds typically have positively skewed returns, with more unexpected gains than losses.

Due to the broad range of strategies that mezzanine and credit opportunity funds may follow, investors can earn interest income and equity-like returns through convertible debt strategies.  Funds can gain exposure to assets that should predictably recoup principal and generate alpha (excess return relative to a benchmark). Another advantage is that private debt funds can incorporate diversification of investments by country, sector, or rating. Thus, lowering volatility of returns.

The pursuit of high returns, however, is not without risk, as these private debt strategies take a bet that returns exceed losses in the case of SMEs defaulting on payments. Mezzanine and credit opportunity funds often carry a higher premium to compensate for this.

As can be seen from developed markets, a flood of funding into the debt market could lead to private debt funds hastily pursuing even riskier options, such as “distressed debt” (lending to companies on the verge of bankruptcy), resulting in eroding industry returns. This has sparked fears of a “private debt bubble”.

In Africa, however, the debt market is a long way from reaching capacity. Private debt in Africa is expected to have potential over the long-term as an established part of investors’ portfolios. Investors into Africa willing to accept the risk could create real value for SMEs, the key drivers of economic growth. The development of the private debt market is essential to unlocking this potential.

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About the Author

Kelsey Tanner completes independent valuations of private companies across Africa. In her role as senior private equity analyst, she prepares investment valuation reports for private equity industry clients. Kelsey also conducts industry research and compiles reports such as the Bright Africa (Private Equity) and the RisCura SAVCA Private Equity Performance reports, which provide insight into industry returns. Kelsey qualified as a Chartered Accountant (SA) in 2017 after completing her articles in KPMG’s financial services division, where she gained experience in valuation modelling and unlisted instrument valuation. She joined RisCura in February 2017.

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