CREDIT GAP AND ECONOMIC GROWTH

Women and girls together contribute more than half to overall world population but their role in
socio-economic and political activities is far below its optimum potential which is resulting in
detrimental consequences especially in developing nations. Wide range of economic research all
over the world has demonstrated that better inclusion of women in formal employment
opportunities can reap significant economic and social benefits. For example, increment in female
labour force participation rates in BRICs, can boost the GDP growth rates by 0.8% per year on an
average (Goldman Sachs Global Investment Research, 2014). The gains are much higher in the
countries where the gaps are the widest.

Due to such positive effects of women labour force participation on the overall growth trajectory of
developing economies, the important question that arises is how to narrow down these significant
gender gaps? Greater inclusion of women in formal financial services is one of the most fundamental
ways to go about it. It will boost self-employment, diversification of risk and help in wealth creation.
Small and medium sized enterprises, owned by women have in this case taken an initiative to bolster
gender and economic disparities. One of the major difficulties faced by these enterprises besides
barriers to entry and business growth is that of under-financing. Due to traditional and legal
restrictions in terms of financial independence, many women, especially in rural areas are banned
from receiving inheritance of certain assets. In many cases social conventions dictate that they can
have access to formal bank accounts only through joint accounts with some other family member
(particularly males), which kills their economic right to handle their finances privately and efficiently.
Tendency of higher risk aversion, coupled with lower levels of education leads to lack of
understanding of the working of formal financial institutions among women. All these factors cause
significant disadvantage to women in terms of access to credit facilities, as banks perceive women to
be a high credit risk, which results in credit constraints in financial institutions. World’s one-third
formal SMEs are owned by women and approximately 70% of them are under-financed in terms of
credit, which has resulted in $285 billion credit gap in developing countries. Credit gap is basically
the formal financing needed for the institutions to work efficiently but not available. Efforts to
reduce this credit gap can increase per-capita GDP by 12% by 2030(Goldman Sachs Global
Investment Research, 2014).

HOW TO BOOST ECONOMIC GROWTH BY CLOSING CREDIT GAP IN WOMEN OWNED SMEs?

1) Banks and other financial intermediaries should make efforts to make loans attractive for women
owning SMEs by realising actual risk that women face rather than what is perceived, by offering
alternative approaches to cater to collateral requirements etc.

2) Government needs to take steps to improve the financial infrastructure to promote efficiency in
holding of capital and information. This will also lead to better accessibility to financial services to
women, especially in developing countries.

3) Addressing demand side factors, like education of women is also very important to tackle credit
gap. It will help in increasing risk tolerance and ability to make informed decisions.
4) Encouraging women owned enterprises in informal sector to enter the formals sectors, would
provide better access to women to these potential markets. Tax registration process should be made
simpler and more user-friendly. This would help all the SMEs and not just the ones under women.

5) Micro-financial institutions have to be made more gender-responsive. Besides providing standard

credit facilities they need to offer wide range of other financial services like flexible credit, health
insurance, remittances etc. Government, NGOs, society and private sector, all have to make a joint
effort to provide sound and gender-friendly credit services to all. This only can help the institutions
to find their actual worth in delivering responsive and affordable credit services and empower
women.