Welcome to the first installment of the Risk Insight Monthly Video & Blog Series!
On September 15th, thousands of representatives from all around the world convened in New York for the opening of the 70th Session of the UN General Assembly, and one of its main missions is the Advancement of Women, particularly in developing economies across the globe. This is an issue that the Executive Director of UN Women, Phumzile Mlambo-Ngcuka, has called the “most critical of all global goals.”
At S&P Capital IQ, we are fortunate to provide credit solutions to financial and credit lending institutions that serve emerging markets. Through these client engagements there have been some insightful lessons learned.
For example, many of our clients have a double bottom line: meaning, first these institutions want to provide loans with acceptable and sustainable levels of credit risk while, secondly, ensuring these loans will have a positive social impact, such as facilitating economic development by offering financial services to underserved populations.
Over the years, it has been evident to us at S&P Capital IQ that one of the strongest economic growth engines in emerging markets and globally are small or medium sized businesses known as SMEs.
Unfortunately, in emerging markets, there is vast research that identifies a credit gap for small women-owned businesses. Research from the International Finance Corporation (IFC) and Goldman Sachs estimates that as many as 70% of women-owned SMEs in developing countries are unserved or underserved by financial institutions – a financing gap of about $287 billion.
When we promoted the launch of this series last week, we polled our own audience of primarily credit risk managers in the Americas, asking “While the credit gap for women-owned SMEs in emerging markets are well established, do you believe there is a lending bias against small women-owned businesses in developing countries?” We promised to reveal the results in this blog, and here they are: almost two thirds of those who answered felt there was a lending bias against women-owned SMEs in developing countries.
Reasons for a lending gap vary, but include the lack of collateral and high cost of funding, but more concerning are the cultural and societal norms underlying gender biases. The IFC, Goldman Sachs, as well as many others, have taken up this challenge of closing the women-owned SME credit gap.
We believe the S&P Capital IQ and McGraw Hill Financial Corporate Responsibility teams can offer innovative solutions to the challenge.
The advantages for closing the lending gap for small women-owned business in emerging markets are pretty clear: it would fuel economic growth, boost labor force participation, drive up per capita income and strengthen GDP growth. Just this week, we completed the final testing of an enhanced SME scorecard designed to help credit lending institutions identify and rank order the default risk of loans to SMEs.
A cornerstone toward enhancing lending to women-owned SMEs is to have a transparent and replicable risk scoring framework - frankly, one that can’t be gamed or manipulated by separate lenders.
To accomplish this, you first need a scorecard where the essential key risk factors are identified, the importance or weights of those risk factors are highlighted and the financial benchmarks are developed on a granular scale.
Then you need a governance framework that allows for consistent application driving the methodology behind the scorecard. Consequently, when lenders are looking to assess SME borrowers, you would yield a consistent, transparent and replicable approach that would be more objective in the credit scoring of SMEs and level the playing field for women-owned businesses.
What are some the Key Dimensions of Risk that should be considered for an SME solution?
- Country Risk - SME solutions, especially in emerging markets, should consider country risk, which essentially is the risk of doing business in a country.
- Industry Risk - Each industry has a different risk profile, and those should be captured with separate Industry Risk Scores.
- Competitiveness – The risk dimension that tends to have more discriminatory power than the other risk dimensions.
- Management - More so than other asset classes, management is a vital business risk factor for SMEs.
- Financial Risk – For an SME tool, the financial risk factors should consider cash flow, operating efficiency, leverage and profitability measures.
We have been working with our partners to identify and consider our existing management and competitiveness risk factors to see if those, or perhaps new factors, could share additional insights into gender-specific credit risks.
Importantly, your SME solution should provide strong developmental evidence. The developmental data set for a scorecard should include thousands of global SMEs with a good balance of small businesses from developed and emerging regions. There also should be a good mix between industries. The development and testing process needs to be fully documented and include the model performance statistics.
In the current environment of weaker economic growth in emerging markets, the need to jumpstart this sleeping giant is essential, now we believe that we have the tools and capabilities to help close the credit gap for women-owned business in emerging markets.
Interested in our Credit Assessment Scorecards? Click here to get more info.
 Why gender equality is the most critical of all the global goals,” UN Women, September 9, 2015