According to a growing body of evidence, increased female participation in the economy, particularly via women-owned small and medium enterprises (SMEs), has positive effects on economic growth and wider developmental goals and priorities. Despite such mounting evidence, we find that women-owned SMEs and female entrepreneurs face barriers and constraints that severely restrict their growth potential. This blog will highlight the necessity to create an enabling environment for female owned SMEs – both globally and in Pakistan – by detailing the benefits of female owned SMEs along with the multiple differentiated barriers that they face.

Why Women-Owned SMEs Matter: Currently, SMEs with full or partial female ownership represent 31-38% (8 to 10 million) of formal enterprises in emerging markets and contribute to economic and societal development in the following ways:

• Women-Owned SMEs Make Significant Contributions to Their Economies: An increasing amount of data suggests that women-owned SMEs catalyze economic growth and accelerate job creation within their economies. In the United States, for example, women-owned SMEs (which are growing at more than double the rate of all firms) contribute about $3 trillion to the US economy and have generated up to 23 million jobs. Similarly, according to a recent survey on female business owners in the Middle East and North Africa region, comparable economic benefits are visible in developing countries: women-owned SMEs in the region make up to an average of $100,000 annually in revenue.
• Women-Owned SMEs Contribute to Wider Development Goals: Female entrepreneurs who operate their own SMEs are more likely to help their countries achieve development goals. This is because women are more likely than men to use their earnings and increased bargaining power to invest in their family’s welfare via spending on nutrition, healthcare and education. This creates a virtuous cycle, as it builds the potential of future generations, who in turn, can generate further economic growth and bolster gender and income equality.
• Women-Owned SMEs are Promising Businesses: Women-owned SMEs demonstrate great potential for growth and profitability. Recent research by MasterCard has shown that in some countries, such as Indonesia, Malaysia, Singapore, Thailand and Vietnam, these SMEs have shown a consistent growth trajectory and have proceeded to grow at faster rates than businesses owned by men. Moreover, data suggests that in the absence of women entrepreneurs, output per worker is approximately 12% lower.

Why Women-Owned SMEs Fail to Grow: Women-owned SMEs are more likely than their male counterparts to cite access to finance as a constraint, with 29% of women-owned SMEs versus 24% of male-owned SMEs stating that they face difficulties in accessing necessary financial services and products. Women-owned SMEs have between $260-$320 billion in unmet financing needs worldwide and a collective $1 trillion credit gap amongst the total number of firms that have at least one female owner. The financial gap is largely driven by the following factors:

• Financial Barriers:

(i) Lack of Collateral and Proper Documentation: Financial institutions often request land or property deeds as forms of collateral or verified documentation such as national identification cards or birth certificates. This can often become problematic for women to provide, especially in patriarchal societies where ownership of property and access to legal documentation is challenging for women.

(ii) Perceived Risk by Financial Institutions: Female-owned SMEs are often seen as riskier, higher cost and/or lower return. For this reason, financial institutions are less keen to lend to female-owned SMEs.

(iii) High Cost and Inaccessibility of Financial Services and Products: Commercial banks often do not provide products and services suited to SME needs and preferences. As a result, entrepreneurs rely on financing their businesses through personal savings, investment from private sources (family and friends) or through re-invested business earnings. Accessing financial services is especially challenging for women, particularly those women who reside in remote areas. Women who operate SMEs in remote areas often face high transaction costs of banks that operate within such remote areas or are hesitant to undertake unsafe and risky travel to urban centers to access requisite financial services and products.

In addition to financial barriers, there are also many non-financial barriers that women-owned SMEs face:

• Non-Financial Barriers:

(i) Small Size, Limited Skills & Networks: Globally, women entrepreneurs control less than 40 percent of formal microenterprises, less than 36 percent of small firms, and less than 21 percent of medium-sized firms. Most of these businesses operate in the informal, lower value-added service sectors and home-based businesses—all of which are more likely to lack the education, training, financial literacy, business skills and business acumen necessary for ensuring sustained growth of their firms. These factors severely limit their ability to engage in strategic focus and long term planning of their firms. Furthermore, small professional networks and limited mentorship opportunities have a knock-on effect by constraining women’s ability to widen their connections and prospects for their businesses.

(ii) Social and Cultural Roles: Deeply entrenched traditional and patriarchal perceptions on the roles of females within the household and society have kept women from engaging in entrepreneurial activity in certain countries. As such, women have restricted mobility, decision-making powers, and limited time available for working towards the growth of their businesses. In some countries, these perceptions can permeate into regulatory and legal structures and policy documents, which often request a male signatory.

The Pakistan Context: Pakistan has the lowest rate of female entrepreneurship in the world, with only 1% of female entrepreneurs compared to 21% of male entrepreneurs. Access to finance is one of the factors that has prevented women from engaging in entrepreneurial activities, with only 3% of women having access to an account at a formal financial institution. Beyond this, there are many structural, institutional and socio-cultural barriers that restrict the entrepreneurial capabilities of Pakistani women. These reflect many of the barriers discussed above, including limited access to information and mentorship, small and ineffective professional networks, limited business development skills, limited effective marketing platforms to promote visibility, patriarchal perceptions on women’s role in society along with constitutional structures, policy documents and regulatory arrangements that put women at a distinct disadvantage. As such, we find that the majority of women operating micro and small businesses in Pakistan are low wage earners or middle income earners, who generate products specifically for a middle man, and focus on small home-based businesses with little growth potential (relating to fashion-designing, dress-making-knotting, canning work and food retailing). Efforts have been made to develop female entrepreneurship and support women-owned micro and small businesses in Pakistan; however, a study by the Pakistan Microfinance Network¹ demonstrates that these efforts are often piecemeal and inadequate as they fail to ensure significantly increased female access to financial products and services and have had limited success in promoting the development of female entrepreneurs beyond the small home-based businesses that they are currently engaged in.

Women-owned SMEs are a profitable, but underserved segment of the global economy. They have the capacity to generate sustainable and profound economic and non-economic returns to countries, including Pakistan. Despite this, the constraints women face in attempting to grow their businesses are often insurmountable, especially at the individual level. Though steps are being taken to overcome these constraints, it is pertinent that policymakers and financial institutions take on concerted and vigorous efforts to create an enabling environment for women-owned SMEs to thrive and contribute to their economies.

[1] Pakistan Microfinance Network, ‘Entrepreneurship and Financial Inclusion of Women in Pakistan’ (unpublished), Pakistan Microfinance Network, 2014