The key success factor of women entrepreneurs in small-scale business is the amount of business finance available to fund the initial investment and then on-going access to microfinance. Success in this respect requires the business to have an appropriate financing strategy.
Business finance can come from either internal or external sources. The main internal source of finance is from retained earnings, which are particularly important factors for MSMEs that have difficulty in raising external capital. External sources of business finance can be formal or informal. Most MSMEs in poor countries depend heavily on informal sources of funds from family members, relatives, friends and money lenders. However, these sources of funds are often for small amounts and short-term, which are mainly for financing cash flow. These sources are not appropriate for providing the long-term capital needed for acquiring strategic assets.
Capital being, one of the key ingredients facilitating the growth of small business, numerous studies have documented inadequate financial resources as a primary cause of small business failure (Wucinich (1979); Welsch and White (1981); Gaskill, Van Auken, and Manning (1993); Van Auken and Neeley (1996); Coleman (2000)). The lack of quality financial information about small business increases the risk of investing in such a venture. At the start-up stage, lenders commonly base their decision on the creditworthiness of the entrepreneur, rather than the business. Even after the business exists for a period of time, the business may still remain opaque relative to large business because of the unavailability of public information.
As a result, lenders tend to charge higher rates to compensate for their additional risk or decline to lend. Small firms are forced to rely heavily on trade credit and other informal sources of financing such as personal savings, personal credit cards, home equity loans, and loans from friends and family (Ang (1992); Peterson and Rajan (1994); Ang, Lin, and Tyler (1995); Berger and Udell (1995); Sinks and Ennew (1996); Cole and Wolken (1996); Berger and Udell (1998)).
Another characteristic that may affect financing decisions of a small business is the business cycle. It is contended that changes in optimal capital structure are a function of the firm size, age, and information availability. In addition to firm characteristics, the demographic origins of small business owners may also affect financing decisions. In general, the lending decision of a creditor is based on the borrower’s credibility and expected cash flow of the project.
Gibson (1992) believes that owners’ search for capital is often inefficient, unorganized, and unsuccessful as a result of their lack of information about the alternative sources of funding. Moreover, Busenitz et al. (2003), suggest that the availability of information often determines decisions. This includes information about alternative sources of capital as well as the process through which capital is acquired (Berger and Udell, 1998; Gibson, 1992). Holmes and Kent (1991) refer to the limited awareness of capital alternatives in the context of a financing gap or “knowledge gap”.
However, there are other possible causes for the failure to establish sufficient financing. For example, higher risk firms have greater difficulty in obtaining capital than lower risk firms and must seek “niche” sources (Cassar, 2004). Chaganit, DeCarlis, and Deeds (1995) emphasize that capital that is easier to acquire is used more often while capital that is more difficult acquisition commonly leads to lesser usage. A lack of financing may partially explain why women-owned firms are proportionally under-represented for all high-growth firms. The disparity in ability to attract equity funding is evident as women-owned firms attracted only 4 percent of venture capital investments in 2004 (Morris et al., 2006). Women-owned firms are smaller, younger, less profitable, and more concentrated in service businesses than men-owned firms.
Because of the difficulties experienced by women who attempt to raise capital, many women business owners are less likely to use external financing and more likely to rely on business earnings and private resources for financial needs (Coleman, 2000). A study by Brush et al. (2001), found that equity investments in women-owned businesses lagged that of male-owned businesses. In fact, equity investment in women-owned businesses has been extremely small in recent years. This lack of investment in women-owned firms diminishes opportunities for women as well as negatively impacting diffusion of innovations, job creation and economic competitiveness.
Access to Financial Resources for Women Entrepreneurs
Although some specialized funds/programs have been undertaken to facilitate credit towards small businesses with more relaxed conditions but in practice, in most of the cases, entrepreneurs are required to offer collateral to guarantee loan repayment. The majority of the women do not possess any assets and cannot formally offer the necessary securities against loans. For offering tangible securities (usually land), bank procedures force women to involve men in the transaction. Thus, despite various promotional measures under the industrial policy and other development policies, the disbursement of loan to the small entrepreneurs still remains very low.
A study on default loans suggests that the default rate was higher in small and medium businesses than the big loans. The small firms were also found to be suffering from inefficient management problems. Various social researchers mention that access to capital is one of the main stumbling blocks preventing women from starting their own businesses in greater numbers. It is opined that financial aspects of venture start-up and management are without a doubt the biggest obstacles for women.
According to Marlow and Patton (2005: 717), women have difficulty getting financing partly because of discrimination. The author quotes Sharon McCollick who used “clawing your way to the top without nails”, to describe the scratching at the doors of banks to secure financing for her now a successful business.
Obtaining start-up financing and credit (Schwartz, 1979; Pellegrino and Reece, 1982; Hisrichand Brush, 1984 and Neider, 1987), cash flow management in early operations (Hisrichand Brush, 1984 and Scott, 1990) and financial planning (Hisrichand Brush, 1984) are quoted by McClelland et al. (2005: 87) as being frequently noted as obstacles for women entrepreneurs. Mattis (2004: 155) found that in recent years, women-owned business start-ups have received less than 2 percent of available venture capital funds, especially in potentially lucrative new ventures in high-technology fields. Whereas men often list investors, bank loans, or personal loans in addition’ to personal funds as sources of start-up capital, women usually rely solely on personal assets, such as savings and credit cards.
Quoting Kamulun and Kumar (1991), another major problem could lie in the fact that most women who want to borrow money from banks do not have the necessary skills to formulate a professional business plan. Other studies on gender and business ownership have generated conflicting evidence on whether financing poses problems for women starting and running businesses.
In South Asia, women are almost invisible to formal financial institutions—they receive less than 10 percent of commercial credits (Mahbubul Haq Human Development Centre, 2000). When women do have access to credit it is often in small amounts, whether this suits their needs or not. Differential access to credit may, of course, be a reflection of differences in the choice of the sector, educational level or the amount of loan requested.
Sometimes, credit may be available for women through several schemes but there are bottlenecks and gaps. The multiplicity of schemes is often not adequately listed nor is there networking among agencies. As a result, clients approaching one institution are sometimes not made aware of the best option for their requirements (Vishwanathan, 2001). In the area of guarantees, several discouraging habits have become ingrained in financial institutions and banks, such as requiring male members to accompany women entrepreneurs for finalizing projects proposed by women, as well as almost invariably insisting on guarantees from males in the family (Commonwealth Secretariat, 2002).
A general lack of experience and exposure also restricts women from venturing out and dealing with banking institutions. This results in lower investments. Alternately they tend to find working capital at higher rates of interest. The availability of finance and other facilities, such as industrial sheds and land for women entrepreneurs are often constrained by restrictions that do not account for practical realities. All these in turn affect the enterprise and its survival. In one study in India (Kaur and Bawa, 1992), 54 percent of women entrepreneurs had started their business with their own personal savings and some financial assistance from their spouse, 23 percent received finances from their parents, 13 percent from relatives and friends and only 10 percent from a government agency and nationalized banks.
Many other studies in South Asia have substantiated these findings. Dr. Shehla Akram, founder of Women Chambers of Commerce in Lahore has also identified funds as a major issue of women entrepreneurs, so also most middle-level women entrepreneurs in Pakistan were financed by their own savings or borrowing from their relatives.
Another study by Das (2000) shows that more than 50 percent of the women used their own funds or funds borrowed from their spouse or family to set up their business. Though 43 percent had taken loans from a financial institution, for a significant proportion (38 percent) this was only a small part of their original investment and not the primary source of funds. In sum, it is interesting to note that although it often is self-reliance that motivates women to venture out on their own, they have to rely on the securities of others to raise their basic capital requirements.
There is a wide array of credit programmes operating in developed countries. Credit is a constraint faced by many women entrepreneurs the world over and women need to be able to access mainstream banking and finance and need support in this area. Experience from around the world shows that women need flexible finance that meets the developmental needs of the enterprise. The system of loan guarantees has emerged as a successful means of increasing access to credit. This reduces the perceived risks to formal lenders associated with lending to women. However, it is essential that the delivery should be kept simple and transparent.
Access to Credit and Microfinance for Women Entrepreneurs
The rural financial system in India has evolved through two sets of financial institutions, formal and informal. The formal system consists of a multi-agency approach, comprising co-operatives, public sector commercial banks (CBs), regional rural banks (RRBs) and private sector banks. The public sector banks and RRBs constitute the government sector. The co¬operative sector comprises of district cooperative banks (within which are primary societies and urban banks) and primary land development banks. Private commercial banks constitute the third channel.
Since existing private banks do not do much rural lending, the Reserve Bank of India has provided for the setting up of local area banks in the private sector to promote savings in the rural sector and to provide credit locally. The rules and regulations within the financial sector govern these institutions. The informal system consists of rotating savings and credit associations (ROSCAS), traders, merchants contractors, commission agents, moneylender’s etc. Each of these is governed by norms and rules that have been formulated by the concerned institution/person.
The rural credit market expanded significantly in the post-nationalization phase. There has been a significant improvement in outreach due to nationalization and social banking. The poverty eradication programs of the government also played important roles in addressing the credit needs of the poor. The Integrated Rural Development Program (IRDP) was the largest ever anti-poverty program launched during the Sixth Plan. It used the banking channel to direct assistance, which was a combination of credit and subsidy to those below the poverty line (Nair, 2000)).
A dilemma seems to exist between developing a sound banking system and simultaneously dealing with poverty. There appears to be a mismatch between development goals and what is expected of economic/financial prudence. Banks have generally shown a disinclination to service the poor who are distanced spatially and metaphorically from them and hence whose risk profile is difficult to assess. In the recent years, economic factors eventually took precedence over the social agenda. RRBs were formed with the primary objective of meeting the credit needs of the weaker sections.
However, frequent loan waivers and write-off steps were taken in political interests hastened the process of the erosion of the rural credit delivery system. Now there seems to be a general agreement among the banking authorities and development professionals that development agencies in the non-governmental sector should be called upon to act as intermediaries in the delivery and management of rural credit. The formal sector consequently took the initiative to develop a supplementary credit delivery mechanism by encouraging non-governmental organizations (NGOs) to act as facilitators and intermediaries.
Currently, the rural microfinance sector is dualistic in nature. The formal structure has a legal and regulated component, which provides credit and other services to the non-formal sector. The non-formal structure largely comprising NGOs, SHGs, clusters and federations of groups operate outside the legalized structure and have demonstrated considerable organizational flexibility and dynamism in responding to the demands at the grass roots. The institutional mapping of the participants involved in microfinance interventions spans from regulatory bodies (like the Reserve Bank of India and NABARD) to apex bodies that disburse bulk credit for lending to intermediaries that are involved in providing financial services to clients, and finally to the clients themselves who are the beneficiaries of the initiative.
Within the microfinance participants in India, the players constituting the regulatory bodies, apex bodies, and intermediaries comprise those responsible for the supply side of the intervention. The clients constitute the demand side of the intervention. The regulatory body is primarily the Reserve Bank of India. NABARD also performs a regulatory role, although this bank features among the suppliers of bulk credit too. The apex bodies, also called the wholesalers, are those who supply bulk credit for lending purposes. Some of the major institutional sources of bulk credit to the Indian microfinance sector consist of the following:
- Small Industries Development Bank of India (SIDBI), Lucknow.
- Rashtriya Manila Kosh (RMK), a government initiated NGO under the Department of Women and Child Development.
- Housing and Urban Development Corporation (HUDCO), New Delhi.
- Housing Development Finance Corporation (HDFC), Mumbai.
- Friends of Women’s World Banking (FWWB), Ahmedabad; (SIDBI, 2000b).
Regulatory Bodies: NABARD is the primary agency for coordinating and facilitating the extension of rural credit. Commercial banks supplement the efforts of NABARD and co-operative banks help in meeting the credit requirements of rural India. The SHG-Bank linkage was introduced by NABARD in February 1992, as a Pilot Project to cover 500 SHGs with policy back-up from the RBI. NABARD brought together the SHGs already promoted by NGOs, and the banking system, to provide various financial services. Additionally, NABARD also provides other types of support, such as training of bank staff, NGOs, and government agencies involved in the area of microfinance.
NABARD’s credit schemes are gender neutral. Focused attention to gender issues in credit and support services is given through the women’s cell set up by NABARD where credit is provided in the form of refinancing assistance to the banking system in respect of their advances for agricultural and allied sectors (like rural cottage and village industries) activities. NABARD has brought out a number of schemes exclusively for the benefit of women entrepreneurs. These are as follows:
- Assistance to Rural Women in Non-farm Developmen (ARWIND).
- Support for setting up women development cells (WDCs).
- Assistance for Marketing of Non-farm Products of Rura Women (MAHIMA).
- Gender sensitization programmes.
NABARD has also sanctioned a number of credit-linked promotional programs in the form of Rural Entrepreneurship Development Programmes (REDPs), artisan guilds, and training-cum-production centres (TPCs), with the intention of enhancing women’s entrepreneurial capabilities and settling them into self-employment and wage employment.
Under the SHG-Bank Linkage Programme, as on 31st March 2012, 79.60 lakh SHG-held savings bank accounts with total savings of INR 6,551 crore were in operation. By November 2012, another 2.14 lakh SHGs had come under the ambit of the programme, taking the cumulative number of savings-linked groups to 81.74 lakh. As on 31st March 2012, 43.54 lakh SHGs had outstanding bank loans of INR 36,340 crore. During 2012-13 (up to November 2012), 3.67 lakh SHGs were financed with an amount INR 6,664.15 crore.
To quote NABARD, “the small beginning of linking only 500 SHGs to banks in 1992, had grown to over 0.5 million SHGs by March 2002 and further to 8 million SHGs by March 2012. From almost 100 percent of the SHGs linked to banks at the pilot stage from southern states, the share of southern States in the total number of SHGs linked shrank to 46 percent by March 2012, while the share of eastern States (especially, West Bengal, Odisha and Bihar) shot up to over 20 percent. The third decade of the programme promises to be one of maturing the linkage programme with livelihoods support, a lot more innovations in the product range offered through SHGs and path-breaking reforms in leveraging technology to improve efficiency while extending its outreach to more geographical regions, especially the most resource-poor regions of the country”.
Together, the 8 million SHGs of the poor maintain a balance of over INR 6,550 crore in the savings bank accounts with the banks, while they are estimated to have harnessed savings of over INR 22,000 crore of which nearly 70 percent (over INR 15,000 crore) goes for internal lendings. Over 4.4 million SHGs are regularly availing credit facilities from the banks. During 2011-12 alone, over 1.15 million groups availed loans amounting to INR 16,535 crore from banks and together 4.4 million groups had loans to the extent of INR 36,340 crore outstanding against them with the financing banks as on March 31, 2012. Under the SHG-Bank linkage programme, over 103 million rural households have now access to regular savings through 7.96 million SHGs linked to banks.
The core needs of savings and credit for consumption and production of SHGs are being met by the banking system.
These SHGs have not only availed loans but have also availed loans more than once. It is being emphasised that a member of the older SHGs would now be in a position to graduate into micro enterprises by taking up income generating activities. It is a difficult task to find viable micro enterprises for millions of poor households in rural areas. Though micro enterprises is not a panacea for the complex problem of chronic unemployment and poverty, yet their promotion is a viable and effective strategy for achieving significant gains in incomes and assets of poor and marginalised people.
However, in the absence of any specific hand-holding strategy to provide financial and non-financial services in an integrated manner, the graduation of SHG members from microfinance to micro enterprises has not been smooth due to several obstacles. NABARD is, therefore, undertaking a pilot project in select districts, particularly for members of matured SHGs for promotion to the stage of micro enterprises. NGOs have been selected in each district for implementing the pilot projects.
Recognising the need for up-scaling the microfinance interventions in the country, the Union Finance Minister, while presenting the budget for the year 2000-01, had created Micro Finance Development Fund (MFDF) with an initial contribution of INR 100 crore, to be funded by Reserve Bank of India, NABARD and commercial banks in the ratio of 40:40:20. In the Union Budget for 2005-06, the Government of India decided to re-designate the MFDF into MFDEF and raised its corpus from INR 100 crore to INR 200 crore.
The MFDEF is managed and administered by NABARD under the guidance of an MFDEF Advisory Board. The objective of MFDEF is to facilitate and support the orderly the growth of the microfinance sector through diverse modalities for enlarging the flow of financial services to the poor, particularly for women and vulnerable sections of society consistent with sustainability.
The research study ‘Micro Finance Regulation in India (Sa-Dhan, 2001), unravels the features of a self-regulatory mechanism in microfinance in India. The sequel to the report of the National Task Force on Supportive Policy and Regulatory Framework for Micro Finance had suggested the need to encourage the development of a self-regulatory mechanism and had also defined some of the broad parameters under which such a regulatory mechanism could be given shape. The above study after researching into the existing microfinance scenario, recommends that regulation should not be left to the market or to the government. The report lists the participants that should come under self-regulation as the SHGs; the Federations of the SHGs, NGO, MFIs, NGO facilitators, Co-operatives, other formal MFIs like banks, NBFCs, and LABs.
The Self-Regulatory Authority (SRA) is expected to verify if the MFIs are really serving the poor, set accountancy rules, reporting and disclosure requirements, establish prudential norms and performance standards, and accredit the complying MFIs. It is also expected to give credit ratings and provide deposit insurance financed from contributions of members. The study recommends that even if regulation norms and standards are established by the MFIs themselves, supervision must be done by an independent institution (Sa-Dhan, 2001).