Africa
Africa desperately needs to adopt gender-smart and technology-based approaches to capital allocation and financial product design
How inclusive innovation, technology and equity-based capital allocation systems can help close the gender financing gap
Written by Efe Braimah, Head of Nigeria Advisory and Member of Group Council, and GLI Program Director
This piece was prepared in collaboration with Kuramo Capital Management.
There are over 30 million women-owned micro, small and medium enterprises (WSMEs) in Sub- Saharan Africa, accounting for approximately 60% of MSMEs (Micro, Small and Medium-Enterprises) or self-employed population on the continent. However, African women are also systematically disadvantaged and prevented from fulfilling their potential by a myriad of supply and demand side constraining factors.
As such, WSMEs only contribute to about 13% of the continent’s gross domestic product (GDP) with access to finance being a major barrier to scale and productivity. AfDB estimates that there is a $42 billion financing gap in Sub-Saharan Africa. In a 2019 report on “The Power of Parity: Advancing Women’s Equality in Africa”, McKinsey estimated that Africa could gain more than $300 billion in GDP by 2025 if this gender gap is closed.
For African women, access to finance remains disproportionately low across all capital structures. We need a more nuanced equity-based approach to addressing the access to finance gap for women.
Access to venture capital
In the venture capital space, less than 5% of total funding raised by African startups in 2022 went to women-only teams, as tracked by Briter Bridges, while female-founded startups, or gender-diverse teams, still only attracted ~13% of Africa’s total equity investments.
These figures remain alarmingly low even though research has shown that female entrepreneurs make twice as much revenue per dollar invested in comparison to their male counterparts.
There are many prevailing theories on why the gap persists: a lack of gender diversity amongst capital allocators leads to affinity bias as people gravitate toward people who look like them and share their backgrounds; or, that female founders still lack access to networks. Could social behavioral patterns still stand in the way of successful raises?
Regardless of the drivers, one thing is clear, the fastest way to unlock capital for female entrepreneurs and gender-smart businesses at scale is to invest in female-led fund managers with gender-smart investment strategies.
Access to formal credit
In terms of debt, access to the formal credit markets and trade finance remain critical to survival and expansion, yet elusive. The World Bank revealed that over 50% of female entrepreneurs reported being rejected in their most recent loan applications in comparison to 17% of men.
Furthermore, the trade and services industry — where WSMEs are over-represented — took one of the hardest hits from the effects of COVID-19-related lockdowns and social distancing measures. This has further aggravated the pre-existing gender business productivity gap.
There are several constraints to the ease and frequency of women businesses accessing the formal credit market in African economies. These include high interest rates and collateral requirements on the supply side. While most MSMEs will struggle to meet collateral requirements for many traditional lenders, cultural and societal norms further disadvantage women.
African women typically own fewer assets than men primarily due to gender-based discrimination encoded into local property laws, and so they lack the collateral necessary to secure substantial loans in comparison to their male counterparts.
On the demand side, International Monetary Fund (IMF) reported that decision-making behaviors of women based on factors such as low financial literacy, risk aversion, and fear of failure have impeded them from even applying for loans, thereby self-selecting themselves out of the credit market.
Equal opportunities are no longer enough
In order to create equal access to finance for women, we need to critically consider the lived experiences African women and develop solutions according to these differences — equal opportunities are no longer enough to close the gap.
Equality means that women are given the same resources or opportunities while equity recognizes women have different circumstances and allocates the exact resources and opportunities needed to reach an equal outcome based on this. This involves building in human-centered designs that integrate the lived experiences of African women in intervention programs and financial products.
Women-centered financial ecosystem design
Our collective equity-based approach should focus on three key interventions:
1. Increasing the quantity and quality of female capital allocators in the ecosystem to overcome gender and affinity bias. Research has shown that female funders are 2–3 time more likely to invest in female entrepreneurs
2. Increasing the pool of capital allocated to female funders by increasing availability of data reinforcing the fact that there is no tradeoff between gender and alpha. In fact, there is an even greater business case for a gender diverse investment team as they have been shown to have 20% higher net IRR than all-male teams.
3. Reducing the digital gender gap to help increase access to credit for African WSMEs. Supply and demand side interventions need to focus on the following key areas:
- Reducing credit risk of WSMEs by leveraging digital financial services providers such as fintechs with AI-based credit scoring or insur-tech solutions to help unlock credit near term;
- Building out credit profiles long term through complementary digital products and services e.g. pay-as-you-go (PAYG) solar home systems increase access to energy for business productivity while building a credit profile for the WSME;
- Developing alternative collateral mechanisms to unlock financing such as digitizing inventory for moveable collateral and leveraging inventory management platform to enable inventory lending or trade finance solutions and;
- Capacity building for WSMEs to increase business skills as well as financial and digital literacy
Overall creating equal access to finance for African women requires a targeted equity-based approach. In the private equity markets, Institutional Investors, Development Finance Institutions (DFIs), and other Limited Partners (LPs) need to fund more women and women-focused investment vehicles that in turn invest in more women. In the credit markets, both traditional lenders and digital financial services providers need to actively include more women in the digital economy through targeted products and service offerings that can help increase their digital literacy and build their credit profiles.
About the Author
Efe Braimah, Head of Nigeria Advisory, Member of Group Council and GLI Program Director
Efe is a member of CrossBoundary’s investment advisory team and is based in the Lagos office. She also currently serves as the Program Director of a Gender Lens Investing (GLI) Accelerator for sub-Saharan African female fund managers at Kuramo Capital. Efe has a first-class Master’s in Civil and Environmental Engineering from Imperial College London. She is a native of Nigeria, and has also lived in China, the United States, the United Kingdom, and Tanzania. Prior to joining CrossBoundary, Efe worked for The Boston Consulting Group (“BCG”), where she supported the BCG Social Impact practice in strategy development and government stakeholder engagement for donor-funded organizations in Nigeria.
About CrossBoundary
CrossBoundary is a frontier and emerging markets-focused investment advisory firm with a global presence. Our mission is to unlock the power of private capital to make a strong return and a lasting difference in frontier and emerging markets. We have advised foundations, private equity funds, impact investors, local enterprises, development finance institutions, development organizations, and government agencies to support capital mobilization into sustainable transactions in emerging markets. Our teams have advised on over US$1 billion of closed transactions across a broad range of impactful sectors, including agriculture, health, education, manufacturing, ICT, infrastructure, and clean power. We have 170+ experienced investment and advisory professionals across 23 offices globally. Our advisory experience spans the Middle East and North Africa, Central and Southeast Asia, Eastern Europe, Latin America and the Caribbean, and Sub-Saharan Africa where we have 10 offices spanning Central, East, North, West, and Southern Africa. Find out more at www.crossboundary.com
About Kuramo Capital
Kuramo Capital Management is an independent investment management firm that provides global investment services to institutional investors, focused on alternative assets in emerging and frontier markets. Kuramo has a presence in 3 global offices — Lagos, Nairobi, and New York City. Kuramo has focused on supporting and expanding the private investments landscape in Sub-Saharan Africa by investing in new and emerging fund managers. Its innovative and inclusive approach to fund investing has led to the creation of 15 new indigenous fund managers which has in turn catalyzed nearly $3 billion in impact capital. Kuramo currently manages about $500 million in asset across three families of fund vehicles. Kuramo funds have direct and indirect investments in over 200 companies in 30 sub-Saharan Africa countries in sectors. Find out more at www.kuramocapital.com
