Do banks discriminate against women entrepreneurs?

Some studies such as Carter and Shaw (2006) show that the share of women among the self-employed is disproportionately small, that they run smaller businesses, that they are less likely to rely on venture capital and that their firms have lower debt-equity ratios. These differences in financing patterns could be due to two sorts of factors. First, bankers’ decisions about loan applications may differ across men and women whose businesses are similar in terms of solvency and creditworthiness (supply-side discrimination, associated with the work of economist Gary Becker). Second, male and female entrepreneurs may differ in terms of risk attitude, education, personal wealth, experience, etc., known as statistical discrimination. The challenge is to find out which of these (or both) factors hold.

A recent study by Muravyev et al. (forthcoming) attempts to do precisely this. The study is based on firm level data from the Business Environment and Enterprise Performance Survey (BEEPS, 2005), conducted in Europe and Central Asia by the World Bank’s Enterprise Surveys and EBRD.

Focusing on bank loans, the study finds substantial evidence of discrimination by banks against women entrepreneurs. For example, the probability of receiving a loan is about 5 percentage points lower for female-owned/managed firms than for male-owned/managed firms. This is a large difference given that only 58% of the loans are approved. Further, female entrepreneurs pay higher interest rates - about 0.5 percentage points more than male entrepreneurs do (the average interest rate is 12.2% per annum). However, the silver lining in the study is that discrimination against women decreases (almost vanishes) with the level of financial development of countries.

What is the reason for discrimination against women? The study reports evidence of “Becker-type” discrimination – the preference of the lender not to be associated with certain groups of borrowers - rather than “statistical discrimination” that arises when gender (race, etc.) is used as a proxy for risk factors that cannot be directly observed. In other words, banks discriminate against women not because they consider women to be more risky borrowers but because banks do not want to lend to women simply out of bias against women.