Case Study April 2024 FROM COLLATERAL TO CASHFLOW: EXPANDING ACCESS TO FINANCE FOR NIGERIA’S FEMALE BUSINESS OWNERS Authors: Ariel Gruver, Tricia Koroknay-Palicz, Sreelakshmi Papineni, Sarmad Shaikh, and Siegfried Zottel SUMMARY This case study was produced by Women in Nigeria are starting and growing businesses at a remarkable rate the World Bank’s Africa Gender offering a vast untapped market for business lending. The World Bank, through Innovation Lab (GIL) and Finance, its Nigeria Women Entrepreneurs Finance Initiative (We-Fi)1, partnered with the Competitiveness, and Innovation Development Bank of Nigeria (DBN) and two commercial banks in Nigeria – (FCI) Global Practice. The case study provides insights from the Access Bank and Sterling Bank – to develop innovative credit solutions that Nigeria Women Entrepreneurs expand access to finance for women entrepreneurs. These credit solutions Finance Initiative (We-Fi) project reduce reliance on collateral in lending decisions by leveraging data to assess previously led by Siegfried Zottel credit-worthiness and manage risk. Gender inequality in ownership of assets that and now led by Hadija Kamayo can serve as collateral is one of the main barriers faced by women entrepreneurs (both World Bank, Senior Financial Sector Specialists). We thank Jana in accessing finance in Nigeria and beyond. Access Bank’s cashflow-based Malinska and the FCI Competitive lending product for small- and medium-enterprises (SMEs), for example, uses Policy Evaluation Lab (ComPEL) analysis of business bank account transaction data to determine loan eligibility for their expertise and insights, and provide collateral free loans to business owners. Such approaches have especially Ana Goicoechea; and the World Bank Umbrella Facility the potential to unlock commercial finance for women entrepreneurs.2 for Gender Equality (UFGE) for This case study summarizes key lessons from this work, including an initial funding. We also thank the team at Access Bank, especially, Chioma diagnostic; an assessment of demand for business loans; analysis of SMEs Ogwo and Oluchi Samuel; and who applied to and/or received Access Bank cashflow loans; and administrative early support from Ayo Olojede and data from Access Bank’s cashflow loan program. Our objective is to provide Olaitan Alao. The authors thank insights into the successes and challenges of disbursing loans to women-led the contributions of Josephine Ijere and Nneka Okoh who provided SMEs (WSMEs) in Nigeria. This research is being conducted in partnership with excellent research management. the World Bank’s Africa Gender Innovation Lab (GIL)3, which is also carrying out an impact evaluation that will capture how cashflow-based lending impacts The Africa Gender Innovation Lab male- vs female-led firms’ access to credit and business performance. conducts impact evaluations and rigorous research to figure out what works and what does not to 1 https://we-fi.org/ improve gender equality and uses 2 Details of the Nigeria We-Fi program. this evidence to shape policy. 3 https://www.worldbank.org/en/programs/africa-gender-innovation-lab https://www.worldbank.org/en/programs/africa-gender-innovation-lab MOTIVATION: WHAT IS THE PROBLEM? personal savings, as formal channels meet only 18% of MSME’s credit needs. Furthermore, less than 1% In Nigeria, roughly half (40%) of the micro-, small- of commercial bank loans in Nigeria go to MSMEs, and medium-enterprises (MSMEs) are owned by as compared to an average of 15% recorded in other women.4 Access to finance remains a challenge developing countries. Roughly 46% of women- and ranks among Nigeria’s entrepreneurs top led SMEs (WSMEs) in Nigeria have no loan history concerns, particularly for women entrepreneurs.5 More female-led than male-led firms identify access with a financial institution. While 31.4% of women to finance as a major constraint (52% vs 30%), in Nigeria borrow in some capacity to finance their and 56% of female entrepreneurs indicated that business, only 3.7% borrow from formal financial their most recent loan application got rejected, as service providers.8 Gender gaps in access to credit compared to 17% of male entrepreneurs.6 play a central role in explaining the gender gap in business performance. Firms run by women have While women business leaders show significant lower profits and sales, fewer employees, lower interest in taking loans, they receive a smaller productivity, and slower growth relative to male-led allocation of bank credit compared to men. firms.9 A World Bank survey found that while up to 92% of WSMEs were interested in obtaining formal A major contributing factor to gender gaps financing, only 11% of the surveyed banks’ MSME in access to credit are gender inequalities in loan portfolio was going to women-led businesses.7 ownership of assets that can serve as collateral. The primary source of MSME funding in Nigeria is For instance, only 11% of women versus 41% of 4 Kempis, Michelle; Timothy Ogden. Small Firm Diaries Firm Profile Data from the Small Firm Diaries Nigeria. 2023. 5 Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), National Bureau of Statistics (NBS), 2017. National Survey of Micro Small & Medium Enterprises (MSMEs), 2017. 6 World Bank Enterprise Surveys, 2014. Nigeria 2015: Country Profile. World Bank. 7 World Bank, 2021. Supporting women entrepreneurs in Nigeria; Access to finance and market diagnostics. 8 Demirguc-Kunt, Asli; Klapper, Leora; Singer, Dorothe; Ansar, Saniya; Hess, Jake Richard. The Global Findex Database 2017: Measuring Financial Inclusion and the Fintech Revolution (English). World Bank Group. 2018. 9 World Bank. 2019. Profiting from Parity : Unlocking the Potential of Women’s Businesses in Africa: Main Report (English). 2 men in Nigeria own a house.10 Nigerian financial WHAT WAS DONE? institutions (FIs) commonly use the value of the The World Bank, through We-Fi13, has been working collateral that the prospective borrower can bring in partnership with the Development Bank of to the table both to decide whether to lend, and Nigeria, Access Bank, and Sterling Bank to develop how much. Furthermore, most Nigerian financial innovative solutions to improve access to finance for institutions require collateral that is higher than women entrepreneurs in Nigeria. Since 2019, the the loan amount, as a risk management strategy. Nigeria We-Fi project has been involved in several Enterprises unable to meet such requirements seek activities and outputs, including: other informal sources of funding or go without. • A diagnostic study and market assessment New, innovative ways of assessing borrower of credit offerings available in Nigeria for women- credit-worthiness are allowing financial led small and medium enterprises (WSMEs), and institutions to expand access to credit while how WSMEs can learn about, adopt, and use also managing, and even reducing, risk. These them – including potential challenges [full report innovative approaches make it possible for credit- available on request]. worthy borrowers who lack collateral to access • Providing technical support for the development formal loans and larger loan amounts. There is a large of innovative digital credit solutions for unmet demand from creditworthy customers who WSMEs, including Access Bank’s cashflow are currently excluded from or limited in their access lending product, and Sterling Bank’s Business to credit from formal financial institutions due to Support Facility lending platform. lack of collateral. Serving this clientele offers growth opportunities and a good risk profile to lenders. • Designing gender sensitivity training Leveraging alternative data about the borrower materials for loan officers and other bank staff to and their business to inform lending decisions can support increased lending to women [materials help financial Institutions (FIs) manage and reduce available on request]. lending risk while expanding access to credit – • Research on messaging to prospective both increasing the pool of eligible borrowers and borrowers, and with applicants of Access Bank’s allowing FIs to offer larger loan sizes. Such lending cashflow loan product. practices put more emphasis on the other Cs of credit - Character, Capacity, Capital and Condition, • Proof-of-concept pilot study of Access Bank’s when analyzing loan requests. These new ways of cashflow loan product managing credit risk have the potential to benefit FIs and customers, increase FIs operational efficiency, DIAGNOSTIC STUDY ON LENDING TO contribute to Nigeria’s economic development WOMEN ENTREPRENEURS IN NIGERIA by allocating credit towards growth-oriented In 2021, Nigeria We-Fi conducted a diagnostic entrepreneurs, and help close gender gaps in study and market assessment14 to provide insights access to credit. on the current state of SME financing in Nigeria, Importantly, evidence shows that by leveraging as well as provide recommendations to assist alternative data, banks can reduce (or even women-led SMEs (WSMEs) better access finance eliminate) collateral requirements with no in Nigeria. The study consisted of interviews impact on repayment rates or incidence of with lending institutions comprising commercial non-performing loans.11 Women entrepreneurs banks, microfinance institutions (MFIs) and lending have demonstrated high loan repayment rates and FinTechs, and women entrepreneurs. The report tend to be loyal banking customers, increasing the emphasized the need for loan products that are potential for cross-selling opportunities.12 designed to serve the needs of WSMEs, beyond 10 World Bank Gender Data Portal. Accessed February 26, 2024. https://genderdata.worldbank.org/ 11 Alibhai, Salman, Rachel Cassidy, Markus Goldstein, and Sreelakshmi Papineni. 2022. Evening the Credit Score? Impact of Psychometric Loan Appraisal for Women Entrepreneurs. Working Paper. World Bank. 12 Carranza, Eliana; Chandra, Dhakal; Inessa Love. 2018. Female Entrepreneurs: How and Why Are They Different? 13 Women Entrepreneurs Finance Initiative. https://we-fi.org/ 14 World Bank. 2021 Supporting women entrepreneurs in Nigeria; Access to finance and market diagnostics. 3 WSME financing preferences and expectations from surveys Loan Size by Sector Loan Pricing Loan Tenor Repayments Turnaround time & Channels The average loan size in demand • The preferred interest • The preferred tenor • About 60% of survey by WSMEs is between N1m-N5m: rate varies for WSMEs by WSMEs for an respondents prefer • WSMEs prefer shorter • Agriculture: N1m–N10m across sectors, with 87% uncollateralized loan monthly repayments, turnaround time • Manufacturing: N2.5m–N10m of survey respondents ranges between 6-36 while 21% prefer between 1 to 7 days. • Construction: N2.5m–N20m seeking interest rates months, with 77% of quarterly repayments. • Majority of WSMEs prefer within a 10-15% band. survey respondents • Hospitality: N1m–N2.5m • 66% of the WSMEs accessing loans via digital seeking to repay • Education: N1m–N5m • Some of the women also prefer moratorium platforms - up to 82% loans between less • Professional services: suggested the removal of the loan, ranging of survey respondents. than 6 months and N5m–N20m of management between 1-6 months. 2 years depending • Trade: N1m–N5m and facility fees on the amount. Note: Surveys conducted in 2021 through Focus Group Discussions with women entrepreneurs. simply offering a preferential interest rate for women. INNOVATIVE DIGITAL CREDIT Credit products should be designed with the needs, SOLUTIONS: CASHFLOW LOANS preferences, and capabilities of WSMEs in mind, In cashflow-based lending, analysis of the including around loan size, repayment, loan tenor, prospective borrowers’ business cash flow data is application, and assessment of creditworthiness. used to determine whether to offer the applicant a The report also highlights the need to make banks loan, and what size loan to offer. This data could and bank products more accessible to women. come from customer bank account statements, self- Only 31% of Nigerian women have a formal account compared with 61% of men.15 Women are less reported data (ideally in combination with validation experienced with and knowledgeable about bank checks), or any other form of data on revenues or products, and as compared to men are more cashflow. In Nigeria, commercial banks (including reluctant to approach banks for funding. Many Access Bank, Fidelity Bank, Standard Chartered WSMEs in Nigeria face capacity and knowledge Bank, Sterling Bank, Union Bank of Nigeria, and constraints. This includes a lack of knowledge Zenith Bank) are providing large, collateral-free on bank’s loan offerings, and on how to properly business loans.16 These have loan tenors of between position themselves to access credit from financial 6 months and 24 months, and max loan sizes of institutions. This contributes to WSMEs being less between 2.5 million Naira and 20 million Naira, likely to apply for loans, and amongst those who do and utilize a cashflow-based lending approach. apply, a lower likelihood of approval. Both Access The fintech Lidya also offers a cashflow-based Bank’s cashflow loan program and Sterling Bank’s working capital loan with an average loan amount Business Support Facility (BSF) loan product for of 18 million Naira, and loan tenor up to 60 days.17 registered SMEs adopted recommendations aligned with the findings from the diagnostic study. 15 EFinA, 2019. https://efina.org.ng/media-room/assessment-of-womens-financial-inclusion-in-nigeria/ 16 Nigeria We-Fi innovative credit approaches blog. 17 Lidya. “Lidya Is Unlocking Credit For Africans - Home.” Accessed February 26, 2024. https://www.lidya.info/. 4 Figure 1: Distribution of Loan Sizes of Access Bank Cashflow Loan 2021-2023 2021 Year of Loan Disbursement 2022 2023 0 1m 2m 3m 4m 5m 6m 7m 8m 9m 10m Loan Amount in Nigeria Naira (NGN) Note: Loan disbursement data sourced from Access Bank Administrative Data. Data is presented for each year for any cashflow loans disbursed between January 2021 and August 2023. Amounts are not inflation adjusted. Vertical lines represent the mean cashflow loan size in Nigerian Naira within each year. Most loans were capped at Naira 5m but some larger loans were disbursed of up to Naira 10m in the earlier years. Cashflow-based lending at Access Bank to determine cashflow. The business information is entered into a spreadsheet and is validated by The loan product a credit officer during a business appraisal visit. Access Bank’s cashflow-based loan product18 is Access Bank plans to make this loan product targeted at business owners who own registered fully digital in 2024 – whereby customers request small or medium enterprises (SMEs) and are a loan, and a computer analyzes the customer’s seeking a loan of 1million to 5million Nigerian Naira Access Bank business account transaction data to to finance working capital or business equipment.19 assess cashflow, determine creditworthiness, and Loan offers are based on the applicants’ business what size loan to offer. This will allow for reduced cash flow (as per their business bank account transaction costs on the part of Access Bank; transaction data), and the loan does not require the faster processing of loan applications; quicker turn- business owner to pledge any physical collateral to around time between application disbursement; secure the loan.20 Loan size is determined based and for the cashflow loan program to operate at a on a 30% debt service ratio and the loan tenor is much larger scale, in terms of number of customers 12-24 months. Women-led SMEs are offered a served. Given the success of the Nigeria pilot, We- preferential interest rate. To qualify for an Access Fi is now being scaled across the Africa region.21 Bank Cashflow Loan, the applicant must have a registered business that has been operational for at least one year, a bank account with any Loan product performance bank that has been open for at least 3 months, Between January 2021 and August 2023, Access and no negative credit history. The cashflow loan Bank disbursed over 20,000 cashflow based product currently offered by Access Bank can be loans to 15,583 business banking customers, of initiated through a digital or in-person application, whom 30% were female. Throughout this period, but analysis of credit-worthiness is currently done the average loan size was approximately 3 million using self-reported information from the borrower Naira. While more men received cashflow loans than 18 https://cashflow.accessbankplc.com/home 19 The max of 5 million Naira was set in 2021 and may be increased to 10 million in light of inflation. 20 “Access Bank PLC | Business.” Accessed February 26, 2024. https://www.accessbankplc.com/business. 21 Scale-up of digital cashflow lending blog. 5 women, those women who did receive cashflow prior to the baseline survey. Amongst those who loans received higher average loan sizes than men. had applied for loans within the past 12 months, the Access Bank reports a 99% repayment rate for their average amount requested was 2.27 million Naira. cashflow based loan portfolio over the period; and In early 2024, the World Bank collected follow-up nearly half (45%) of cashflow loan recipients are survey data from 70% of the 214 business owners. repeat cashflow-loan borrowers. Over these three Among those that were surveyed we find 7 percent years, average loan sizes stayed roughly the same (5 percent of women-led and 8 percent of male- in Naira terms. led) of firms permanently or temporarily closed their business which is lower than estimates of small firm Profile of cashflow loan borrowers death rates in low- and middle-income countries.22 In 2021, the World Bank GIL surveyed 214 business Most of the firms were still operating the same owners (121 women and 93 men) who applied for business. Among men in the sample 96 percent and were internally approved for an Access Bank attempted to borrow and 88 percent successfully cashflow loan during 2021. These firms were drawn borrowed, and among women 98 percent attempted from four states –Abuja, Lagos, Oyo, and Rivers and 85 percent were successful. The majority State. The business owners average age was of firms (75 percent) had received at least one cashflow based loan from Access Bank by the time 42. Nearly all are married with children, literate, of the follow-up survey; and 45 percent were repeat and 40 percent had graduated from tertiary level borrowers. Women who borrowed to finance their education. Respondents are experienced business business tend to borrow larger amounts than men. owners (with 70 percent owning a business for 10+ Among those who borrowed, 18 percent of women years). Businesses are primarily in the wholesale and and 11 percent of men faced collateral requirements retail sectors (77 percent). On average businesses when borrowing. Most (60 percent) borrowers state are open 6 days per week and 10.6 hours per the purpose of their loan was to purchase inputs, day, and respondents report spending 33 hours raw materials, and inventory stock. Indeed, we per week working for their business. 9 out of 10 find some preliminary evidence that those women- respondents have separate bank accounts for their led firms randomly assigned to receive a cashflow business. Average monthly profits averaged around based loan as part of a pilot randomized controlled 2 million Naira (in 2021) and firms have an average trial (RCT) impact evaluation had higher values of 4.8 employees. Nearly 72 percent of respondents capital investment and inventory stock than the report that they applied for business financing, 40 control group two years later. Women assigned to percent reported borrowing from a formal financial the treatment arm of the RCT had a 20-percentage institution, 7 percent among friends and family; and point higher likelihood of borrowing from a formal 5% from informal loan sources in the past 12 months source relative to a control group two years later, whereas we find no impact on the likelihood of formal borrowing among men. This suggests the cashflow loan helps alleviate a credit constraint for women. Reflections and lessons learned Cashflow lending draws on digital records of a customer’s business bank account. Ensuring women take-up and regularly use their bank accounts may require further effort on the part of the financial Institutions to ensure that accounts are easy to use and may require special outreach by the banks. Knowing that greater usage can generate greater access to credit is also a good incentive for customers to increase usage. 22 McKenzie, David and Paffhausen, Anna Luisa; Small Firm Death in Developing Countries. 2019. The Review of Economics and Statistics 6 Digitally enabled loan application and review ASSESSING THE DEMAND FOR processes can reduce bank transaction costs per CASHFLOW-BASED LOANS loan, eliminate bias, can facilitate evidence-based In 2021, we conducted a campaign to advertise the lending, and can dramatically reduce the timespan Access Bank cashflow-based loan product to Access between initial application and disbursement. This Bank business banking customers. During this contrasts with traditional lending procedures, campaign, 80,000 business banking customers (half in which the application, review, and approval male, half female) with working telephone numbers process for business loans can be lengthy and time were sent a text message about the cashflow loan consuming for both applicant and the loan officer. product. The goal was to understand how different messages affected interest in the cashflow loan, and High transaction costs per loan (i.e., loan officer time to understand more about customers interest in and per loan application approved) can incentivize FIs demand for loan products. and loan officers to focus their efforts on the largest value loans, and most qualified borrowers. The information campaign involved sending a series of 7 text messages to customers. The initial To ensure that loan officers contribute to goals message read “Access Bank invites you to take a such as increasing the number of loans issued to short survey. The text messages will be of no cost to women, percentage of loans issued to women, or you, and you will get NGN 100 airtime if you answer number of loans issued through an innovative credit all the questions. Continue? Yes/No”. The second product, they should be held accountable to these message was about the cashflow loan product, and through their key performance indicators (KPIs) or customers were randomized to receive one of the annual goals. Capacity building is also important following messages as per Table 1 below: so that staff of financial institutions gain a better understanding of WSMEs’ specific needs. Table 1: Messages tested during awareness campaign Base: “To access a business loan, do Digitizing is key to scale profitably but has you know that you can use your business challenges. Fully digitizing the loan application cashflow statement? Access Bank cashflow process for the Access Bank cashflow loan has taken loan product helps entrepreneurs like you to longer than expected but is crucial for achieving grow their business. Would you like to learn impact at scale. Our findings show that most business more?” banking customers would be interested in a loan, Female Base + Gender Nudge: “As a female and that most prefer a digital application process. A business owner…. “ fully digitized loan product can allow for a financial Base + Gender Nudge + Interest Rate: “As institution to dramatically increase the number of a female business owner… at a preferential SME loans that can be approved. Automation also interest rate of just 15 percent”. has the potential to positively serve every stage of Base + No Collateral: “…. With no a loan’s life cycle, from pre-screening of applicants collateral”. to credit underwriting and customer onboarding, to Base: “To access a business loan, do portfolio monitoring and management, and to credit you know that you can use your business decisions. cashflow statement? Access Bank cashflow loan product helps entrepreneurs like you to Most Nigerian banks are yet to leverage the benefits of Male grow their business. Would you like to learn tapping into differentiated products and services that more?” have proven to be successful (like cash flow lending) Base + Ease of Approval “…. Quick and to serve unbanked and underbanked women. Given easy…” the massive customer base offered by WSMEs, Base + Interest Rate: “...at an interest rate financial Institutions could gain tremendously from of …” offering women-focused cashflow lending products Base + No Collateral: “ … with no collateral” to women entrepreneurs.23 23 Women’s Financial Inclusion Data (WFID) Partnership. 2022. Towards Women’s Financial Inclusion: A Gender Data Diagnostic of Nigeria. 7 After receiving information about the cashflow loan, each customer was sent a short series of survey questions, followed by a final message that read “please click on the link to the Access Bank cashflow portal if you would like to learn more or to apply online.” Of the 80,000 Access Bank customers, 7,276 (9%) clicked into and replied to the first message. The findings below are based on responses from these customers. Key findings from Information Campaign • Overall, 73 percent of male entrepreneurs and 80 percent of female entrepreneurs were interested in visiting the Access Bank cash flow loan application online portal.  • Neither including a simple gender nudge (i.e., “this product is for women”) nor a “no collateral” nudge increased women’s interest in the product.  • Telling men that the product is “quick and easy” makes them less likely to want to learn more about the product. • Explicitly mentioning the interest rate reduces appetite for the product [alternatives may be cheaper on the market, or perhaps mentioning the interest rate always dissuades people].   • Of those not interested in the loan, the most common reason was “I have no need for a business loan” (38 percent of women and 49 percent of men).   • Among all respondents, 65 percent had never previously received a business loan from a bank or financial institution. When asked why they had never received a loan, the most common answers were “I had no need” (37 percent), “did not know of a suitable opportunity” (29 percent), and “loan application process too complicated” (23 percent), with women more likely than men to report the last two.  Our findings suggest that interventions that increase women’s awareness of suitable loan opportunities, and that make applying for loans easier may be helpful in closing gender gaps in access to finance. We are planning a qualitative study to explore this further. FOR MORE INFORMATION, PLEASE CONTACT “Bank staff are more open to listening to men Sreelakshmi Papineni share their dreams and wary when women share spapineni@worldbank.org the same dreams. There is already a bias that Africa Gender Innovation Lab the woman is dreaming too big and does not afrgenderlab@worldbank.org have the capacity to actualize such dreams” 1818 H St NW - A female agribusiness owner in Lagos operating for 10 years Washington, DC 20433 USA www.worldbank.org/africa/gil Photo credits: Nigeria Women Entrepreneurs Finance Initiative (We-Fi) Project 8