Despite progress in many areas, only about one in four businesses globally is owned by a woman – a number that has remained stagnant for two decades according to gender-disaggregated data from the World Bank. This inequality is a human rights issue, an economic drag and a constraint on innovation.
However, emerging evidence suggests that performance-based incentives could be part of the solution. These measures can aid development banks and other funders in creating tangible social outcomes and financial returns as well as motivating organisations to allocate more resources to address inequality in business ownership.
Some development banks, impact investors or philanthropic funders include incentives when they support projects designed to meet specific targets for financing women-owned businesses. Typically, these incentives involve interest rate reductions or cash payouts that kick in when the investee or lendee meets a particular outcome, such as the number of loans extended to women-owned businesses or the number of women-owned companies in a supply chain. The International Finance Corporation and others are expanding the use of these incentives.
A recent publication by IDB Invest, the private-sector arm of the Inter-American Development Bank,” examined the outcomes of 23 projects incorporating incentives aimed at fostering gender equality. The research, co-sponsored by the Women Entrepreneurs Finance Initiative at the World Bank, which uses performance-based incentives in development finance in many of its projects around the world, offered actionable advice for organisations considering such measures.
Key findings
People surveyed by IDB Invest perceived that performance-based incentives were instrumental in improving gender equality. Not only did the incentives help organisations achieve their initial gender targets, but they also justified the allocation of resources within client organisations. Incentives also resulted in spillover effects, such as shifting internal mindsets, and demonstration effects where one of the companies used strategies from an initial programme in other projects in the region. Research also found that new industry networks had been created, as companies connected with organisations that promote or include women entrepreneurs.
The report’s actionable guide lists 12 best practices for companies and financial organisations that want to use performance-based incentives, including setting benchmarks early, adding technical assistance for women-owned businesses, and measuring and aggregating data by gender.
Emerging quantitative evidence showed the effectiveness of performance-based incentives. The report cited the Women Entrepreneurs Opportunity Facility, founded by the IFC and Goldman Sachs in 2014 to support women-owned enterprises in developing countries by combining financial incentives with advisory services. Initial findings indicate a 94% increase in the number of women-led businesses receiving loans from IFC investments that had an incentive, compared to 84% without. Additionally, client banks observed a growth of 86% in lending to women-owned businesses over three years of the study.
Moving private capital
Incorporating performance-based incentives has become increasingly common within the development finance sector. We-Fi, along with the IFC and other development finance institutions, has long promoted this approach. IDB Invest began implementing performance-based incentives in 2015: ‘It’s almost as if this is becoming the norm rather than the exception’, said Matthieu Pegon, director of blended finance at IDB Invest.
Incentives create a quadruple win. For development banks, performance-based incentives create more certainty about outcomes, such as the gender equality targets. ‘It’s ultimately what you pay for, in terms of subsidy,’ Pegon said.
Second, the incentives help in the creation of effective blended finance products, which leverage public sector funds to help convince private capital to move into new spheres – like lending to or investing in women-owned businesses. In some cases, a financial institution, like a regional or local bank, may be the recipient of the blended finance investment with performance-based incentives attached. In others, a large company may receive an investment with a performance-based incentive to diversify suppliers. These incentives justify paying for necessary changes, such as offering technical assistance to women-owned suppliers or committing senior management to setting goals and conducting sales force training.
A third benefit: more women-owned businesses are receiving financing. However, economists don’t know whether performance-based incentives have an ecosystem effect, attracting more women to participate fully in the economy.
And fourth: People working within institutions benefit from the mindset shift to help them see women and women-owned businesses in a new light. As Wendy Teleki, head of the We-Fi secretariat, notes, ‘Performance-based incentives catalyse a conversation at a higher level about gender’. This mindset shift lies at the heart of We-Fi’s work on systemic change within institutions – to see women and women-owned businesses as powerful actors within the global economy.
Elizabeth MacBride is Senior Knowledge and Advocacy Consultant at the Women Entrepreneurs Finance Initiative.
For more information on the work of Women Entrepreneurs Finance Initiative, listen to OMFIF’s On Demand podcast with Wendy Teleki from We-Fi.