Only about one in four businesses around the world is owned by a woman.
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The number has been stuck in that range for two decades, according to World Bank gender-disaggregated data. This inequality is a human rights issue, an economic drag and a constraint on innovation.
However, evidence is emerging of a particular kind of financial structure that helps: performance-based incentives.
In April, We-Fi and IDB Invest, the private-sector arm of the Inter-American Development Bank, convened a webinar to discuss recent findings surrounding projects designed to meet specific targets for financing women-owned businesses.
Some development banks, impact investors or philanthropic funders include incentives when they lend money or invest in a project. Typically these incentives involve interest rate reductions or cash payouts that kick in when the investee or lendee meets a particular outcome, usually related to a social good.
Performance-based incentives help development banks and other funders create measurable social outcomes in addition to financial returns, and motivate organizations in the ecosystem – such as companies and regional banks – to allocate more resources to achieve the desired results.
Panelists at the webinar covered a recent publication by IDB Invest that examined the outcomes of 23 projects and offered actionable advice for organizations considering performance-based incentives for gender equality.
IFC Expands the Use of Performance-Based Incentives
Among the research findings:
- Though worldwide quantitative analysis does not yet exist, people surveyed by IDB Invest perceived that performance-based incentives improve gender equality. The incentives also contributed to achieving gender targets beyond those initially set and provided justification for resource allocation within client organizations. Incentives also resulted in spillover effects such as shifting internal mindsets. The report found the evidence of demonstration effects. For instance, one of the companies used strategies from.the initial program in other projects in the region. The report also found that new industry networks had been created, as companies connected with organizations that promote or include women entrepreneurs.
- The report and actionable guide list 12 best practices for companies and financial organizations 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.
- The report and webinar included emerging quantitative evidence that supports the effectiveness of performance-based incentives. They cited the Women Entrepreneurs Opportunity Facility (WEOF), 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. Hanh Nam Nguyen, Principal Investment Officer and Blended Finance Lead, IFC, pointed to these results, saying they are good indications incentives are working. She also said the IFC is using incentives in equity investments.
Moving Private Capital
We-Fi, along with the IFC and other development finance institutions, has long promoted performance-based incentives. IDB Invest also began incorporating 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, IDB Invest.
The performance-based 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.
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 finance 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. Performance-based incentives give a justification to pay for necessary changes, like technical assistance for suppliers that are women-owned businesses, or investments of time by senior management to set goals and do salesforce training.
A third benefit: Economists don’t know whether performance-based incentives have an ecosystem effect, attracting more women to participate fully in the economy. But, more women-owned businesses are receiving financing.
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 powerful actors within the global economy.
This mindset shift lies at the heart of We-Fi’s work on systemic change within institutions. “Performance-based incentives catalyze a conversation at a higher level about gender,” said Wendy Teleki, Head of the We-Fi Secretariat.
For the report by IDB Invest and Dalberg, a consultancy, click here.
The IDB Invest team contributing to the report included Patricia Yañez-Pagans, Matthieu Pegon, Galia Rabchinsky Krawetz, Sofia Ahualli, Laura Juliana Giraldo Martinez, Jimena Serrano Pardo, Maria Alejandra Barrientos Chavez, Angeles Barral Verna.
The Dalberg team contributing included Marcos Paya, Kusi Hornberger, Daniela Casas, Alexander Dow, Alexander Raymond, Fabiola Salman and Rachna Saxena.
