borrowers’ children.<sup>32</sup> While microcredit may not directly lead to greater income generation from women’s entrepreneurial activities, its indirect effects can lead to greater gender equality.

# **Weaknesses**

Credit subsidies and guarantees are often not transparent. Unlike direct transfers, they do not appear in government budgetary statements, and thus, are often not accounted for explicitly.<sup>33</sup> In addition, they can distort resource allocation by providing lower‐than‐market rate borrowing for a select group of lenders. This can encourage low‐efficiency activities and subsidize entrepreneurs who may be less able to form viable, profitable businesses.

Subsidized credit can also be harmful to lenders and the financial sector as a whole. While banks’ unwillingness to lend to women can stem from a lack of information on female borrowers, or from simple bias, women may also be less creditworthy from the banks’ perspective, for example, by lacking collateral or guarantors, or having less previous business experience. Lending to such borrowers can be risky and costly for banks, even with subsidies. Further, providing lower‐than‐market rates for borrowing can push down deposit interest rates, discouraging savers and leading to reduced flow of funds.<sup>34</sup> Within microcredit, subsidized lending has been associated with high default levels; it can hinder the development of more sustainable lenders and encourage rent‐seeking.<sup>35</sup> A series of rigorous, randomized studies found no evidence that microcredit raised household income, at least in the short‐term, although it was associated with other positive effects, as mentioned above.<sup>36</sup> A 2015 study of six microfinance programs in Sub‐Saharan Africa showed only modest effects on business investment and performance. It also showed that loans were mostly used for household expenditures rather than business investments, suggesting that merely alleviating a credit constraint may not be sufficient to grow female‐owned businesses in low‐income countries.<sup>37</sup>

# **Design considerations**

Incentive schemes involving credit provision should consider:

- **Prioritizing credit access over credit price** . Expanding access for female entrepreneurs to lending products as a whole is likely to have a more sustained effect than narrowly targeting credit rates.<sup>38</sup>

- **Complementing access to credit with broader access to financial services and tools** , such as savings accounts and insurance products that meet the needs of female borrowers. Access to financial products beyond credit can contribute to business growth. In Kenya, providing women

> 32 Anne Mikkola and Carrie Miles, “Development and Gender Equality: Consequences, Causes, Challenges and Cures” (Helsinki Center of Economic Research, April 2007).

> 33 “Subsidy Types | Global Subsidies Initiative.”

> 34 Juan Buttari, “Subsidized Credit Programs: The Theory, the Record, the Alternatives,” USAID Evaluation Special Study, June 1995.

> 35 “The Role of Governments in Microfinance,” Donor Brief (CGAP, June 2004).

> 36 “Does Microcredit Really Help Poor People?,” CGAP, October 2009, https://www.cgap.org/blog/does‐microcredit‐really‐help‐ poor‐people.

> 37 Campos and Gassier, “Gender and Entrepreneurship in Sub‐Saharan Africa.”

> 38 Buttari, “Subsidized Credit Programs: The Theory, the Record, the Alternatives.”

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