Gender gap and access to finance: A cross‐country analysis

• Published date: 01 February 2022
• Author: Radeef Chundakkadan,Subash Sasidharan
• Date: 01 February 2022
• DOI: http://doi.org/10.1111/rode.12830

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     wileyonlinelibrary.com/journal/rode  Rev Dev Econ. 2022;26:180–207.

© 2021 John Wiley & Sons Ltd

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INTRODUCTION

During the  course of  business  operations, entrepreneurs encounter  several barriers.  Access to 

finance is  recognized as one  of the  key obstacles in the  smooth functioning of  firms (Banerjee 

&  Duflo, 2014;  Beck  et al., 2005;  Klapper  et al., 2006).  Several  studies  have  identified  that 

Received: 26 October 2018 

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  Revised: 26 August 2021 

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  Accepted: 27 August 2021

DOI: 10.1111/rode.12830  

REGULAR ARTICLE

Gender gap and access to finance: A cross-

country analysis

RadeefChundakkadan1

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SubashSasidharan2

1Department of Liberal Arts, Indian 

Institute of Technology Bhilai, Raipur, 

India

2Department of Humanities and Social 

Sciences, Indian Institute of Technology 

Madras, Chennai, India

Correspondence

Radeef Chundakkadan, Department 

of Liberal Arts, Indian Institute of 

Technology Bhilai, Raipur, India.

Email: radeef@iitbhilai.com

Abstract

Using  a  rich  firm- level  data  set  pertaining  to  80  coun-

tries,  this  paper  investigates  the  relationship  between 

institutional  gender  equality  and  financial  constraints 

on female- led firms. We employ a broad index  of gender 

inequality as well as  alternate measures in terms of eco-

nomic, educational, and political inequality. We observe 

that  institutional  gender  equality  benefits  female  en-

trepreneurs’ access  to finance. In  addition, in  a gender- 

equal environment,  we observe  that female- owned and 

female- managed firms  are  less likely  to be  discouraged 

from applying  for formal  finance. We  find these  effects 

are more  pronounced in  the case of  small and  medium 

enterprises (SMEs) and young firms. Further, our results 

suggest that economic, educational, and political gender 

equality is vital  to improving women enterprises’  access 

to external finance.

KEYWORDS

credit market discrimination, financial constraints, gender 

equality

JEL CLASSIFICATION

J16; G21; Z13

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CHUNDAKKADAN and SASIDHARAN

female- owned firms are less likely to obtain formal loan approval (Bellucci etal.,2010; Mascia & 

Rossi,2017; Muravyev etal.,2009).  Further, entrepreneurs are often subject to various kinds  of 

credit market discrimination (Blanchard etal.,2008; Blanchflower etal.,2003; Storey,2004). The 

bias in the credit market stems from lenders’ preferences and beliefs about women (taste- based or

prejudicial discrimination), or  they use observable demographic  characteristics of the borrower 

to overcome asymmetric information (statistical discrimination).

The Sustainable Development Goals highlight gender equality and  empowerment of women 

as  one  of  their  objectives.  Therefore,  policy- makers across  the  world  stress  policies  to  reduce 

economic, educational, and political inequality between men and women. This includes policies 

and regulations including  equal pay and  equal opportunity legislation,  quotas for women's po-

litical representation, and financial support for  women (Blau & Kahn, 2003; Bush,2011; Ghosh 

& Vinod,2017). Such institutional policies are expected to reduce the  gender gap, and the effect 

is more  likely to be  reflected in the  context of  credit market discrimination as  well. Therefore, 

female- owned firms  may face lower  financial constraints where the  institutional gender gap  is 

relatively lower.1 In other words, gender equality is likely to reduce the financial constraints cre-

ated by credit market gender discrimination.

Institutional gender  equality is  advocated as a  means to  reduce the f inancial constraints of  

female- led firms  in several  ways. First, credit  market discrimination arises  from the asymmet-

ric information between lender  and borrower. It is costly for  lenders to obtain the true  value of 

borrowers or  they are unable  to observe repayment  capacity. Therefore, lenders rely  on soft or 

easily available information including demographic characteristics, such as gender, to judge the 

quality of  borrowers (Arrow, 1973; Phelps,1972).  Unfortunately, lenders are prejudiced about 

the skills, knowledge,  and managerial capabilities of women entrepreneurs2 and  consequently, 

have a lower incentive to grant loans for women businesses. However, in those economies with 

relatively lower gender gap, such bias may be less pronounced, which makes it easier for women 

entrepreneurs  to  obtain  formal  finance.  Second,  since  financial  institutions  are  mostly  male 

dominated, credit market barriers  (both bank- level and institutional- level) are relatively  higher 

for female entrepreneurs. Gender equality enhances the education level of women, including fi-

nancial literacy, and thus women's chances of becoming loan officers improve. Beck et al. (2018) 

provide evidence of own- gender preference in the credit market, i.e., female (male) loan officers 

are more likely to grant loans to female (male) borrowers. Hence, women in relatively lower gen-

der gap countries are more likely to  receive formal loans. Finally, the political representation of 

women can lead to framing policies, which promote the financial inclusion of women.3

Our  study  makes  several  contributions  to the  existing  literature.  First,  to  the  best  of   our 

knowledge, ours  is the  first study  to examine  the nexus  between institutional  gender equality 

and financial constraints on female- owned firms. Most studies (Ghosh & Vinod,2017; Muravyev 

etal.,2009)  that have examined the existence  of gender bias  in the credit market have devoted 

little attention  to the role  of institutional  factors (Fletschner,2009).  The study by  Ongena and 

Popov (2016) is closest in spirit to our work. They measure the gender gap based  on the cultural 

belief of  male superiority, which  is subject to perception bias. However, we use a more nuanced 

measure of gender equality which covers economic, educational, health and political aspects.

Second, in the empirical analysis, we combine firm- level data from the World Bank Enterprise 

Survey (WBES), the measure of  institutional gender equality from the World Economic Forum, 

and other  country- level information  from  the World Development  Indicators for  80 countries 

during the  period 2008– 2016. Unlike  Ongena and Popov  (2016), our data  set include firms  be-

longing to a large number of developing economies, which experience greater gender inequality 

(Jayachandran,2015). Therefore, our analysis captures the role of institutional gender equality in