Eliminating the gender bias of loans in Mexico

The popular belief is that women are more risk averse than men. Paradoxically, many financial institutions perceive their female clients as riskier, and this manifests itself in a less favorable credit offer compared to that of their male peers: smaller amounts, shorter terms, higher rates, and greater guarantees. These perceptions make women-led businesses more barriers to accessing acceptable credit to run and grow their businesses.

This is a loss for both women and the economy, as women-led businesses also tend to hire more women than their peers. In addition, the banks stop receiving millions of dollars in profits as we have verified with some financial institutions in the region. Part of the problem is the gender biases that percolate and affect the decision to grant credit or not and under what conditions.

How can we reduce these entrenched gender biases in the financial sector? One answer is offered by Fintech.

Fintechs have revolutionized finance and are allowing greater access to financial products and services. One of its greatest impacts will probably be on inclusion issues, since they have enormous potential to ensure access on an equal footing and without bias. Many fintechs base their credit decisions using sophisticated, automated algorithms and mathematical models.

Although it should not be assumed that algorithms are inherently fair, a well-designed algorithm where human participation in decision-making is minimal can eliminate the problem of biases that negatively impact funding options, for example gender, ethnic or origin.

This is the case of the Mexican fintech Konfío. As part of the work we are doing with the company, we had the opportunity to audit their algorithm and we concluded that the offer for men and women is identical. Furthermore, we were able to compare the payment behavior and confirm that it is identical between both groups. However, an equitable offer of credit for men and women is the exception rather than the norm among financial entities both in Mexico and in the rest of the region.

We are also working with Konfío to estimate the impact of these loans on the growth of business sales. We found that two years after receiving a loan from Konfío, business sales growth is 19% higher compared to similar businesses whose application was rejected. Among Konfío’s women clients, sales growth is 42% higher compared to similar businesses owned by women whose application was rejected.

The natural question is why is this growth rate difference more than double when we only consider women-owned businesses?

The most plausible answer is that since it is more difficult for women to get credit in general, and when they do get it, it tends to be under less favorable conditions, it is possible that the women rejected by Konfío experience lower growth than the men rejected who probably They get credit more easily. It is not that Konfío’s clients are doing extraordinarily well, but that the rest of the women are doing extraordinarily poorly given the conditions of the credit market in Mexico.

This situation presents fintech companies with a unique opportunity both in Mexico and in the region: if these financial service providers define a gender strategy from the start and mitigate possible biases in their credit process, they will grow capturing an underserved segment ready to make the most of those loans.

These fintechs with a gender-inclusive lens will develop a unique advantage over their competitors: women tend to be loyal customers. Whoever arrives first to serve them has a better chance of keeping that segment within their portfolio.

If the rest of the institutions in Mexico and in the region were able to eliminate the biases in the supply of credit, women could realize the growth potential of their businesses and give a boost to the economic growth of the region without this implying sacrificing the performance of financial institutions. We would all win. There is nothing risky in doing it.

For more detail on the analysis mentioned in this blog, see the DEBrief by Irani Arráiz (2023) “Promote the growth of companies while equating credit conditions for women’s MSMEs in Mexico”.