Economic Research Forum (ERF)

Gender discrimination in small business lending: evidence from Turkey

61
Discrimination in access to financial services can prevent women from exploiting their entrepreneurial potential. This column reports on a ‘lab-in-the-field’ experiment to test for the presence of gender discrimination in small business lending in Turkey.

In a nutshell

The results of a ‘lab-in-the-field experiment with employees of a large commercial bank in Turkey finds that while unconditional loan approval rates are the same for male and female applicants, there is a more subtle form of discrimination.

Loan officers are 30% more likely to make loan approval conditional on the presence of a guarantor when an application appears to come from a female instead of a male entrepreneur.

Gender discrimination against women entrepreneurs applying for a loan is concentrated among young, inexperienced and gender-biased loan officers.

Providing rigorous evidence on gender discrimination in access to finance is challenging for at least two reasons. First, not just the supply of credit but also the demand for it can differ by gender. For example, women may self-select into industries that are less capital-intensive or that operate at a smaller scale.

Second, gender discrimination can be both direct and indirect. Even when loan officers are unlikely to reject female loan applicants straight away, they may apply conditions that make credit de facto unattainable for many women. Previous non-experimental evidence suggests that guarantor requirements may be a source of such indirect gender discrimination (Alesina et al, 2013).

In a recent study (Brock and De Haas, 2019), we test for the presence of both direct and indirect gender discrimination in small business lending in Turkey. We implemented a lab-in-the-field experiment during which loan officers evaluated loan applications in which the applicant gender had been (randomly) manipulated by us. The setting also allowed us to measure various loan officer characteristics, including their implicit gender bias and risk preferences, which normally remain unobservable.

The experiment in a nutshell

We conducted our experiment with 334 employees of a large commercial bank in Turkey. Each of these participants evaluated two rounds of four loan applications (so eight in total). We determined the gender of each application by assigning new names, randomising between male ones (Ahmet, Ali, Mehmet, Mustafa) and female ones (Ayse, Emine, Fatma, Zeynep). Participants had to decide whether to approve or reject each application and, in case of initial approval, whether to request a guarantor or not.

All applications occur in the data multiple times, sometimes as coming from a male applicant and sometimes from a female applicant. This allows us to obtain a within-application estimate of gender discrimination. Importantly, loan officers assessed applications that our partner bank had received in the recent past so that we know how loans subsequently performed in reality (Cole et al, 2015 follow a similar approach). We incentivised all loan decisions in line with common bank incentive schemes.

For each credit application, the participant was also asked to estimate, on a 0-100 scale, the probability that the borrower would repay. This helps us to verify that the experimental task was meaningful in the sense that loan officers could infer credit risk based on the information in the loan file.

Figure 1 provides a scatterplot of the files used in the experiment. We see a tight negative correlation between expected repayment probability and the likelihood of loan rejection. This suggests that our incentive scheme worked and that participants thought the task realistic and paid attention to the information provided.

Equally important is to check whether the decision-making in our lab-in-the-field correlates with what happened to the loan applications in real life. We find that this is the case. Overall, 72% of all applications that related to loans that performed well in real life were approved during the experimental sessions (green dots).

This percentage is significantly lower for applications related to non-performing loans (53%, red dots) and for applications that were rejected in real life (47%, orange dots). This indicates that across the board participants correctly identified loans that performed well or badly in real life and made lending decisions in line with these subjective perceptions of loan quality.

We also implemented experimental modules to measure participants’ risk preferences and implicit gender bias. To measure the latter, participants took an implicit association test (IAT) in which they had to sort, as quickly as possible, words that appeared sequentially on an electronic tablet. In one task, ‘female’ words had to be allocated to the category ‘family’ and ‘male’ words to the category ‘career’ (the stereotypical task). In another task, ‘male’ words had to be allocated to the category ‘family’ and ‘female’ words to ‘career’ (the non-stereotypical task).

We defined a participant’s implicit bias as the normalised difference in mean response times between the non-stereotypical and stereotypical task. While the scores range widely, a large majority of lending staff (87%) have a positive IAT score, indicating that they subconsciously associate business more with men than with women. This tendency is stronger among women than among men.

 

 

Main results

Our lab-in-the-field experiment with Turkish loan officers yields four main results:

First, we find no evidence of direct gender discrimination. That is, one and the same loan application does not have a higher chance of being rejected when we present it with a female rather than a male applicant name. We also find no evidence of direct gender discrimination among specific sub-populations of loan officers, such as male versus female loan officers or officers with more versus less lending experience.

Second, while unconditional approval rates are similar for male and female loan applicants, loan officers do discriminate against women in an indirect way. In particular, they are 30% more likely to require a guarantor when we present an application as coming from a female instead of a male entrepreneur.

Third, for this indirect discrimination, we find a consistent and intuitive pattern of statistically significant heterogeneous treatment effects. When we present the application as coming from a woman instead of a man, loan officers are more likely to ask for a guarantor when they are less experienced; younger; and/or display more implicit gender bias during our IAT.

Importantly, there is no difference between male and female participants in how they treat female applicants. This implies that earlier evidence based on observational studies (such as Beck et al, 2013), and which suggested that male and female loan officers treat female loan applicants differently, may partly reflect deeper personal characteristics that are usually unobservable (such as implicit gender bias) rather than loan officers’ gender per se.

Lastly, we find that discrimination is concentrated among loans that performed well in real life, making it potentially costly to the bank. The bars in the middle and at the right of Figure 3 show that for lower-quality applications it does not matter whether we present them as coming from male or female entrepreneurs.

In contrast, the first two bars show a large and statistically significant gender difference. This is confirmed by a parametric analysis: also when we control for loan officer covariates as well as file and city fixed effects, women are 12.4 percentage points more likely to be asked for a guarantor in case of high-quality loans.

Policy implications

Our results are mostly in line with models of implicit gender discrimination. As such, policies to mitigate the impact of loan officers’ implicit biases may be called for. This could include simply making sure that loan officers have sufficient time to evaluate loan applications.

Banks could also set bank-wide or branch-wide goals for lending to women without a guarantor. Management could then hold those that deviate from this norm accountable through comply-or-explain procedures.

Interventions like these may be more effective than explicit diversity training programmes, which can make gender differences more salient and even generate a backlash (Bohnet, 2016). Measuring the effectiveness of different types of interventions to contain the negative impact of implicit gender bias among loan officers provides a fruitful area for future experimental research.

Further reading

Alesina, AF, F Lotti and P E Mistrulli (2013) ‘Do Women Pay More for Credit? Evidence from Italy’, Journal of the European Economic Association 11(s1): 45-66.

Beck, T, P Behr and A Guettler (2013) ‘Gender and Banking: Are Women Better Loan Officers?’, Review of Finance 17(4): 1279-1321.

Bohnet, I (2016) What Works. Gender Equality by Design, Harvard University Press.

Brock, JM, and R De Haas (2019) ‘Gender Discrimination in Small Business Lending: Evidence from a lab-in-the-field experiment in Turkey‘, EBRD Working Paper No. 232, European Bank for Reconstruction and Development.

Cole, S, M Kanz and L Klapper (2015) ‘Incentivizing Calculated Risk-taking: Evidence from an Experiment with Commercial Bank Loan Officers’, Journal of Finance 70(2): 537-75.

This column was first published at Vox.

 

 

 

 

Most read

Fair competition is needed to empower women economically in the Arab world

The participation rates of women in the labour market in Arab countries are the lowest in the world. This column argues that remedying the under-representation of women in the labour force is a social and economic imperative for the region. There are three dimensions for action to realise the potential of Arab women: amending laws and regulations; instilling fair competition in markets; and promoting the digital economy.

Arab countries are caught in an inequality trap

Conventional wisdom, based mainly on surveyed household income distribution statistics, suggests that inequality is generally low in Arab countries. At the same time, little attention has been devoted to social inequalities, whether in terms of outcomes or opportunities. This column introduces a forthcoming report, which offers a different narrative: based on the largest research project on the subject to date and covering 12 Arab countries, the authors argue that the region is caught in an inequality trap.

Recession without impact: why Lebanese elites delay reform

The survival of Lebanon’s political elites is highly dependent on the wellbeing of the economy. Why then do they delay necessary reform to avoid crisis? This column examines the role of politically connected firms in delaying much-needed economic stabilisation policies.

Competition laws: a key role for economic growth in MENA

Competition policy lacks the attention it deserves in the countries of the Middle East and North Africa (MENA), a region characterised by monopolies and lack of market contestability. As this column explains, there are many questions about the extent of anti-competitive barriers facing new market entrants in the region. What’s more, MENA’s weak overall performance on competition is likely to be hindering economic growth and the path towards structural transformation.

The Egyptian economy is still not creating good jobs

Growth in Egypt has recovered substantially since the downturn following the global financial crisis and the political instability following the 2011 revolution – but what has happened to jobs? This column reports the results on employment conditions from just released data in the 2018 wave of the Egypt Labor Market Panel Survey.

How Egyptian households cope with shocks: new evidence

Managing risks and reducing vulnerability to economic, social, environmental and health shocks enhances the wellbeing of households and encourages investment in human capital. This column explores the nature of shocks experienced by Egyptian households as well as the coping mechanisms that they use. It also examines the relationship between such risks and job formality and health status.

The future of Egypt’s population: opportunities and challenges

Egypt’s potential labour supply depends on the growth and changing composition of its working-age population. This column reports the latest data on labour supply and fertility rates, concluding that the country has a window of opportunity with reduced demographic pressures to try to address longstanding structural challenges for the labour market.

Egypt’s labour market: facts and prospects

An ERF policy conference on the Egyptian labour market in late October 2019 focused on gender and economic vulnerability. This column summarises the key takeaways from the event.

Domestic demand and competition: a new development paradigm for MENA

A lack of competition in domestic and regional markets is holding back development in the Middle East and North Africa. This column argues that the region and the international community must ensure that barriers to market entry and exit are eliminated, and that independent regulatory bodies at the national and regional levels help to promote domestic demand as the main engine for sustainable and inclusive growth.

Gender discrimination in small business lending: evidence from Turkey

Discrimination in access to financial services can prevent women from exploiting their entrepreneurial potential. This column reports on a ‘lab-in-the-field’ experiment to test for the presence of gender discrimination in small business lending in Turkey.