No Real Estate? No Problem. A Look at the Potential of Asset-Based Lending to Empower Women in Colombia

November 18, 2020

To learn more about this topic, join Marketlinks on December 10, 2020 for the "What Progress Have We Made to Increase Financial Inclusion Through Movable Property Lending?" webinar.

This blog was written by Carolanne Chanik of USAID INVEST. 

Around the world, women are unable to access credit. In many countries, social norms and laws restrict women’s ability to control property, so female entrepreneurs are often unable to obtain the real estate needed to satisfy traditional collateral requirements for loans. Asset-based lending (ABL) allows businesses to use their company’s moveable assets — such as equipment, vehicles, livestock, and inventory — as pledged collateral. Recently, INVEST and USAID have been exploring the intersection of ABL and women’s access to finance in Colombia.

Ana Almanza weighs a cocoa crop before purchasing it in Isla de la Amargura
Ana Almanza weighs a cocoa crop before purchasing it in Colombia. (Photo: Thomas Cristofoletti, USAID).

The human body needs a variety of macro and micronutrients to thrive. While certain foods, such as chips, French fries, and macaroni and cheese, might prevent hunger, a person whose diet consists of solely these foods will end up malnourished. The body needs a variety of foods — fruits, vegetables, proteins, and more — to survive and flourish.

Like the human body, economies are complex systems, and diversity helps them thrive. Unfortunately, not every business or person has equal opportunity to participate in the economy. Women around the world face visible and invisible barriers when attempting to enter local, national, and global marketplaces.

In many countries, women lack equal access to the credit and capital needed to start and grow their businesses. The credit gap for women is approximately $1.7 trillion globally. In 40 percent of economies, women’s early stage entrepreneurial activity is less than half that of men, and in 61 percent of countries, women cannot run a business in the same way as men, and 81 percent of countries do not prohibit discrimination by creditors on the basis of marital status while 63 percent of countries do not prohibit discrimination by creditors on the basis of sex or gender.

Excluding women is stunting global economic growth. The global economy would grow by $12 trillion by 2025 if women were able to participate at equal rates to men. It’s time to diversify the global economy’s diet. It’s time to enable women’s full participation in the global economy.

USAID’s Office of Gender Equality & Women’s Empowerment (GenDev) and USAID INVEST, an initiative that mobilizes private capital for better development results, are working together to find solutions for increasing women’s access to financing — one aspect of the multi-pronged challenge of enabling women to participate in the economy. With funding from the GenDev Office, INVEST is supporting a series of pilots that test the use and efficacy of small-scale economic interventions in sample locations with an aim to adapt and scale successful solutions in the countries where they are most needed.

Recently, INVEST and USAID GenDev have been exploring the intersection of Asset Based Lending (ABL), also known as Moveable Property Lending (MPL), and women’s access to finance in Colombia. In contrast to traditional lending stipulations that require real estate as collateral for secured loans, asset-based lending allows small-and medium-sized enterprises (SMEs) to use their company’s moveable assets — such as equipment, vehicles, livestock, and inventory — as pledged collateral.

In February of 2014, Colombia enacted a new law that allows for moveable assets to be used as collateral and registered in a lender-accessible central database, which defines moveable assets and outlines the security interests for creditors. Banks and lenders in Colombia can now use these moveable assets as pledged collateral offering a means of repayment should a borrower default on repayment. Because ABL creates an alternative route for SMEs that would otherwise take out high interest repayment plans or be denied credit, it has the potential to broaden access to affordable finance for SMEs. In 2010, estimates showed that nearly 78 percent of SMEs’ assets globally were moveable assets. Asset-based lending can open the door for these businesses, allowing them to have access to the economic ecosystem from which they would have otherwise been barred.

However, ABL is also a promising solution for increasing women’s access to affordable finance. Women own less than 20 percent of the world’s privately held real estate. Around the world, social norms and cultural expectations often prevent women from purchasing, inheriting, or owning real estate, give men preferential access to real estate, or restrict women property owners from using their property as collateral for loans. Two-fifths of countries limit women’s property rights. As a result, female entrepreneurs and business owners are often unable to obtain or use the “real property” needed to satisfy traditional collateral requirements for financing.

“There’s a hypothesis at work that because women are less likely to own property like real estate, it’s harder for them to get loans as small business owners,” explains INVEST Strategic Investment Advisor Lisa Gans, who led the Colombia work. “Because female small-business owners might not have access to large scale capital or real estate, it can be harder for them to secure lines of credit or loans from traditional lenders, like banks, in order to continue to purchase the inventory they need to grow their businesses.”

Unfortunately, uptake of moveable asset lending in Colombia has been hampered by a lack of process and expertise around valuation of movable property. Banks and other financial institutions need to be sure that the collateral SMEs want to borrow against exists, is in good condition, and hasn’t been pledged against more than once. In short, non-fraudulent borrowing and lending requires a field assessment to ensure the financial safety for all parties involved. Without incentivizing support to conduct these field examinations, however, banks can be sluggish to take on this type of non-traditional lending, and without a standard process for valuing moveable assets, lenders in Colombia have so far been unwilling to make loans against them, despite the creation of the law and the registry.

Through a partnership with the International Finance Corporation (IFC), INVEST set out to supplement this registry by creating a field examination guide that establishes parameters for lending institutions to conduct field examinations themselves or hire third party contractors to conduct them on their behalf.

“Let’s say a women-owned business went to a bank and wanted to get a loan,” Gans explains. “The borrower would think: ‘I’ve got inventory, but what can I do with it? Someone has to try to verify and assess the assets that she has at her business that can be used as collateral for a loan and to figure out what the loan-to-value ratio would be.’”

To tackle this problem, INVEST set out to create a handbook and provide a step-by-step guideline for firms looking to conduct assessments of moveable property. The initiative issued a Request for Proposals (RFP) for the design and creation of this asset-based field examination guide, looking to tap a partner with the right expertise.

“We knew this would be challenging,” says Gans. “We weren’t sure who would apply.”

INVEST received a proposal from a U.S. based-firm that had never before worked with USAID — Dopkins & Company, LLP. Dopkins is a certified public accounting and consulting firm based in western New York that specializes in solving complex business issues around audit, tax, wealth management, IT, and asset-based lending.

Dopkins had previously developed a handbook for moveable property lending that was utilized by asset-based lenders in North America and has also conducted ABL workshops throughout the United States and Europe. Joseph Heim, a Partner at Dopkins, explains that while ABL was “once seen as the lender of last resort,” it has become a viable alternative approach to financing for companies who cannot secure traditional lines of credit.

Heim has been with Dopkins since 1990. He found himself attracted to the company’s model of serving middle market companies throughout the United States and Canada, working primarily with closely held and family-owned businesses. “It’s very rewarding work,” says Heim. “When you’re working with these types of companies, you’re dealing with the owners; you’re dealing with entrepreneurs. You have a direct hand in helping them solve their complex business issues.”

Despite an extensive background working in ABL, Dopkins had not yet worked within the international development or governmental spheres.

“A common thing you’ll hear in this line of work is that the United States has a very respected financial sector,” says Gans. “Where INVEST comes in is to take this partner who was not been operating in an international context and connect their knowledge and skill with USAID, which might not have found them on their own.”

Thinking on this first experience working with USAID and the U.S. federal government on asset-based lending and moveable property, Heim says, “It was the opportunity of a lifetime. To have the opportunity to advance a financing solution that I’m very passionate about plus the opportunity to help a country — not just a bank but a country — it was amazing.”

At the beginning of January 2020, Heim received the RFP in his inbox through a “cold call” from INVEST. “I thought it was spam, quite honestly,” he says. “But I took the risk and opened up the attachment and read through the RFP. I found it fascinating.”

That email was no happy accident. According to INVEST Activity Manager Jessamy Nichols, the team had conducted robust vendor research into firms with asset-based lending and moveable property expertise.

“Because it’s such a niche subject, we wanted to find a partner who knew exactly what they were talking about and had experience in this space already,” explains Nichols. “I’m sure a consulting firm could have eventually crafted these types of deliverables, but Dopkins had a very granular expertise on this that allowed them to hit the ground running.”

Dopkins kicked off their work in April of 2020 and over the course of five months, their team developed a field examination handbook and a series of field examination templates, designed for easily incorporating ABL into a menu of services, for Colombian banks and lending institutions.

Dopkins also researched and identified firms that both currently provide ABL field examination services in Colombia as well as firms that could be trained up on the process to evaluate assets against the national registry on behalf of lending institutions. In September of 2020, Dopkins concluded their work with a presentation to USAID, the International Finance Corporation (IFC), and financial institutions in Colombia, conducted in both English and Spanish.

“Banks in Colombia now have blueprints for assessing the value of moveable property in order to actually make loans against it, which is just a really different thing than having a registry without the practical means for evaluating the property to be registered,” says INVEST’s Gans. “This work has the potential to increase the uptake and impact of registry throughout Colombia.”

While USAID and INVEST focused on the creation of the tools necessary for making ABL a reality for lenders, the IFC worked to increase awareness of ABL among potential consumers. “Most small business owners aren’t even aware they can get a loan by pledging against their tractor, for example,” says Gans. “So, IFC took on that outreach and communications piece, while we [USAID and INVEST] took on the missing financial component — the technical knowledge in the form of this field examination handbook.”

The IFC provided pivotal support to cement the practice of ABL and moveable property lending in the Colombian landscape. “The IFC played a critical role by validating the tools and materials in the Colombian context to ensure uptake post-activity,” explains INVEST Activity Coordinator Charlotte Davidsen. “And by acting as peer reviewers on the technical documents, the IFC guaranteed that the final product could be actionable.”

Although the partnership between INVEST and Dopkins resulted in a strong product, developing the handbook was not without challenges for both parties. Colombia has a unique economic environment and the Dopkins team took some time to understand it. Heim, who was supposed to travel to Colombia during the project’s implementation, had to conduct the work remotely after the COVID-19 outbreak and subsequent social distancing policies.

“Certainly, gaining an understanding of the Colombian laws and regulations was a very important part of the process, and for me, not being there and not being an attorney…that presented a challenge,” says Heim. “Thankfully, we have a partnership with the global accounting firm RSM, and they have a Colombian office. Typically, accountants aren’t well-versed in legal doctrine, so it took my team and our colleagues at RSM in Colombia time to understand the laws and regulations, but we got there.”

The creation of mechanisms like INVEST is part of a larger USAID strategy to find and work with knowledgeable partners best suited for solving the development challenge regardless of their previous government contracting experience.

“The value of working with specialized firms is that they bring insights that USAID wouldn’t always have access to,” says INVEST’s Nichols. “INVEST’s role is to help turn a firm’s niche expertise into a format that’s digestible and aligns with USAID’s expectations, speaking in their own language and using their own templates. Essentially, INVEST helps firms like Dopkins translate their expertise into a USAID-friendly format.”

Now that Dopkins has been brought into the federal fold, the firm can more easily respond to USAID solicitations in the future. “If there were follow-on trainings or a need to do this in other countries, I would really encourage them to bid,” says Gans. “We’re creating this relationship between USAID and a new firm and also an awareness of opportunities for this company that never would have worked with USAID otherwise.”

As for Dopkins, Heim also feels encouraged by the collaboration and the future of ABL’s uptake in Colombia and other emerging economies.

“I feel very confident in our ability to replicate this process in another developing country because we [Dopkins] have the experience and the relationship with RSM who has offices across the globe,” he says.

By enhancing ABL practices and creating replicable, alternative pathways to affordable financing for women, USAID is contributing to women’s economic empowerment around the globe and taking one step towards providing the global economy the diversity it needs to flourish.

To learn more about this topic, join Marketlinks on December 10, 2020 for the "What Progress Have We Made to Increase Financial Inclusion Through Movable Property Lending?" webinar.