Why investors should care about financial inclusion
We look at what financial inclusion is, why it matters and how investors can make a difference.
- The full, in-depth version of this article is available as a PDF here.
What is financial inclusion?
Financial inclusion is about making affordable financial services, that meet individuals’ needs, accessible for all. According to the last edition of the World Bank’s Global Findex, the biggest triennial survey on financial inclusion worldwide, almost a quarter of the world’s population do not have a formal bank account. This is the most basic element of financial inclusion, and access varies significantly by country, gender, income, education and other factors.
Individuals and businesses who lack access to financial services are the financially excluded. In the case of bank account access, these are referred to as the unbanked, and globally these total more than 1.4 billion people.
Why does financial inclusion matter?
Accessing and actively using financial services, such as loans, saving accounts, payment services, remittances and insurance, has many benefits. First, it eases transaction costs to households and businesses, aiding financial planning and investing in areas like housing, health and education. Second, it increases resilience against negative economic shocks, especially for poor and vulnerable populations.
For instance, the provision of climate insurance to the poor and vulnerable by financial institutions provides protection against the negative consequences of climate catastrophes. And third, it can support the growth of micro, small and medium enterprises (MSMEs) and create additional jobs.
Why responsible lending practices are crucial
Greater access is good, but responsible lending practices are paramount. While enabling more people and MSMEs to access financial services can accelerate positive economic and social development, having irresponsible lending practices could also lead to negative effects. Over-indebtedness and coercive collection practices are among some of the risks of this industry, especially if vulnerable households and MSMEs are targeted. These risks, nonetheless, can be mitigated if financial institutions have adequate policies and procedures in place.
How is technology advancing financial inclusion?
Overall, fintechs have allowed for technology to transform the way in which traditional banking is carried out. The lower costs of services and the greater accessibility for consumers has meant that those who have historically been excluded from centralised finance now have many ways to become integrated. For example, the World Bank’s Findex survey shows that over the last decade, 1.2 billion previously unbanked adults have gained access to financial services and the unbanked population fell by 35%, primarily boosted by the increase in mobile money accounts.
Benefits exist for already included individuals, as well as the regions in which they live, as more economic activity is captured. As transitions to ever increasing digital ways of finance take place, we should also hope to see a reduction in the risks that currently remain.
How can investors support financial inclusion in practice?
Investors can support financial inclusion by channelling capital towards companies which are contributing positively through their products and services, while in tandem delivering attractive financial returns. This is called impact investing.
We discuss specific case studies in more detail in the full paper (link below), but as an illustration, a company providing greater access to banking services via a mobile app, can aid financial inclusion on a number of levels. The ability to deposit savings more securely and efficiently, without the need to visit a physical branch, while also earning interest, is among the simplest benefits, and can help individuals in their planning and pursuit of longer-term goals.
Access to other products such as insurance, investment, payments, and borrowing, are also beneficial. For those individuals who are sole traders or MSME owners, these benefits may extend to their businesses too. At the same time, the company providing this access has potential to benefit through growth in customers, revenues and profits. This should flow through to the benefit of shareholders.
On an ongoing basis, an important element of impact investing is the engagement process: regularly meeting with investee companies and monitoring impact via key performance indicators. For financial inclusion, this may include discussions around regulation, risk management and customer data, through to pricing, new technology and longer-term growth. At the same time impact investors can identify, evaluate and mitigate potential negative externalities, be it with regards to a specific investee company or at a portfolio level.
Case study: Mercado Libre Inc.
What does the company do?
Mercado Libre is an online commerce and payments platform, operating in 18 Latin American countries. It offers a technology solutions across the complete value chain of commerce.
How is Mercado Libre having a positive impact?
The company has a positive impact through its democratisation of commerce and financial services. It aims to level the playing field between large and small vendors, and to make payments and commerce processes simpler, safer and more efficient for all. It allows merchants to grow their businesses and create employment.
For example, in 2021, the company reached 51,500,000 unique fintech users, 900,000 families reported Mercado Libre’s platform as their main source of income and the platform created an average of 6 jobs an hour. Over 500,000 small-to-medium enterprises (SMEs) sold over the platform during the year and 84% were able to expand outside of their city and attract more clients.
How does Mercado Libre approach sustainability?
Mercado Libre is committed to sustainability in every area of its business and strives to generate economic value while at the same time creating social and environmental value.
For example, in 2021 the company issued its first sustainability bond, raising $400 million which will allow it to accelerate its investments in initiatives to reduce its environmental footprint, boost financial inclusion and drive empowerment through education.
It has created a programme that promotes the regeneration and preservation of Latin America’s biomes and, in 2021, quintupled the company’s fleet of electric vehicles while also converting two of its main distribution centres in Brazil to 100% renewable energy. Mercado Libre is also involved in uplifting the communities in which it operates by educating the youth. Last year more than 5,000 boys and girls were trained and introduced to the world of technology.
The full in-depth version of this article is available as a PDF here.