Investing with impact: financial inclusion

Two billion people around the globe do not have access to the services of the financial sector. NN IP’s global equity impact strategy invests in companies that are helping to unlock this social and economic potential.

Most efforts to increase access to financial services around the world have in the past been government initiatives. In recent years, however, thanks to great technological improvements, many private initiatives have started flourishing. This MindScope will take a look at the modern financial inclusion industry. First, it will describe what financial inclusion is and how it fits within the United Nations (UN) Sustainable Development Goals (SDGs). Secondly, it will look at the competitive aspects of implementing financial inclusion, what shapes the industry has taken around the globe and what characteristics make products or solutions good for financial inclusion. Thirdly, it will provide some concrete examples of inclusive initiatives by listed companies. Finally, it will provide investment conclusions.

Owning a bank account is a good proxy for financial services availability

Source: Global Findex Database

Access to or use of a bank account

According to the latest World Bank data, some 2 billion people, or almost half the world’s population over the age of 15, do not have a bank account. That number increases to four out of five when considering adults living in extreme poverty.

The majority of the underserved people is concentrated in developing continents, in particular Middle East, Sub-Saharan Africa and South Asia. It is therefore not surprising that numerous financial inclusion-focused initiatives either originate or are active in these areas. A great deal of microfinance activities takes place in South Asia and South or Central America. Africa, China and India lead the way in inclusive initiatives related to technology. Africa has seen the surprising rise of the mobile money industry. In India and China, public and private initiatives have focused on the tech space.

Could you imagine your life without such a service?

Expanding the reach of financial services to these unserved portions of the population is key to reducing poverty worldwide. Financial services address simple basic needs in economic interaction between individuals. Our lives have become so intertwined with such services that we may not realize how important they are, how much time and energy they save us, and the opportunities and protection they grant us. Try to imagine the risks involved in receiving your salary from your employer in cash and bringing it home physically to hide it somewhere “safe”, or having to trust someone to bring it to your family. That is what financial inclusion is about: providing people and businesses with access to resources they need to improve their conditions and achieve their long-term goals. Alongside the social implications of this lack of coverage is the huge potential for plain economic growth. Small entrepreneurs with the capacity and willingness to generate value and create jobs have to rely solely on their own limited incomes and savings to start any type of business or gain access to education, both pillars of economic growth. This is the potential that impact investing at NN Investment Partners is attempting to unlock by pushing the flow of capital towards the best financial inclusion-related initiatives. We want to pave the way to financial empowerment and opportunity for all.

Why is financial inclusion so important?

As financial services address basic needs of economic interaction between humans, they are key to achieving progress and growth. Yet close to 4 billion adult people reported no formal savings and almost 5 billion claimed no formal borrowing, according to the World Bank. Financial inclusion consists in extending financial services to those vast swathes of the world’s population who do not yet have access to them. Despite the distinction between developed and developing world, the basic needs for economic activity addressed by financial services are much alike; what might change is their relative importance. These basic needs can be identified as: transfer and storage of wealth (from payment to safekeeping), access to or provision of credit (borrowing or lending), mitigation of risk (i.e. insurance) and ultimately investment, which could be seen as a form of provision of credit and or transfer of wealth.

Any endeavour with the aim of servicing one or more of these often complementary needs, where they are not addressed by the traditional financial system, is considered as contributing to financial inclusion.

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