Impact themes in focus: Financial inclusion

Reaching unbanked communities is unlocking more opportunities to create impact than ever before.

Among the earliest incarnations of impact investing, financial inclusion is a theme that has gained significant traction over recent years. There are still 1.4 billion unbanked adults worldwide, according to the World Bank’s Global Findex report for 2021, so there is still some way to go, but the report highlights some of the progress made. Between 2011 and 2021, account ownership increased from 51 percent of adults to 76 percent. 

The impact of this is difficult to overstate. “Financial inclusion brings people opportunities,” says Tim Crijns, fund manager of the Triodos Microfinance Fund and Fair Share Fund. “That could be to start or finance businesses, develop themselves personally and, indirectly, to support households – for example, where households have stable incomes, they tend to send children to school earlier.”

Microfinance institutions – the ground zero of financial inclusion strategies – still play a vital role in reaching unbanked populations, and many private markets firms remain focused on this area as a means to generate impact. Yet the range of investments, products and impact themes targeted by financial inclusion strategies is broadening rapidly. Jaskirat Chadha, head of financial inclusion for debt at M&G-backed impact investor responsAbility, says: “Working with financial institutions can be a very powerful tool for driving different impact outcomes, such as financial inclusion, climate action or gender equality.”

“Previously, investors targeted financial inclusion to alleviate poverty more generally,” adds Stephanie Bilo, chief client and investment solutions officer at responsAbility. “Today, they are doing so for very specific outcomes, including many different social metrics. Also, for example, green lending has gained a lot of traction via financial institutions, and this clearly has a climate angle, but you can now measure aspects such as how many people in rural populations you are reaching or the proportion of female entrepreneurs.”

Crijns highlights some of the other issues coming to the fore via this impact theme: “Financial inclusion is moving well beyond microfinance towards a whole range of areas. That includes finance for solar panels for those with no access to energy, and finance for rural schools or healthcare clinics that traditional banks just can’t finance because it’s too cumbersome.”

Insurance products are another area of expansion for some investors, particularly given the financial vulnerability of many of the populations targeted. “One area we see opportunity is in climate insurance, because so little capital is going into adaptation,” says Maria Teresa Zappia, chief impact and blended finance officer and deputy CEO at BlueOrchard. “People and their livelihoods need protection from the effects of climate change now.” 

Financial inclusion is therefore increasingly becoming a channel for effecting societal and environmental action. “The maturity of financial inclusion means that it can now target a broader set of themes,” says Amit Bouri, CEO and co-founder of the Global Impact Investing Network. “There are a lot of opportunities that it can enable, from housing and gender equality through to climate.” 

Indeed, financial inclusion is the first sector covered by GIIN’s beta launch of its first IRIS+ impact performance benchmark earlier this year, with other sectors to follow. Drawing on the benchmark’s data, GIIN recently published a paper highlighting the role of financial inclusion in promoting gender equality.


Adults who remain unbanked worldwide

Source: World Bank

And while financial inclusion may sound like mainly an issue for emerging markets, some managers are taking a global approach. “There is opportunity everywhere,” says Rekha Unnithan, co-head of private equity impact investing at Nuveen. “The majority is in emerging markets because the sector was seeded by the development finance institutions. But in markets such as the US there is a big gap in access to finance for some people, especially the working poor.”

Crijns shares this view. Triodos targets global opportunities in part to diversify and avoid single country risk, but also because financial inclusion strategies are needed across the world. “The social element of impact investing is becoming more important because it’s now clear that the line between the global south and north is not so distinct,” he says. “We are seeing greater inequalities within countries nowadays as wealth has become increasingly concentrated in all markets.”

The role of tech 

The adoption of technology and the arrival of fintechs and mobile money have clearly played a big role in the advancement of financial inclusion over recent years, as well as the opportunity set. “One of the issues with financial inclusion has been the high cost of customer acquisition and servicing,” says Unnithan. “You need scale to make these propositions viable. However, technology is really changing the landscape.”

Chadha says his firm is looking at how to tap into the market because digital “is the future”. He says: “Technology is playing a very disruptive role in financial inclusion. It is cutting costs and expanding access. Currently, this is typically in consumer finance, although that’s not an area we focus on, but there are moves towards the digitisation of micro, small and medium-sized enterprise finance and microfinance.”

Meanwhile, it’s an area Triodos is already engaging with. “Technology is a very important part of the development of financial inclusion,” says Crijns. “During the pandemic, the purely cash-based microfinance institutions had to close and so now we are seeing the digitisation of the traditional players – we are looking to fintechs to support that. Where we have board seats, we’re trying to push this. Digital payments have a lot of advantages – they are more efficient and lower cost. They are also safer in a lot of ways because you don’t have to walk to a branch with cash. You can just pay over your mobile.”

Yet all are agreed that fintechs have the potential to be riskier than traditional financial institutions. Investors often need an active role in assessing and shaping the governance of these businesses, for example, given the potential for actual or perceived malpractice. “Fintech has really shaken up the microfinance market and financial inclusion theme,” says Zappia. “It’s a really interesting time for the sector. However, investors need to remain cautious – fintech is far less regulated and subject to scrutiny, so you must conduct robust due diligence to understand business drivers and where revenues are coming from. You also need to ensure strict codes of conduct and responsible lending practices are in place.”

Overall, the financial inclusion sector looks set for further growth. LPs are increasingly interested in the role of these strategies in meeting a broadening range of impact objectives, especially since the arrival of covid-19. “LPs were already becoming more interested in financial inclusion, but the pandemic accelerated this,” says Zappia. “Financial institutions were a lifeline in emerging markets during covid because there was no central bank providing liquidity in many of these countries. The pandemic really demonstrated the importance of localisation and the role of financial institutions on the frontline.”