Duncan Goodwin
Premier Miton Global Sustainable Growth Fund Manager
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
What is financial inclusion?
Whether opening a first bank account, or taking out a first insurance policy, the drive for greater access to financial and risk mitigating products provides structural, sustainable growth. In this insight note we look at how financial inclusion supports fairer development, highlight some leading examples, and outline how the investment landscape may evolve over time.
Financial inclusion refers to efforts to make financial products and services accessible and affordable to all individuals and businesses, regardless of their personal net worth or company size. Financial inclusion strives to remove the barriers that exclude people from participating in the financial sector and using these services to improve their lives. It is also called inclusive finance.
As the World Bank notes on its website, financial inclusion “facilitates day-to-day living, and helps families and businesses plan for everything from long-term goals to unexpected emergencies.”
Why does it matter?
Financial exclusion can affect people from a wide range of demographics: the old and the young are notably impacted as are people with disabilities, women, people facing mental health challenges and almost everyone on a low income. People who are locked out of the ‘mainstream’ financial system, are often penalised by having to pay more for everyday services and products. For example, limited digital accessibility often means people cannot access cheaper online prices. At the same time, they may be limited to accessing higher-cost credit, increasing the likelihood of becoming trapped in spiralling debt.
Financial inclusion is the process of providing suitable financial services to the ‘unbanked’ in an affordable, sustainable, and ethical way. This can involve access to traditional credit through banking and insurance products, but also saving mechanisms for healthcare or education and even investment products, allowing people to benefit further from the rapid growth of their economies.
What could be the economic impact of improved financial inclusion?
We believe strongly that increasing financial inclusion can drive economic development. According to World Bank studies, around 1.7 billion people globally lack access to financial services. A significant portion of these unbanked groups are women. Therefore, improved financial inclusion can also lead to greater gender equality and as Melinda Gates, the co-chair of the Gates Foundation said, “financial tools for savings, insurance, payments, and credit are a vital need for poor people, especially women, and can help families and whole communities lift themselves out of poverty.” We completely agree.
Financial inclusion is a key enabler of the UN Sustainable Development Goals, which will be key drivers in the reduction of poverty and enhancing shared global economic prosperity. This is important to investors as economic growth is a fundamental long-term driver of corporate revenues and earnings, which supports asset prices.
How financial inclusion underpins key UN Sustainable Development Goals (SDGs)
Through better access to financial services such as bank accounts and insurance products, people in emerging countries can move out of poverty (enabling SDG 1). Access to credit, insurance and commodity futures exchanges also helps people working in agriculture to better manage their finances, achieve higher yields, and thereby increase food security (SDG 2 and SDG 3). Financial inclusion means people can invest in their children’s education (SDG 4) and improved female empowerment can address gender equality (SDG 5). These five SDGs feed into the wider socio-economic goals such as shared economic growth (SDG 8) and innovation and sustainable industrialisation (SDG 9).
Regulators are also prioritising financial inclusion, given the link to economic growth. Digitisation and electronic transactions have helped fuel an increase in financial inclusion rates. Some of the leading examples of rapid financial inclusion have been within emerging markets, where access to bank accounts has grown rapidly in the last decade.
Quick case study
Looking at HDFC in India and Bank Rakyat in Indonesia. Both companies are using technology to offer financial services to those in remote areas via online and mobile banking. With wider adoption of these technologies during COVID lockdowns, we see a step change in access to these financial products for those countries’ large ‘unbanked’ populations
Financial inclusion drives investment opportunities
The financial industry is continually coming up with new ways to provide products and services to the global population, and often turn a profit in the process. The increasing use of financial technology, for example, has provided innovative tools to address the problem of inaccessibility to financial services and provided new ways for individuals and organizations to obtain the services they need at reasonable costs.
Some examples of fintech developments that have aided the cause of inclusion in recent years include the growing use of cashless digital transactions, the advent of low-fee robo-advisors, and the rise of crowdfunding and peer-to-peer or social lending.
Traditional banking rarely allows money to reach lower market segments (such as micro credit) for cost and/or efficiency reasons, creating the need for new business models. The rapid evolution of fintech, digital, and mobile banking is accelerating the rate of financial inclusion by raising efficiency, lowering transaction costs, and expanding outreach to new clients and markets. This digital evolution is disrupting the high cost of customer acquisition/interactions, credit assessment, and credit underwriting. It is also enhancing cross selling of products and accelerating growth.
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 delivering attractive financial returns. For example, a company providing greater access to banking services via a mobile app, can aid financial inclusion on several 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, these benefits may also extend to their businesses. At the same time, the company providing this access has the potential to benefit through growth in customers, revenues and profits. This should flow through and benefit shareholders.
Quick case study
Efficient and accessible financial products to manage financial risk and support capital allocation are equally as important. Although generally more prevalent in developed economies, they do encourage and facilitate foreign direct investment into emerging markets. We believe the role of financial exchanges and insurance companies has yet to be fully acknowledged or appreciated. We hold positions in London Stock Exchange Group, Aon and Intercontinental Exchange and are engaging with them to better quantify and disclose the positive impact on society of their technology and product offerings.
Improving financial inclusion is morally the right thing to do
On an ongoing basis, an important element of our sustainable investing style is the engagement process: regularly meeting with 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 technologies and longer-term growth opportunities. At the same time, we can look to identify, evaluate and mitigate potential negative externalities.
There are economic and business benefits to be won as well. It helps customers achieve improved financial and non-financial well-being, whilst also enhancing their creditworthiness. It is a way to attract new customers. It demonstrates sustainability credentials to shareholders and engages employees.
