Un-banked adults are typically marginalised or vulnerable, likely to be unemployed with low levels of education. There is also gender disparity, as 56% of all un-banked adults are women. These socio-economic vulnerabilities are made worse by the fact that adults without bank accounts expose themselves to high-cost or risky financial arrangements. This includes borrowing from informal and high-interest moneylenders and having to carry cash or store it, sometimes literally, under a mattress.

There’s a huge opportunity to increase access to banking all around the world. When people have bank accounts, they have a safe place to keep their money. They can create savings and access affordable credit and cheaper services. A bank account makes it easier to access housing and employment. This all reduces inequality and increases economic growth.

The UN’s Sustainable Development Goals (SDGs) include specific targets aimed at expanding financial inclusion, detailed below.

• Strengthening the capacity of domestic financial institutions to encourage and expand access to banking, insurance and financial services for all.
• Increase the access of small-scale industrial and other enterprises, in particular in developing countries, to financial services, including affordable credit, and their integration into value chains and markets.

In many countries, governments have taken the initiative to launch financial inclusion programmes to expand access to financial services. In India, Prime Minister Narendra Modi’s flagship People’s Wealth Scheme enabled every Indian to open up a ‘no-frills’ free bank account with benefits such as debit cards, insurance and overdraft facilities. This programme more than doubled India’s banked population from 2011, allowing it to reach 80% by 2017. That said, half of India’s bank accounts are currently inactive.ii

Companies leading the way

Another solution is the provision of affordable, accessible retail loans that enable customers to improve their quality of life. Retail loans in emerging markets are typically for financing education, buying a home, or launching a small/medium-sized enterprise. One barrier is that 48% of the working population in India has no written job contract, making it next to impossible to take out a loan from a bank. However, non-bank financial companies (NBFC) such as India’s Infoline offer affordable, low interest, and often instant, loans and products for underbanked adults without credit history or formal income documents.

In fact, 60% of Indian borrowers prefer microloans from NBFC and micro-finance institutions compared to banks. The alternative is informal loans from money lenders, who charge up to 50% per annum and have unregulated collection methods.

Investment in digital initiatives is another key enabler of financial inclusion. Banorte, a Mexican bank, has invested up to 80% of its capex budget to specifically reach underserved populations via technology. In Mexico, just 37% of adults have access to a bank account, but 60% have access to the internet making Mexico a fertile environment for fintechⁱⁱⁱ. The success of M-Pesa, a mobile phone-based bank account system in Kenya, proves that certainly in some countries and situations, banks do not need bricks-and-mortar branches to be widely adopted and trusted. In the UK, challenger banks offer mobile-only accounts that are often more accessible than traditional accounts to those with a poor credit score, for example.

One core reason for the low financial participation rates in emerging markets, and among certain demographics in developed countries, is a lack of financial literacy. Financial inclusion is very much part of our sustainable development goals framework. As such, we scrutinise the ways in which banks and financial institutions are educating marginalised customers and engaging with government-level financial inclusion initiatives.

Final thoughts…

In our opinion, financial inclusion is a core enabler of sustainable development. The breadth of opportunities is vast. Encouragingly, we are seeing more innovative products, digital initiatives and education programmes to encourage the use of banks and financial services. In short, we believe this market is well placed for growth.

Companies are selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance. Past performance is not a guide to future results.

ⁱ https://globalfindex.worldbank.org/sites/globalfindex/files/chapters/2017%20Findex%20full%20report_chapter2.pdf

ⁱⁱ https://globalfindex.worldbank.org/

ⁱⁱⁱ World Bank Document : https://documents1.worldbank.org/curated/es/588351544812277321/pdf/Mexico-Systematic-Country-Diagnostic.pdf