Financial inclusion is commonly defined as ‘access to and use of formal financial services'. Despite considerable progress on reducing absolute global poverty over the last 20 years, worldwide, billions of people remain unbanked, uninsured and without assets or savings. We explore why financial inclusion should be an essential part of ‘building back better', not just as a moral imperative, but as a significant economic opportunity which offers real benefits for society as a whole.
What's the issue?
Almost a third of adults globally (about 1.7 billion people) remain unbanked, half of whom are from the poorest 40% of the world population.[1] Many more are unable to access financial services like loans which are taken for granted in the developed world. Being excluded from the formal financial economy, or at least from access to credit facilities which could be deemed ‘reasonable and fair' often creates a vicious circle, trapping people in a cycle of debt.
The problem isn't limited to the developing world. In the US, it is estimated that "financially vulnerable" households spend c13% of their income on unnecessary fees and interest vs c1% for those classified as "financially healthy".[2]
Why invest in financial inclusion?
From an investment perspective, financial inclusion is attractive for a number of reasons, some obvious, some less so.
Clearly it delivers hugely positive outcomes for multiple stakeholders, helping to address a wide range of societal and economic issues which are becoming increasingly acute. From a less altruistic perspective, it offers a huge and varied opportunity set for investors. The types of businesses which can form part of a financial inclusion-focused portfolio include banks, insurers, homebuilders providing affordable housing, credit bureaus and of course fintech, which is providing innovative solutions to some extremely entrenched issues.
Financial inclusion also represents the opportunity to unlock unsaturated economies and access cheap, accelerating growth while building long-lasting relationships with consumers and communities. Within a broader portfolio, financial inclusion offers a great complement to broader "sustainable" themes. While many healthcare and environmental names sit on lofty multiples acknowledging the significant total accessible market ahead of them, banks and insurers exposed to emerging market growth often trade on low teen multiples and are less susceptible to valuation risk in an inflationary or rising rate environment. While the payment companies sit on higher multiples they have very high returns on equity, generate significant cash flow and tend to hold up well in market drawdowns.
What to consider
There is no single approach to investing in financial inclusion, however, there are various factors which should be taken into account when considering a possible investment in this theme. Is it materially inclusive? Can it offer sustainable growth? Does it have the margins to be able to invest in its business? If it's a case of providing capital, has that capital been tested historically against the cohort? And importantly, is the valuation attractive?
Opportunities for investing in financial inclusion exist across both equity and fixed income markets, although it is more challenging to find pure ‘financial inclusion plays' in the corporate bond markets. Mastercard is an example of a leader in financial inclusion which issued a $600 million sustainability-linked bond earlier this year. We also see suitable opportunities in the US high-yield bond market, although these are harder to fit into the investing framework outlined above. We refer to them as specialised lenders and typically, but not exclusively, they are non-banks, i.e. they are not regulated by the US Federal Reserve.
The pandemic has shone a strong light on continuing financial inequality and at the same time offered a real opportunity to pivot towards investing in a fairer and more inclusive global economy. The rewards for doing so go way beyond those directly affected, from increasing political stability to helping address climate change, and from driving global GDP growth to contributing to strong returns from a well-balanced portfolio.
Sources:
[1] World Bank Group - Findex report - https://globalfindex.worldbank.org/sites/globalfindex/files/chapters/2017%20Findex%20full%20report_chapter2.pdf
[2] https://www.theactuary.com/2021/01/13/insured-losses-natural-disasters-rise-2020
Disclaimer:
The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other communications. This does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.
