Financial inclusion has been demonstrated to stimulate economic and social development and to move society toward a range of UN Sustainable Development Goals (UN SDGs). This is achieved by providing access to affordable and responsible financial products and services that people need. We explain below how impact investments that promote financial inclusion can help to foster economic growth and build sustainable economies and societies.
The challenge of accessing affordable credit
The basic premise of an ‘inclusive economy’ is that more opportunities are made available for more people – that an increasingly wide cross-section of society has access to the labour market, financial services and economic opportunity, regardless of their gender, race or ethnicity, age, family background, sexual orientation or socio-economic circumstance.
Financial services are key to achieving progress and growth. Nonetheless, many micro-enterprises, small and medium-sized enterprises (SMEs) and individual borrowers have unmet financing needs. This is often because they have limited or no access to basic financial products and services, or because the products and services to which they do have access are not adequately structured with respect to the prospective client’s repayment capacity. Around 1.7 billion people worldwide cannot access traditional bank finance and are classified as ‘unbanked’. Further, in developing countries 80% of the most economically-disadvantaged individuals do not have bank accounts – with much of the unbanked population consisting of women and poor households in rural areas.
Although financial inclusion is a particularly acute issue in developing markets, access to affordable and responsible financial services, including credit, remains a key challenge for low-income and financially excluded groups in both developed and emerging economies.
Why impact investing is part of the solution
Inclusive finance is helping to bridge this gap. Early efforts aimed at promoting financial inclusion were initiated by NGOs and development finance institutions which would often lend with the objective of social benefit while allowing financial returns to remain a secondary consideration. Over the past twenty years this incipient approach to microcredit has matured to become a rapidly consolidating global microfinance industry. Adequately designed financial products and services, operational efficiencies bred of increasingly sophisticated IT systems, and an understanding that social impact may be achieved without sacrificing risk-adjusted financial returns are now the norm. Providing financing for companies that take this approach allows investors the opportunity to participate in increasing financial inclusion while earning competitive financial returns. This attractive risk-return-impact relationship is helping to increase private-sector investment in this newly consolidating industry and to further reinforce financial deepening in many economies.