It’s not that long ago that somebody who was employed in an African or Asian city and wanted to send money to the family in the countryside, could only do so by putting some money in an envelope and give it to the bus driver. Hoping that he would then hand it over to them.
“That has changed tremendously in most of the countries where we operate”, says Frank Streppel, Head of Global investments at Triodos IM. Thanks to rapid technological developments like transferring money with mobile phones, at virtually no costs. But also because much more people living in remote rural areas have gained access to finance.
Access to credit is one element of this. For millions of people a first step to improve their living standards is by taking a microloan. But there is more: financial inclusion calls for access to a full suite of quality financial services at affordable prices.
Like savings. Or insurances, "probably the least developed parts of financial services in many countries”, says Streppel. “For many people poverty is not the immediate problem, it’s their vulnerability. You’re in big trouble when somebody in the family gets sick, or when there is a fire and you lose everything. That’s where savings or an insurance can make the difference.”
The core of Triodos IM’s investment approach is to make a broad array of fair and transparent financial services available to everyone, to make them more resilient and allow them to pursue avenues of life they were unable to choose. Supporting better financial infrastructures is also part of Triodos IM’s approach. Like support for the establishment of credit reference bureaus, that play an important role in preventing over-indebtedness.
Who are the partners Triodos IM works with?
At year-end 2021, Triodos IM’s financial inclusion funds provided debt and equity to over 100 financial service providers in Latin America, Asia, Eastern Europe, and Africa. They provide a range of financial services to low-income people and small businesses, and vary from small NGOs working in underdeveloped markets to fully-fledged banks and digital lending platforms. With most of them long-term relationships have been established.
XacBank in Mongolia provides a good example of a financial institution that was granted a loan facility when it was still a small finance company. Later, it converted into a bank. Through funds under our management, we became a shareholder and contributed through board participation to further development. The bank has matured while remaining loyal to its developmental mission. XacBank has become a leading bank in the country and an equal partner to Triodos Bank as a joint member of the Global Alliance for Banking on Values (GABV).
Together, the financial service providers Triodos IM works with reached 17.8 million borrowers, of which 78% are women, and 18.6 million savers at year-end 2021. “We were one of the pioneers, and now we belong to the top-10 privately managed investors in financial inclusion worldwide”, says Streppel.
How strong is the evidence that inclusive finance works?
There is a lot of anecdotal evidence being used in the microfinance debate. Thorough research is much needed. An interesting example is the recently published 60 Decibels Microfinance Index Report. This impact study was done from the ground up: nearly 18,000 microfinance clients from 72 microfinance institutions across 41 countries were asked about their experiences.
The report’s main conclusion is that microfinance remains an essential piece of the puzzle to ensure financial wellbeing to millions of people. Clients who report business income increases also report an improvement in their household incomes. Clients of microfinance providers report higher than average capacity to deal with an economic shock.
The report provides valuable reflections on the importance of focusing on contributing to positive change while mitigating the downside riks, and the need to embrace standards.
Are such standards already being used?
Yes. The most important ones are the Universal Standards for Financial Inclusion, developed by the Social Performance Task Force (SPTF). These include standards around various themes including good governance, financing the productive sector; involvement of potentially deprived groups such as minorities or region such as rural areas.
The interests of end clients should be at the center of every investment approach. For this reason, the SPTF has developed the Client Protection Pathway. This concerns criteria set within the sector on transparency, fair prices, fair collection mechanisms etcetera.
The standards are used all over the world by investors and microfinance providers and play a market-making role as well. Policymakers in developing countries, for instance in the Philippines, have explicitly adopted the standards as the model for crafting their formal regulatory regimes.
The SPTF is a global membership organisation with more than 3,000 members from every stakeholder group in financial inclusion. Triodos IM plays an active role in the organisation and has a place in the board representing international investors.
What is a main lesson for the future, based on the recent experiences?
Financial inclusion is not the silver bullet in the fight against poverty and inequality, says Streppel. “But bringing people into the financial system certainly can help a lot. Essential is putting the interests of the end clients at the center of your investment approach. Inclusive finance works best if the right product is offered to the right people in the right doses, and in a fair and transparent manner.”
In the coming years, he adds, Triodos IM will continue to promote the global acknowledgement of the Universal Standards and Client Protection Principles as the standard financial service providers must adhere to. “That’s not the case yet, although progress is being made. So, we will put even more emphasis on that to make this happen for the sector as a whole and for every financial institution we work with.”