Understanding financial inclusion
Financial inclusion, often synonymous with microfinance, involves extending financial services – such as loans, savings accounts and financial education – to individuals and businesses that lack access to traditional banking systems. According to Tim Crijns, traditional banks often overlook potential borrowers due to perceived risks or the small size of loans. Microfinance institutions (MFIs) fill this gap, enabling entrepreneurs – from a tailor in India to a small-scale farmer in Colombia – to secure financing vital for their business growth and overall community enhancement.
Research indicates that financial inclusion significantly improves the quality of life for its beneficiaries. An annual study across 45 countries revealed that 90% of microfinance clients reported improved standards of living after accessing these services. Through loans, these individuals can create jobs, support their families, and contribute to their local economies, underscoring the profound impact of financial inclusion.
Risk and return in financial inclusion
Elaborating on the risk and return related to financial inclusion, Crijns highlights a successful investment in a banking initiative in Senegal, which evolved from a grassroots initiative into one of the country’s leading banks. This transformation illustrates the potential of well-managed microfinance institutions to cater to local needs while ensuring solid returns for investors.
‘We prove that investing in emerging markets is much less risky than you think’
Contrary to the common perception that investing in emerging markets is inherently risky, Crijns argues that the credit risk associated with microfinance is often lower than expected. MFIs carefully vet loan applicants based on their business plans, leading to repayment rates comparable to those of western banks. Furthermore, the geographical diversification of investments across various regions helps mitigate risk, creating a stable investment portfolio.
Kayoko Lyons echoes Crijns' sentiments, noting that financial inclusion investments have consistently shown resilience, even during global financial crises. According to her, the sector’s unique risk-return profile, characterised by stable returns and low correlation to market volatility, makes it an attractive option for investors.
The mandate for impact
The Missionary Sisters of the Sacred Heart prioritise using their investments to support vulnerable populations, particularly women and children. Lyons emphasises the importance of financial services in enabling economic growth and personal development. By facilitating access to credit, individuals can elevate their living standards and foster community development.
Lyons points out that financial inclusion should not be viewed as a cure-all for poverty but rather as a critical component of economic empowerment.She reflects on her personal experiences with credit and loans, advocating for equal access to financial services for all individuals. This perspective aligns with the overarching goal of impact investing: to create lasting positive change in the world.
Navigating the investment landscape
For those new to impact investing, Lyons offers practical advice for entering the financial inclusion space. She encourages investors to start small, emphasising the sector’s solid track record and robust fund management. Engaging with communities and networks within the impact investing ecosystem can also provide valuable insights and support, she adds.
Both experts highlight the importance of due diligence when selecting microfinance institutions. This process goes beyond traditional financial assessments; it includes evaluating the ethos and the mission alignment of these organisations. Investors should seek MFIs that prioritise fair treatment of borrowers and maintain a balance between financial returns and social impact.
The evolving landscape of financial inclusion
As the financial inclusion sector continues to evolve, technological advancements play a pivotal role. The integration of mobile technology into microfinance has transformed how financial services are delivered, making them more accessible and efficient. Both Crijns and Lyons express optimism about the future of financial inclusion, recognising the need for ongoing innovation and adaptation.
In conclusion, financial inclusion presents a compelling opportunity for impact investors to contribute to meaningful change while achieving long-term solid returns. By supporting microfinance institutions and promoting access to financial services, investors can play a vital role in addressing the needs of the 1.4 billion adults and millions of small businesses that remain unbanked. As the conversation around financial inclusion grows, it is essential for investors to remain engaged, informed and committed to fostering sustainable development in underserved communities.
Listen to the podcast with Kayoko Lyons, Karel Nierop and Tim Crijns.