Unique Perspectives

Thematic investing focus: The accelerating drive for financial inclusion

Multiple authors
Archived info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.

The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.

A variety of secular trends are spurring innovation and disruption in the global economy and creating what we believe are attractive thematic investment opportunities. In this series of articles, we take a close look at some of these trends, the breadth of the opportunity set and the related risks. 

Here, we focus on financial inclusion — the global push to ensure that individuals have access to useful and affordable financial products and services. Among our key conclusions:

  • There is broad policy support around the world for boosting financial inclusion, and particularly in emerging markets.
  • While financial inclusion has been gradually improving for years, we expect more rapid gains thanks to the digitalisation of financial services and the growing consumer acceptance of technology in the wake of the COVID pandemic.
  • These trends can lead to attractive investment opportunities, including in areas like consumer lending, microfinancing, insurance, capital markets access and savings/investments.

An overview of financial inclusion and the critical role of capital markets

Financial inclusion is considered essential for reducing inequality and improving the prospects for economic development globally. Enormous progress has been made in recent years: for example, 76% of adults globally have a bank account, up from 50% in 2011. And in emerging markets, nearly 60% of adults made or received digital payments in 2021, up from 35% in 2014.1 But policymakers around the world recognise there is much more to do. The United Nations has identified financial inclusion as a primary enabler of seven of its 17 Sustainable Development Goals, and more than 60 countries have launched national strategies for financial inclusion since 2010.

Well-developed capital markets are the key to improving financial inclusion. They are a driver of economic growth, which benefits employment. They draw savings into the economy, making capital available to companies, which, in turn, creates jobs and facilitates real wage growth. There is also evidence that capital markets are associated with higher productivity levels as the allocation of resources becomes more efficient — through better information, mechanisms that support good governance and the allocation of capital to innovative projects. 

By providing diverse sources of funding to real economy participants, capital markets create competition for bank financing, encourage banks to increase their efficiency and lower the cost of bank capital. This, in turn, can persuade banks to increase their lending capacity, including lending to smaller businesses. Finally, well-developed capital markets can provide access to tools that help households and businesses invest for the future and better manage their risks.

Case in point: Microlending in Indonesia

A company in Indonesia has been at the forefront of increasing access to financial services, particularly microlending, across this vast archipelago. The company has done this through digital adoption and a branchless banking initiative, helping bring financial services to areas of the country previously too difficult for banking services to reach.

Example is for illustrative purposes only and not intended as an investment recommendation.

While rudimentary forms of capital markets can develop in any economy, a sustainable and well-functioning capital market has preconditions. These can be grouped into three categories: 1) macroeconomic stability, 2) a base level of development of the financial sector and 3) a robust legal and institutional environment.

Financial inclusion in emerging markets and why it’s on the rise

It will be especially important to ensure that these preconditions develop in emerging markets, where the financial inclusion trend will be most relevant. There has been clear progress in the development of capital markets in the emerging world. The emerging markets share of the MSCI All-Country World Index, for example, has grown from 2% at inception to 11% as of July 2022. And there is plenty of room for this to grow, given that emerging markets account for more than half of the world’s population and GDP.

More specific indicators of financial development also point to opportunities for improvement. The IMF Financial Development Index, which takes into account a market’s depth (size, liquidity), access (to financial services) and efficiency (cost, sustainability), has shown gains in emerging markets in recent decades, but there are significant variations in factors such as regulation, transparency and sovereignity (Figure 1) — addressing them will help drive further progress.

Figure 1

Turning to the current state of financial inclusion, only 71% of adults in emerging markets had access to a bank account as of 2021, compared with 96% in high-income economies.1 The reasons for being “underbanked” vary (distance to financial institution, lack of trust, etc.), but the most common one given is a lack of money. Consequently, we believe that as GDP per capita increases, improvements in financial inclusion will follow. Beyond gaining access to bank accounts, there is room to better employ the range of products offered by financial institutions, especially within emerging markets where most products are significantly underutilised (Figure 2).

Figure 2

We see signs that the financial technology revolution is boosting financial inclusion, given the growing acceptance of digital transactions across all touchpoints (e.g., merchants, credit, payments), the improvements in payments infrastructure in some markets and the sizeable percentage (65%) of the unbanked population who own mobile phones. In Sub-Saharan Africa, for example, 55% of adults had an account in 2021, including 33% of adults who had a mobile money account — the largest share of any region in the world and more than three times the global average of mobile money account ownership (10%).1

The COVID pandemic accelerated these trends, making consumers more comfortable with technology (e.g., contactless payments, mobile wallets) and encouraging investments in the infrastructure required to support a digitalised financial world — where cost savings allow tech-enabled competitors to serve even those consumers with very small accounts. 

In another positive trend, we have seen an increase in the formalisation of emerging market economies — a process that includes increasing the number of workers who are employed by regulated, tax-paying companies (vs. unregistered enterprises) and that tends to drive increased use of the formal financial system (e.g., banks or digital payments services). India’s informal economy, for example, is estimated by the State Bank of India to have shrunk from 52% of the country’s total GDP in 2017 – 2018 to 15% – 20% in 2020 – 2021.

Case in point: Mobile money transfer in Africa

Over 15 years ago, two African telecommunications companies developed a mobile-phone-based money transfer service to help deepen financial services in a region where traditional banking use was low but informal employment and mobile phone penetration was high. Today, the service is available in nine countries with over 30 million customers and 3.2 million businesses. In the financial year of 2022, it oversaw ~US$240 billion in transaction value — across deposits, withdrawals, transfers, payments and borrowing.

Example is for illustrative purposes only and not intended as an investment recommendation.

The investment opportunities and risks

We think these trends, from strong policy support for financial inclusion to the growing use of financial technology, will benefit companies in a variety of areas, including:

  • Banks and fintech players that are helping to bank the unbanked with better technology, scale and lower unit costs 
  • Microfinance players and banks that are able to create lending opportunities amid the formalisation of the economy
  • Insurance companies that can benefit from higher levels of consumer savings and sophistication, especially in markets with ageing populations 
  • Exchanges, investment banks and brokers supporting capital market development, on both the corporate side (capital raising) and the retail side (wealth creation)

Of course, the path to greater levels of financial inclusion is not without hurdles. Currently, for example, many emerging markets require improvements in the infrastructure needed to support full-scale financial services and more robust financial education for consumers. And despite the prevalence of mobile service across emerging markets broadly, some frontier markets remain on outdated systems (e.g., 3G networks). Regulatory and political issues continue to slow the process of expanding financial services in some countries, as do cyclical issues (e.g., slow GDP growth, high interest rates).

But we believe that over time, financial inclusion will be a durable and investable theme that will create opportunities across many markets and sectors for active managers who are able to identify the most effective enablers of this structural change.

1The World Bank, Global Findex 2021 Survey. | 2The World Bank, March 2022. | 3International Monetary Fund, 2021.


Featured Unique Perspectives

Showing of Insights Posts
2023 ESG & Sustainability Outlook
Archived info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.

Focusing on value amid rising global challenges and opportunities

Our Sustainable Investing (SI) Research Team offers a high-level view of 2023 research and engagement priorities.

Continue reading
Archived info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
2023 Bond Market Outlook
Archived info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.

Emerging markets debt outlook: A glass half full or half empty?

Against a still-challenging global backdrop for emerging markets, Macro Strategist Gillian Edgeworth highlights opportunities created by extreme credit spread dispersion across individual countries.

Continue reading
Archived info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.

Read next