‘Towards inclusive societies – Impact investing and financial inclusion’

The link between economic growth and social progress is complex, although most would agree that pursuing a more inclusive model of economic growth that benefits all segments of society is essential to creating a sustainable future

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’[1]. Further, in developing countries 80% of the most economically-disadvantaged individuals do not have bank accounts[2] – 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. 

Impact investing has been long associated with microfinance funds, which to date make up the majority of existing private debt impact funds. That said, the impact fund universe now includes funds engaged in activities other than pure microfinance. Many of these funds are focused on promoting financial inclusion, with an increasing emphasis on fintech companies that provide products and services to microcredit and SME finance driven by algorithmic underwriting and big data. According to the Global Impact Investing Network’s (GIIN) Annual Investor Survey 2018, after energy, microfinance and financial services (ex-microfinance) comprise the second and third-largest impact allocations (assets under management) by sector. 

At M&G we invest in private and illiquid fixed income assets across twelve thematic impact areas that offer clear positive environmental or social outcomes as well as attractive financial returns. The following example of an impact investment illustrates how our financing has been used to generate positive social impact in the area of microfinance and financial inclusion.

Impact investing in action

Microfinance Enhancement Facility (MEF) – helping to create a cycle of positive change

M&G provided US$90 million senior debt financing to MEF, a $690 million microfinance debt fund set up in 2009 to offer a reliable and stable source of finance to microfinance institutions (MFIs) in a wide range of developing countries. 

The MEF was established by IFC (the private-sector arm of the World Bank Group), KfW (the German development bank) and OeEB (the Austrian development bank) to provide short and medium-term debt to MFIs, which in turn offer loans to thousands of micro and small entrepreneurs in developing countries to support economic development and help break the cycle of poverty. 

The transaction finances a well-diversified pool of loans in terms of country and MFI entity exposure. A demand-driven fund, the MEF has lent to over 230 MFIs across all developing regions since its inception. The MFIs provide a variety of services to support development activity, including unsecured credit, insurance, housing loans, deposits and savings.

Investment impact overview: With an average underlying loan size of $1,730, our investment in MEF will support lending to around 52,000 micro and small entrepreneurs in developing countries. MEF has progressively grown the share of local currency lending in its portfolio to 62% (all local currency loans are fully hedged to the US dollar), thereby de-risking many of its investee institutions and their clients from currency fluctuations. The activities of the MEF and its partner institutions have a strong developmental profile with 80% of borrowers being women, many of whom are heads of household. Moreover, around two-thirds of the loans made in 2018 were to borrowers in rural areas lacking access to conventional finance and therefore struggling to meet their financial goals. 

Beyond equality of opportunity

Impact investors can help to create resilient, inclusive and sustainable economies and societies better equipped to navigate the changes induced by megatrends such as globalisation, digitalisation and demographic shifts. We seek to invest in and structure innovative investment solutions that can offer attractive returns and mitigate risks for our clients while generating a measurable social or environmental impact. We invest not only to promote financial inclusion by giving borrowers better access to affordable and appropriate financial services, but also to improve the lives and prospects of those borrowers as a result of the financing provided. 

For our latest insights on impact investing and to learn more about our approach: www.mandg.com/impactinvesting 


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[1] “The Global Findex Database 2017”, World Bank Group.

[2] “PIIF Report on Progress 2016 – assessing the impact of responsible investors in Inclusive finance”, Principles for Investors in Inclusive Finance.

This article was written by Richard Sherry, Fund Manager, M&G Investment Management. This article was sponsored by M&G, and RI editorial staff were not involved in the creation of this content.