Financial Inclusion – We Need To Step Up The Pace

Financial inclusion is an umbrella term that encompasses many areas but in essence, aims to make financial services products and education accessible to the economically underprivileged. There are many aspects – from having transaction accounts to accessing loans and building up savings. The saving of capital allows people in turn to form micro-enterprises and so financial inclusion increases across the entire economic value chain.

In South Africa, with the highest GINI coefficient in the world, financial inclusion is even more important than elsewhere. This World Economic Forum article outlines six challenges for financial inclusion in SA.

Banks and other financial services providers need to work at product innovation and accessibility of products to vast swathes of the population, with a focus, I believe, on the millions of young people desperately looking for jobs in a market that cannot accommodate them. Many young people have entrepreneurial skills and need seed capital to launch a viable concept or they may have started a small- or micro-enterprises (SMME) that requires further capital to grow.

This is where asset managers can step in, allocating capital on behalf of their large institutional clients, such as pension funds, using “big capital” to fund smaller capital.

Over the past decade, Mergence Investment Managers has pioneered in South Africa in impact investing, that is investing which seeks not only to make a sound financial return but also to impact positively on society. With this in mind, in 2020 we have been running a dual strategy, where we have invested in small business enterprises (SMEs) that are at an infancy stage run by experienced managers in growing industries such as digital infrastructure and providing capital to intermediaries that are addressing financial inclusion for SMEs.

The jockey we are backing who manages the SME needs to have a demonstrated track record of running a successful business at a large scale supported by the strategy and healthy pipeline of growing the business. Effective financial inclusion happens when it meets the challenge of access by previously disadvantaged people or businesses and the cost of the funding is reasonable. The issue of high unemployment in South Africa can only be addressed when we increase access to funding to SMEs, women and youth and the cost of funding provided.

There are various instruments and ways of structuring the transactions in such a way that the deployment of capital can be used in tranches linked to milestones. The lesson for funders is that not every SME is a start-up and there are SMEs led by experienced managers who have not reached their potential due to funding constraints. It’s been a great privilege for us as Mergence to be part of the story that has allowed SMEs to grow and perform above expectation.

We have seen other interesting structures or instruments in the market that are helping to increase the financing of the SME sector. One of these is the use of blended financing. We believe by bringing different financiers with different objectives can lead to a solution that crowds in commercial financiers by reducing the cost of capital and providing the required security package. We believe that by bringing together philanthropists, government, venture capitalists and commercial funders, more solutions and structures could assist in crowding in commercial lenders. The flip side of the coin is recognition by SMEs of what type of capital they need at different stages of their business, and so we see a need for education at the SME level regarding the pros and cons of different types of investors.

South Africans are innovative so let us all work at financial inclusion in whichever sector we are in.

For more information please contact me at bulelwa@mergence.co.za.