Promoting Financial Inclusion Through Investing

In a world of inequality, there are numerous financial challenges related to addressing the unique and varied needs of different geographies and economies, especially in Southeast Asia. To achieve the 17 Sustainable Development Goals outlined by the World Bank Organisation, advancing towards financial inclusion is a crucial enabler to reduce poverty and enhance prosperity.

Financial inclusion primarily refers to extending access to credit, deposit, and other financial products to individuals and businesses in a sustainable and impactful manner. Here, FinTech platforms, often backed by venture capital firms, play an increasingly influential role in providing broader pathways and access to formal financial services.

Together with speakers from East Ventures (Avina Sugiarto), Norfund (Fay Chetnakarnkul) and Zingforce & Purpose Venture Capital (Sertac Yeltekin), Helicap has presented the realities and challenges of providing financial inclusion in Southeast Asia in a recent webinar.

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Trends in Impact Investing

There has been an increase in interest in impact investing from investors, finance professionals, and the general public alike – the size of the impact investing market has more than tripled between 2017 and 2019, reaching USD 715 billion, with further growth expected. Characterised by return-generating investments made with the explicit intention to provide measurable, positive social and economic outcomes, several target sectors for impact investing were highlighted by the speakers:

• Food & Agriculture
  ASEAN is one of the largest exporters of agriculture, where food often has a strong cultural significance. With food security as a policy priority for many of the governments, this sector naturally draws many investors who are interested in enhancing agricultural practices and creating sustainable food supply chains. In Indonesia, Aruna, an integrated fishery platform, has transformed more than 26,000 fishermen’s lives by making a fair and sustainable fisheries ecosystem while tripling fishermen income, serving as an example of start-ups receiving impact investing funds. Aruna is one of the many agritech firms that are making their mark on the ground in Southeast Asia.

• Financial Services
  Impact investors in the financial services sector aim to extend financial inclusion by making financial services and products like payment processing, money transfers, credit, and insurance available to rural and low-income communities. The aim for companies and investors in the financial inclusion space is to improve the livelihood of individuals outside the purview of existing traditional finance institutions. These efforts can provide underbanked individuals with the resources to found and grow businesses, fair and equitable means of protection in times of financial or personal distress, and opportunities to participate in digital economies. In doing so, vulnerable communities can gain a higher supply of quality jobs, extend the accessibility of healthcare, and increase their financial health, among a number of other secondary outcomes.

• Healthcare & Biotechnology
  Sertac shares that investors tend to prefer sectors they have a cultural resonance with. The pandemic both highlighted key gaps in healthcare infrastructure, and rendered healthcare providers a source of solace to most, pushing the Healthcare & Biotech sectors to the limelight for investors. Increasingly more investors see the value in investing in healthcare during the post-pandemic recovery of world economies.

• Education
  Education Technology or EdTech has expanded greatly during the pandemic, driving greater adoption from both consumers seeking education online and institutions adapting to social distancing measures. The technologies and models developed in this period are now seeing application in extending the accessibility of quality education to remote, rural, and underfunded communities across the globe. The global EdTech market size is expected to reach over USD 230 Billion by 2028, supported by strengthening global internet infrastructure.

• Renewable energy
  In light of increased government and consumer demand for sustainability, global energy demand pivots towards alternatives to polluting traditional energy sources to reduce carbon emissions. Companies in this sector, such as Indonesian solar power company Xurya, are able to provide commercial and industrial companies energy services without requiring large injections of capital expenditure.

Challenges in Impact Investing

Working against the myth: “Concessionary returns”

One of the greatest challenges faced by impact investors, including those promoting financial inclusion, is the ongoing myth that impact investments deliver concessionary returns. A common misconception on impact investing is that investors must sacrifice short-term gains for long-term objectives – which can lead to increased difficulty for funds and companies with impact mandates to raise capital – as Sertac has experienced. This can lead to difficulties in these funds and companies delivering their full financial and impact potential, despite delivering par and above-market returns. In order to combat this misperception, Sertac believes impact investors need to both document the intentionality and extent of the impact they are targeting to their LPs, and explicate the returns potential their investments hold, in order to differentiate the impact investment opportunities from philanthropic ones.

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‍“Investors come to us with the notion that if you want to be impactful or developmental, you have to sacrifice around your commercial returns. Therefore it is extremely important for us to demonstrate that impact investing is profitable and commercially sustainable, especially for financial inclusion in emerging markets”  

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– Fay Chetnakarnkul
Investment Director & Head of Asia,
Norfund

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Impact-Washing

Growing public and investor interest in environmental sustainability, social responsibility, and accountability, has led to the proliferation of impact claims in public communication, marketing, and investor presentations of companies. However, not all of these impact claims are substantiated. These unsubstantiated, sometimes intentionally misleading, impact claims in the marketing and characterization of a company’s activities or investments are referred to as ‘Impact-Washing’.

To counteract impact-washing, impact investors and companies with impact mandates have established industry standards and tools for documenting, measuring, and managing impact, such as GIIN’s Iris+. Such methods for impact measurement and management (IMM) are further explored in the following sections, however, in essence, investors seek to ensure that the beneficiaries of their investee companies truly experience an improvement in their lives. In order to do so, they rely on a combination of qualitative and quantitative data measuring the intended positive, and potential unintended negative, outcomes faced by the beneficiaries of investee companies. Through such methods, investors can ensure that their funds do, in fact, bring positive impact, while companies can substantiate their claims to access impact capital.

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‍“If you want to make an impact, you have to listen to the people who are being impacted or you say you’re impacted. And you have to do it constantly, systematically.”

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– Sertac Yeltekin
Co-founder & Managing Director,
Purpose Venture Capital

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Impact Investing in Financial Inclusion

Impact investors seeking to extend financial inclusion typically invest in financial services companies providing equitable products and services to rural, low-income, and underbanked populations. The purpose of this is to provide financial services to the underserved communities, in order to foster their financial resilience, provide socio-economic improvement opportunities and ensure equitable access to healthcare, education, and food.

Today, more than 6 in 10 Southeast Asians remain underbanked. This lack of extensive banking and credit history records limit their access to traditional credit products, while high transfer fees by traditional financial institutions commonly present a significant challenge to the most vulnerable in the region, a prevalent destination for remittances. Moreover, the lack of options for these communities have allowed the rise of formal and informal financial institutions charging predatory rates, potentially leaving their customers in worse financial situations. These factors, among others, act as challenges to the digitalisation and development of Southeast Asian communities, slowing down their integration to the global economy. These significant gaps in the financial services market are drawing increasingly more attention from impact investors seeking to address these challenges. Our speakers have highlighted a few of the sectors impact investors target to extend financial inclusion in Southeast Asia:

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“The percentage of underbanked people [is] very high, it’s very costly to be poor. Cost to transfer remittances from one country to another is high. So I think there’s a lot of interest from investors in tackling this big challenge.”

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– Avina Sugiarto
Venture Partner,
East Ventures

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• Digital Payment Services: Facilitating small business growth
  Digital payment service providers, who facilitate payments and money transfer through digital means, can be especially significant for MSMEs and individuals looking to participate in digital economies or grow their businesses. These companies can allow payments to be made with traditional bank and credit cards, as well as e-wallets, QR codes, direct debit, and more, at rates affordable to small businesses. In doing so, they can support the growth of local economies without access to traditional banking services. Avina highlights Xendit, a digital payment gateway as an example for the impact these companies can have. Xendit recently became a unicorn company, exceeding one billion USD in valuation, and is one of the leading FinTech payment infrastructures in Indonesia.

• Credit Providers: Extending loans to MSMEs and low-income individuals
  A range of alternative lending companies have shown strong growth in Southeast Asia over the past decade, utilising proprietary credit risk assessment methods to offer credit solutions to under- and unbanked individuals and MSMEs. Though not all follow financial inclusion mandates, many strive to provide their products and services at fair and equitable rates, payment plans, and small amounts, increasing accessibility to low-income individuals. The impact these credit providers can have differs significantly according to the loan segments they cater to, and can involve increasing the affordability of education, healthcare, or food, supplying growth capital to MSMEs to reduce gender inequalities, and leasing options to lower the digitalisation costs of MSMEs and individuals, among many others. Our speakers highlighted KoinWorks, a startup that provides a variety of lending solutions to underbanked individuals and MSMEs in Indonesia, as an example in this segment. Some companies in this space also prominently use peer-to-peer structures, where retail investors, including low-income individuals, can fund loans and investments across loan segments, gaining investment options regardless of credit status. Alami, a P2P Sharia lending company in Indonesia, is one such example, and recently added Hijra Bank to its suite of Sharia-compliant financial products and services.

• Investment Platforms: Creating investment and saving options
  Many of the low-income and underbanked communities in Southeast Asia lack opportunities to invest their savings, either as a way of protection against inflation or for long-term returns. FinTech companies can provide these opportunities to vulnerable communities through a range of services currently available to middle and high-income individuals, as well as those in developed markets, through reducing minimum investment amounts, waiving or reducing flat fees, and a variety of other means. It is very significant, however, for these companies to combine their products with education opportunities, in order to increase the financial literacy of their targeted market segments. Avina mentions Bibit and Stockbit as two such examples operating in Indonesia, where they operate platforms allowing retail investors to invest in stocks and mutual funds. Both companies also lead education initiatives for their customers.
  
  Beyond the examples highlighted by our speakers, investing into financial inclusion can take place in a wide range of products and services. The prominent sectors not covered in this section include, but are not limited to:

• Deposit services: Providing low-income individuals with debit and checking accounts
• E-Wallets: Allowing unbanked individuals to participate in digital economies
• Money transfer services: Conducting low-fee money transfers, reducing the cost of remittances and increasing the growth potential of rural economies
• Microinsurance: Extending insurance protection to low-income, rural, or short-term businesses, individuals, and business processes

“This could mean access to credit, access to deposits, ability to transfer money, and you know, it’s very expensive to be poor”.

– Fay Chetnakarnkul

Impact Measurement in Financial Inclusion

Understanding how to effectively measure and manage impact is vital in ensuring that impact investors are achieving their desired outcome. In order to do so, investors commonly employ impact measurement and management (IMM) tools with key metrics, often specific to regions, sectors, and companies, that capture both qualitative and quantitative data from employees and beneficiaries of company products and services. These metrics aim to reflect the ability of the investments and investee companies to deliver their intended, positive outcomes, while avoiding unintended negative ones. However, due to the complexity and specificity of impact considerations across investment mandates, impact investment firms often use a variety of third-party and proprietary tools to build their own processes for IMM.

For investors interested in financial inclusion, these processes often focus on the number of individuals benefiting from products and services, the significance of this benefit, and their secondary consequences, among others. Negative consequences endangering the financial wellbeing or life quality of the individuals are also measured to affirm that the company is delivering truly positive outcomes. For example, for a company extending access to credit products to underbanked individuals, the number of borrowers, the prior availability of credit to the borrowers, the ability of the uses of this credit leading to sustained, long-term improvement in the lives of the borrowers, and potential impacts on the accessibility of healthcare, high quality jobs, education, or increased food security may be among these metrics. For the same company, factors like over-indebtedness of borrowers and effect of credit products on gender equality in the community may be among the potential negative outcomes tracked.

In conducting these measurements, both quantitative and qualitative methods are commonly used. For example, Fay tells us that Norfund conducts an annual survey on the developmental impact their investments have generated. This allows them to set key parameters to measure quantitative results such as how many borrowers, how many clients, or how many loans have been provided to the underbanked. To date, Norfund has provided about USD 45 million in loans to their financial institution partners for clean energy. Meanwhile, Avina shares that East Ventures tracks key indicators such as market studies in terms of value creation engagements in their portfolio companies, as well as what these companies are doing on the ground in their respective fields and sectors. Through these methods, both Norfund and East Ventures ensure that their investments go to companies that deliver true positive impact to their beneficiaries.

^{“I think measuring has to be simple, it should be based on certain quantitative and qualitative criteria”}

^{– Sertac Yeltekin}

In conducting these measurements, both quantitative and qualitative methods are commonly used. For example, Fay tells us that Norfund conducts an annual survey on the developmental impact their investments have generated. This allows them to set key parameters to measure quantitative results such as how many borrowers, how many clients, or how many loans have been provided to the underbanked. To date, Norfund has provided about USD 45 million in loans to their financial institution partners for clean energy. Meanwhile, Avina shares that East Ventures tracks key indicators such as market studies in terms of value creation engagements in their portfolio companies, as well as what these companies are doing on the ground in their respective fields and sectors. Through these methods, both Norfund and East Ventures ensure that their investments go to companies that deliver true positive impact to their beneficiaries.

Food For Thought: Firms and investors looking to enter the financial inclusion space as an impact investor are advised to employ IMM methods to ensure their investments bring the positive outcomes they are intended for. In considering impact measurement methods, investors can refer to the three dimensions of impact measurement in financial inclusion, as outlined by the World Bank in 2012^[1]: Access to financial services, Usage of financial services and Quality of the products. A fourth dimension, the service delivery, can also be significant according to the sectors and segments investors are interested in:

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Conclusion

Impact investments in financial inclusion have the potential to both bring positive outcomes to the low-income, rural, and underbanked populations, and provide investors with above-market and par-market returns. The opportunity, as well as the need, is especially significant in Southeast Asia, where impact investors can help extend a variety of credit, deposit, insurance, and investment products to local communities.

At Helicap, we aim to empower businesses by connecting global investors to private investment opportunities in Southeast Asia.  Bridging the gap between banks and the underbanked, our investee companies primarily target the USD 300 million underbanked adults in the region also benefiting from financial inclusion investments. Understanding the significance of Impact Investing and Financial Inclusion allows us to broaden our horizons and put our work into the impact context of the region we operate in.

Today’s blog content has been adapted from Helicap’s March Webinar on the topic of “Financial Inclusion Through Investing” and we would like to thank our partners and speakers for their insights and sharing.

About Our Speakers

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Norfund is the Norwegian Investment Fund for developing countries. Their mission is to create jobs and to improve lives by investing in businesses that drive sustainable development. Norfund is owned and funded by the Norwegian Government and is the government’s most important tool for strengthening the private sector in developing countries, and for reducing poverty.

About Fay Chetnakarnkul:
Fay Chetnakarnkul is an Investment Director and the Head of Asia for Norfund. She is responsible for managing and leading Norfund’ s Asia portfolio. Prior to joining Norfund, she worked at the International Finance Corporation and The World Bank Group. She has experience within the field of development finance from transactions in Southeast Asia, South Asia, Africa, Latin America, and Eastern Europe.

East Ventures is a pioneering and leading sector-agnostic venture capital firm headquartered in Singapore. Founded in 2009, East Ventures has transformed into a holistic platform that provides multi-stage investment, including Seed and Growth for over 200 companies in Southeast Asia.

An early believer in the startup ecosystem in Indonesia, East Ventures is the first investor of Indonesia’s unicorn companies, namely Tokopedia and Traveloka. Other notable companies in the portfolio include Ruangguru, SIRCLO, Kudo (acquired by Grab), Loket (acquired by Gojek), Tech in Asia, Xendit, IDN Media, MokaPOS (acquired by Gojek), ShopBack, KoinWorks, Waresix, and Sociolla.

East Ventures was named the most consistent top performing VC fund globally by Preqin, and the most active investor in SEA and Indonesia by various media. Moreover, East Ventures is the first venture capital in Indonesia to sign the Principles of Responsible Investment (PRI) supported by the United Nations (UN). East Ventures is committed to achieving sustainable development and bringing positive impacts to society through its initiatives and ESG-embedded practices.

About Avina Sugiarto:
Avina Sugiarto is a Venture Partner of East Ventures. She has over 12 years of experience in investing across alternative assets including venture capital, private equity, private credit, and special situations across industries from technology, property, logistics, natural resources, to consumers and financial services. Prior to joining East Ventures, Avina was a Senior Vice President at Indies Capital Partners. She was responsible for deal sourcing, analysis, execution, and fundraising across Indies’ investment products. She was also a key member of the investment partnership with Varde Partners, a USD 15 billion global alternative asset manager, headquartered in the United States.

Avina leverages her extensive experiences to invest in growth-stage technology companies and further drive sustainability and integration of ESG practices in East Ventures’ investments.

Purpose Venture Capital is a Singapore-based early stage Venture Capital firm building sustainable and profitable tech businesses with the goal of supporting tech entrepreneurs and their visions for a positive impact on the world. They focus on supporting companies that disrupt conventional business models through purpose-aligned capital.

About Sertac Yeltekin:
Sertac Yeltekin is the Co-founder and General Partner of Purpose Venture Partner. He is also the Founder and Managing Director of Zingforce Ventures, a Singapore based firm specialised in venture building, advisory and social finance strategy. Apart from capital, they provide advisory and business development services. With 27 years of experience in the financial sector as a senior manager and consultant, he is the Co-Founder of Etkiyap, the first impact investing platform in Turkey, dedicated to advocacy, training and fund-raising in Turkey and in the surrounding region. In the past, Sertac was a Chief Operating Officer for Insitor Partners, SIngapore’s first impact fund manager to set up operations in Southeast Asia, and a pioneer investor in India and Pakistan. Sertac is committed to impact investing around the world and his experience ranges across sectors and countries through multiple engagements.

References:

Bala, S. (2021, March 3). ESG investments surged in Asia-Pacific in 2020 as sustainable investing takes off, MSCI survey finds. CNBC: https://www.cnbc.com/2021/03/04/sustainable-esg-investments-surged-in-asia-pacific-in-2020-msci.html

Economist Impact. (2022, February 25). Data point: what’s driving ESG adoption in ASEAN countries? Economist Impact: https://impact.economist.com/sustainability/resilience-and-adaptation/data-point-whats-driving-esg-adoption-in-asean-countries

International Organization for Standardization. (2021, November 10). Impact Washing: What is it and how to spot it . International Organization for Standardization: https://www.iso.org/news/ref2752.html

Kor, V. (2021, July 21). ESG Investing in Asia-Pacific: Challenges and Opportunities. Preqin: https://www.preqin.com/insights/research/blogs/esg-investing-in-asia-pacific-challenges-and-opportunities

Lim, K. J. (2022, February 22). How to close Southeast Asia’s financial inclusion gap. World Economic Forum: https://www.weforum.org/agenda/2022/02/closing-southeast-asia-s-financial-inclusion-gap/#:~:text=While%20Southeast%20Asia’s%20economy%20has,remain%20underbanked%20or%20unbanked%20today

The World Bank. (2022, March 29). Financial Inclusion. The World Bank: https://www.worldbank.org/en/topic/financialinclusion/overview#2

The World Bank. (2012, June). Financial Inclusion Strategies Reference Framework. https://documents1.worldbank.org/curated/en/801151468152092070/pdf/787610WP0P144500use0only0900A9RD899.pdf

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