Impact Investments could guide the way for financial inclusion in Africa, as the right balance of profit-based investments and a developmental mind-set is key to bridge the gap between the haves and the have-nots in the fast growing continent.
Globally, Africa lags behind other developing regions in financial inclusion with only 23% of adults holding an account at a formal financial institution, twice lower than the world average estimated at 50%.
The Centre for Financial Inclusion defines Financial Inclusion as “access to a full suite of financial services, provided with quality to everyone who can use financial services with financial capability, through a diverse and competitive marketplace.”
Financial inclusion is critical to achieve poverty alleviation, sustainable economic growth and social cohesion. Such wide gaps in financial inclusion in Africa with their snowballing implications on inclusive growth are then worrying for the fast growing continent, where the gap between the haves and the have-nots is also growing steadily.
An individual approach to financial inclusion may then fall far short of the requirements of a continent which is already in the midst of growth pangs, and is clearly in need of a broader solution to address an ever-widening gap.
Providing entrepreneurs with access to credit to grow their business, provide local employment opportunities and create a ripple effect on financial inclusion in their community then emerges as the solution to bridge the financial inclusion gap at the broader level of the community rather than the narrower level of the household.
Traditional financiers have long been around without much impact on financial inclusion either at the level of the household or by allowing access to credit to small and medium enterprises (SMEs). Low-income households and SMEs have traditionally not formed an important target segment for profit-seeking organisations due to large volumes and low value involved in such investments.
And, at the other extreme, philanthropic donations to such enterprises are limited in scope by their very non-profit nature, which does not ensure that the money given will create returns that lead to sustainability.
It is then a mix of profit-based investments and a developmental mind-set that is the need of the hour to ensure financial inclusion that generates measurable impact.
Indeed, Development Finance Institutions (DFIs) such as the World Bank, International Finance Corporation (IFC), African Development Bank (AfDB), the German Development Bank KfW, the Dutch Good Growth Fund (DGGF), Department for International Development (DFID), USAID and others have been extremely active in the financial inclusion space in Africa.
A study by Dr Isabella Massa of the Overseas Development Institute throws up some interesting insights about DFIs’ support to financial inclusion for households and SMEs in Africa. The first interesting observation is that less than 10% of all projects, whether at the household or the SME level, are supported by more than a single DFI, pointing to a low level of collaboration between these institutions. Also, she notes that is was only in a few instances that DFIs partnered with private institutions for such projects, indicating low collaboration between DFIs and the private sector as well.
This compartmentalised approach by DFIs to financial inclusion in Africa may be limiting the benefits of such intervention. A collaborative approach among different DFIs, as well as between DFIs and the private sector, may allow the development finance sector to maximise its reach, and correspondingly, its impact as well.
Impact investing, where investments are chosen with a blended return in mind, then emerges as an exciting area for DFIs to explore to deepen their impact. A blended return factors in both the financial returns as well as the developmental returns of an investment. Hence, impact investors targeting blended returns can be expected to prioritise sustainable SMEs with high implications for community development and low-income households.
Impact investors in the private sector who are active in Africa and have local expertise in evaluating entrepreneurs from the continent can then ensure that development finance is channelled to the right businesses where it can maximise its socio-economic impact.
GroFin is one such impact investor, which is supported by DFIs such as the DGGF, KfW, DFID and USAID. By using a unique combination of finance and business support to assist unserved and underserved entrepreneurs in Africa and the Middle East, GroFin helps create measurable socio-economic impact in their communities. GroFin entrepreneurs add over US$ 469 million in economic value added per annum, sustain over 62,450 jobs through their operations, and create more than 312,270 family beneficiaries per annum.
It is through this far-reaching impact on the community with a cascading effect on family beneficiaries that impact investors like GroFin ultimately lead to both broader and more sustainable financial inclusion in their countries of operation. It may be high time for development finance institutions to collaborate over financial inclusion in Africa, to generate a deeper impact.
The article was originally published by the author on LinkedIn Pulse.