Unlocking Sustainable Growth through Inclusive Finance

This letter was originally sent to LightCastle Bimonthly Newsletter subscribers.

We are building the next-generation products and services that can be used en masse. However, we often limit our thinking towards food, affordable housing, health and education. While ensuring these are imperative, to guarantee the proper distribution of resources, we need to make sure there are high-quality inclusive financial services.

Bangladesh is a dense country with the 8th largest population in the world. There are ~1,200 people/sq km. Interestingly, with such a large market, 60% of the adult population is unbanked and insurance penetration is at less than 1%. The country has 60+ banks, 34+ NBFIs (Non-Bank Financial Institutions) and 750+ microfinance institutions. Even then, access to credit remains a key challenge. Both Micro & Small entrepreneurs and the local income communities find it hard to have access to cost-effective, patient and growth capital.

Three things if implemented can help change the status quo:

1. Use of Technology to not only automate but to speed up distribution and bring transparency into the system. As of now, there are close to 198 million registered MFS (mobile financial services) accounts with the active account being 68 million (central bank). The digital banking guideline was also released. By using technology, financial services scale-up has become tech-intensive compared to physical infrastructure intensive allowing for expedited speed and capital efficiency. This would mean lower costs of transactions and allowing cheaper and better products for consumers. However, this is just the beginning of the whole process. From credit underwriting to distribution to disbursement to transparency, we need to incorporate technology at each part of the value chain. Ensuring that while being aware of fraudulent activities is easier said than done. However, that is the way forward and over time the traditional banking model will get disrupted.

2. Building the right kind of financial products and services is imperative. Just distributing products via a tech-value chain is not enough. You need the right type of instruments. While vanilla debt is a good instrument for working capital, for growth you need patient and possibly risk capital. Small micro-entrepreneurs for those in agriculture also need capital that is, a) matches with the cash flow of their production; b) risk built into it to compensate for the loss of yield and natural disasters, and c) smart in nature, i.e. money plus model where they also get access to network and business management support. Bundled and embedded finance as well as blending different sources and types of instruments can also help de-risk investors and hence increase appetite for additional funding in the sector.

3. Incentivizing with the right kind of regulations and policy support. This can happen in two ways. By setting up mechanisms like credit guarantees, first loss capital, tax breaks or simply having refinancing schemes, you can push incentives into sectors the government wants. This would be a way to get into sectors where you want to unlock additional capital like health, climate, education, food security, alternative energy, and circularity as well as make financing available for underserved enterprises and communities. Fund of funds for financing micro-entrepreneurs and underserved communities as well as developing a standardized verification and monitoring system of such investments will also push the needle in the right direction.

Financial services need to be inclusive and only then we would be able to unlock value creation towards an advanced economy. Only growth is not enough – to ensure that we live in a sustainable world, we need inclusive growth.