The power of financial inclusion

The power of financial inclusion

Emerging markets are home to nearly of all the world’s unbanked population. According to data published by the World Banki, those without access to financial services are most likely to be the very poorest households, young people and those who have received the least education.

An inspiration for microfinance initiatives

“We can create a poverty-free world because poverty is not created by poor people. It has been created and sustained by the economic and social systems that we have designed for ourselves; the institutions and concepts that make up that system; the policies that we pursue.”

Muhammad Yunus
Starting with US$27, from his own pocket, to finance his first loan, Muhammad Yunus founded Grameen (or village) bank. He went on to win a Noble prize for this microfinance (small loans) initiative, which brought into the fold those excluded by the traditional banking network. Yunus’s vision remains an inspiration for many, including us; access to financial services can act as enabler to better life chances for some of the world’s poorest and most excluded individuals. Yunus’s first loan in 1976 was to a group of female basket weavers. Then and still now, women in emerging markets are the least likely to have access to financial services. This is the case across the globe with 80% of all female owned businesses having an unmet need for creditii. Women are even less likely to be part of the traditionally banked sector in emerging markets, partly because they are much less likely to own assets like land or property, which are often needed to secure a loan against.

Learning from trailblazers

Indonesia, the fourth most populous country in the world, has made tremendous strides over the last 10+ years in reducing poverty ratesiii. Covid-19 caused some of this progress to stall but long term we expect the positive trend to continue. Ultra-micro and micro businesses make up a significant part of Indonesia’s economy (accounting for over 60% of its GDPiv. And the importance of this sector is recognised by the country’s ministry of finance which announced Rp4.85 trillion for the development of this sector in 2021. However, access to credit remains uneven in Indonesia where similar to Bangladesh, the traditional banking sector is inaccessible to many. One company, Bank BTPN Syariah (BTPS), a microfinance institution, has turned its focus to the ‘productive poor.’ Adopting a business model similar to Yunus’s Grameen Bank, it lends to women-only groups in rural villages. The bank’s goal is to promote financial inclusion, across Indonesia, empowering productive poor families to have a better livelihood. The enterprise was started in 2008.

A win-win for all stakeholders

We initiated our investment in BTPS in 2019 and have been impressed with its consistency and focus on achieving a positive impact for all its stakeholders. Shareholders have seen impressive growth since the bank’s IPO in 2018 (with the exception of 2020 when Covid hit business). Excluding 2020, the bank’s loan book has been growing in the high teens. At the end of Q1 2022 the bank had generated a Return on Equity (ROE) of 23.4% and Return on Assets (ROA) of 11.1%. Just to reflect on this, in our universe any bank that can earn an ROA above 2% is considered to have a superior level of profitability in our opinion. The controlling shareholder, Bank BTPN, owns a 70% stake in the business. The parent (BTPN) is a sound and profitable banking group with an experienced management team and solid asset quality in all the areas that it operates in. It has a conservative nature, highlighted by the fact that BTPS has 30% of its assets in liquid instruments. It has a unique and high growth franchise with a strong capital position (Capital Adequacy Ratio of 53%).

Ready-made packages simplify the offering ​

Customers include more than 4.1m women entrepreneurs. They benefit from BTPS’s Paket Masa Depan (Package for a Better Future) which provides coaching services alongside financial loans. A team of 12,000 employees, spread across 23 provinces, covering 70% of the market, provides the support. Historically this was delivered in person but now if can often be digital. The bank’s team conducts bi-weekly face-to-face meetings with groups of borrowers across 246,000 neighbourhoods. This service differentiates BTPS’s offering and appeal to customers, in turn aiding retention. The typical BTPS customer makes their living from selling goods; food, livestock or simply made products. Loans have an average ticket size of ~$140 and BTPS has maintained flat-rate pricing of 30%, across all cycles, in the past four years. Before a loan is granted, 4-5 days of financial planning training is delivered to customers to help them understand how to budget and plan their expenditure. Loans are granted for 51 weeks and customers are grouped into a membership system that requires mandatory saving and shared responsibility. After the first loan has been repaid ‘Lending Cycle 1’, many customers enter into a new lending cycle ‘Lending cycle 2’, to further enhance their businesses. BTPS offers customers a total of 5 lending cycles. Thereafter, loans remain available and as BTPS would have built up an extensive profile of the customer’s credit history by that time, a more tailored form of support can be provided.

Creating a positive ripple effect

Communities are the ultimate beneficiaries of BTPS’ approach to lending. The bank runs extensive social programs with its customers, including health and wellness, business capacity building and financial literacy programs. Below we share some data from BTPS’ social impact scorecard that shows that as customers progress through each lending cycle, there is an improvement in their living standards. Correlation may not always demonstrate causation and measuring impacts can be a difficult task, nevertheless, we are pleased to see these outcomes.
Lending Cycle 1 (first loan)
Lending Cycle 2
Lending Cycle 3
Usage of firewood as a cooking fuel
Number of Children who do not go to school
Number of households that do not have a toilet/latrine

Providing an alternative that promotes inclusion

All of BTPS’s loan officers are female (and 95% of all employees are female).  Typically, they are high school graduates aged 18-26. A career with skills development at the bank provides a favourable alternative for young women who might otherwise be channelled into low-skilled service or manufacturing jobs. BTPS has well-established mentoring and coaching programs, with a minimum 5% of personnel costs allocated to human capital development. Furthermore, many of the skills gained are transferrable into other areas of life, particularly those centring around IT and digital applications. As shareholders we encourage BTPS to continue to work on retaining talent especially amongst its field-force, where cultural and family pressures can mean women are persuaded to drop out of the workforce once they get married. We also believe maintaining repayment rates at a reasonable level is important for the long-term sustainability of the company. At 30% rates are high, especially when compared with traditional banks. However, the bank reaches out to rural clients that other institutions bypass, because they are more resource intensive, and BTPS also offers much needed, and we believe helpful, financial education training.

Building blocks to aligned aims

Financial inclusion is a vital building block for eight out of the 17 UN sustainable development goals and investing in companies like BTPS, that are making a positive contribution towards these goals, while still delivering for shareholders, aligns to our aims.

iWorld Bank Group, The Global Findex Database 2021; Financial Inclusion, Digital Payments and Resilience in the Age of COVID-19
27 September 2022
Sam Mahtani
Sam Mahtani
Fund Manager, Responsible Global Emerging Markets
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The power of financial inclusion

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