BlueOrchard Brief: Why investing in post-pandemic financial inclusion offers opportunities for investors
Zurich, 23 March 2022 – In this brief by Mahesh Joshi, Head of Private Equity Investment Asia at BlueOrchard, he argues, that the coming years present a unique opportunity for investments in financial inclusion as pandemic-related risks subside, the industry consolidates, and stronger companies prepare to meet significant post-pandemic demand growth.
The Covid-19 pandemic threatens to undo significant gains in poverty reduction
The last two decades have witnessed significant alleviation in global poverty with the share of people in extreme poverty falling significantly, from 27.8% in 2000 to 9.3% in 2017.(1) Microfinance has been one of the key pillars driving this change by helping improve access to financial services and providing springboards for people to improve their livelihoods.(2) In the last decade, 1.2 billion previously unbanked adults were able to access formal financial services.(3) BlueOrchard’s portfolio companies have contributed to this inclusion, growing assets approx. 2.5x faster than listed financial institutions emerging markets since 2010.(4)
However, 1.7 billion adults, a large part of them in emerging markets, still had no access to formal financial services as of 2018.(5) The Covid-19 pandemic worsened the situation. According to the World Bank, 400 million people may fall back into poverty as a result of the Covid-19 crisis.(6) Microfinance plays a significant role in helping low-to-middle income people rebuild their lives and livelihoods after the pandemic disruption.
BlueOrchard data indicate that risks are easing, and growth and RoE are rising
Analysis of 187 financial services companies from 56 countries in BlueOrchard’s portfolio show clear signs of improving growth and return on equity (RoE).(7) As we adapt to the realities of this new normal over the next few years, we have experiential cause to believe these trends will continue, providing investors with a unique opportunity to generate strong returns while making a demonstrable impact.
Data from BlueOrchard’s portfolio also show that the risks related to the pandemic have eased. Provisions as a percentage of total assets have stabilised for most companies, with those in the top-quartile even showing improvement. However, the pandemic has clearly impacted the balance sheets of most companies and this scenario lays the groundwork for equity fundraising in the near term.
Companies that weathered the pandemic well are best placed to drive growth
The companies that have weathered the effects of the pandemic well are in a better position to achieve significant growth over the next few years as their are likely to struggle to raise growth capital. Looking across BlueOrchard’s portfolio, the top quartile companies have consistently delivered strong RoE despite the pandemic. We believe that companies of this sort are best positioned to raise equity capital and, in turn, will be best placed to drive growth in keeping with future demand.
Based on our analysis, we believe the coming years present a unique opportunity for investments in financial inclusion as pandemic-related risks subside, the industry consolidates, and stronger companies prepare for unprecedented demand growth.
Please refer to our recently released BlueOrchard Academy White Paper – Impact Private Equity – Fostering Financial Inclusion in Emerging Markets – for more insights on the opportunity in financial inclusion.
(1) World Bank – https://data.worldbank.org/indicator/SI.POV.DDAY?end=2019&start=1967&view=chart.
(2) Taofeek Aremu Kasali , Siti Aznor Ahmad & Hock Eam Lim, The Role of Microfinance in Poverty Alleviation: Empirical Evidence from South-West Nigeria, Asian Social Science; Vol. 11, No. 21; 2015; Dejene Adugna Chomen, The role of microfinance institutions on poverty reduction in Ethiopia: the case of Oromia Credit and Saving Share Company at Welmera district, The role of microfinance institutions on poverty reduction in Ethiopia: the case of Oromia Credit and Saving Share Company at Welmera district, Future Business Journal volume 7, Article number: 44 (2021); Sayed Samer, Izaidin Majid, Syaiful Rizal, M. R. Muhamad, Sarah-Halim, Nlizwa Rashid, The Impact of Microfinance on Poverty Reduction: Empirical Evidence from Malaysian Perspective, Procedia – Social and Behavioral Sciences 195 ( 2015 ) 721 – 728; Stylianou Tasos, Muhammad Ijaz Amjad, Masood Sarwar Awan, Muhammad Waqas, Poverty Alleviation and Microfinance for the Economy of Pakistan: A Case Study of Khushhali Bank in Sargodha, Economies 2020, 8(3), 63.
(3) World Bank, On fintech and financial inclusion (worldbank.org), October 2021.
(4) BlueOrchard Academy White Paper – Impact Private Equity – Fostering Financial Inclusion in Emerging Markets, February 2022.
(5) World Bank – https://www.worldbank.org/en/topic/financialinclusion/overview#1.
(6) World Bank, June 2021.
(7) 65 companies in Asia, 21 in Africa & Middle East, 33 in Cacusus & Europe and 68 in Central & South America.
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