Market developments

The global economy strengthened in 2017. The IMF’s October 2017 World Economic Outlook upgraded its global growth estimate for 2017 to 3.6%, well above the 2016 growth rate of 3.2%, which was the lowest since the global financial crisis.

The upturn was quite broad-based, with better-than-expected numbers for both advanced economies and emerging markets. As expected, the Fed raised interest rates by 0.25% in March, June and December. Still, financing costs remained low in 2017, and loose monetary conditions continued to make access to financing relatively easy, alleviating liquidity concerns for countries with high debt.

In Latin America and sub-Saharan Africa some signs of improved economic activity were visible, although several commodity exporters, especially those of agricultural commodities, still face difficult conditions. Growth in Asia benefited from stronger-than-expected growth in China. The Commonwealth of Independent States region has started to recover from the crisis, but is lagging potential as banks in a number of countries face issues due to a large percentage of non-performing loans in their portfolios.

Currencies: strong year for the euro

2017 was a strong year for the euro. The US dollar weakened against the euro by no less than 12.4% over the full year3. With the exception of the CFA franc - the common currency of a number of Central and West African countries, which is pegged to the euro - all of the emerging market currencies in the fund’s portfolio also weakened against the euro. The extent of the appreciation of the euro is quite unusual: the last time the currency appreciated this much was more than ten years ago, and it has been at least five years since all the currencies in the fund’s portfolio weakened in any one year.

From innovation to impact

Last year saw a proliferation of initiatives coming from the financial sector, not only to address financial inclusion, but also to achieve the United Nations’ Sustainable Development Goals (SDGs)4. There is a growing awareness and recognition that access to financial products and services will allow people to not only build businesses, but also meet basic needs, such as sending children to school, receiving medical treatment, purchasing a first home, and building a financial buffer that allows them to deal with sudden unexpected needs. In this spirit, many initiatives result from the concerted efforts of private investors, donors, governments, and NGOs to structure innovative financial products and services. For example, the importance of education as a long-term foundation for an individual’s economic security has played a role in of a growing number of education-related financial products, such as loans for tuition fees or savings accounts for university education.

2017 was also the year when fintech moved to centre stage. Not only are more fintech initiatives flourishing, the number of investment activities is also increasing, including those by impact investors. The ubiquity of the internet, combined with the power of technology, has made it possible for many financial institutions to leapfrog. The manner in which financial products and services are provided has evolved, with a trend towards operating branchless and borderless. Fintech companies are digitising their value chain. Some fintech companies, for example, also use psychometric testing that relies on customers’ personalities and behaviour to identify creditworthy clients and extend loans to them. Further maturing and development of blockchain technology during 2017 also resulted in the birth of many initiatives that use the blockchain concept to solve society’s issues: blockchain technology would allow transactions to be executed more efficiently, through increased transaction speed and reduced infrastructure cost, especially for cross-border transactions, and ultimately, lower the transaction fees payable by the end customers5. Instead of competition between fintech and traditional financial institutions, a partnership between both could be the best way to leverage the banks’ scale and the innovative capabilities of fintech.

Partnerships between different types of parties, such as financial institutions, non-profit organisations, and investors, is increasingly necessary to produce, promote and incubate innovation. Also, the role of governments is key here, as their policies can either promote or stifle the progress of financial inclusion. The G20 Global Partnership for Financial Inclusion (GPFI)6, created by the G20 leaders to advance their commitment to financial inclusion, has been working with countries to help them achieve their financial inclusion targets. China7, Indonesia8, Uganda9, Zambia10, and Tanzania11 are some of the countries that have recently seen positive developments in the financial inclusion space in 2017 thanks to favourable government regulation.

While the traditional inclusive finance market, which relies on the brick-and-mortar concept and close human interaction, will continue to exist, it is clear that the needs of some segments of the financially underserved can be addressed using innovative approaches, either through new products or through more efficient ways of servicing. There is increased interest in providing financing to micro, small and medium-sized enterprises (MSME) from the mainstream financial sector. This leaves room for impact investors to focus on the needs of other underserved client segments, and thus drive pioneering innovation that can deepen the impact of inclusive finance.

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