Rethinking finance: enabling sustainable development

Learn why financial inclusion matters and why banks are key drivers of innovation.
August 2021


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Innovation in finance has often been an essential accompaniment of social and economic progress and change. The ability to fluidly connect those in a position to provide capital with those seeking it for some endeavour has been a key element of a thriving economy for centuries.

Historians often date the invention of modern banks to early Renaissance Italy, where affluent families in northern cities like Florence, Venice and Genoa established financial institutions that sponsored vast public building projects, lent capital to entrepreneurs, financed the expansion of trade routes across the globe, or provided capital to explorers looking to kit out fleets of ships and pay hungry crews. The oldest continuously operating bank in the world is the Banca Monte dei Paschi di Siena, harking back to 1472, founded in Siena. Later, banking helped place Holland at the centre of the global economy, before London became the global financial hub of the world, its creativity in the field of banking being a key facilitator of the Industrial Revolution and Britain’s dominance of global trade and shipping.

Access to finance – more to do

And in our own time, banks still have a crucial role to play in bringing basic financial services and literacy to communities traditionally sitting outside its remit, unlocking vast quantities of latent human potential in the process. The World Bank estimated that in 2017, 1.7 billion people were unbanked. That number had shrunk from 2 billion in 2014, and from 2.5bn people in 2011, meaning that more than the population of Europe and the United States combined have moved onto the financial grid in well under a decade, a staggering testament to financial progress in the modern era.

But 1.7 billion is a still an enormous number. Who are these people? Of the 1.7bn who remain outside the financial grid, almost all reside in emerging markets, with half of the world’s unbanked population living in one of seven countries: China, India, Pakistan, Indonesia, Nigeria, Mexico and Bangladesh.

Adults without an account, 2017

As might be expected, the unbanked within emerging markets are not evenly spread across society, but are instead concentrated in certain demographics. Women are disproportionally unbanked, accounting for 60% of the unbanked in China and India, and 65% of the unbanked in Bangladesh. Unbanked people are twice as likely to sit within the bottom 20% percent of households by wealth bracket within their own countries than the top 20% of households. And globally, 62% of the unbanked population have a primary school education or less, compared to half of adults overall in developing countries.

Adults without an account by within-economy income quintile, 2017

Stepping stones to prosperity

Being without a bank account or access to rudimentary financial tools brings with it a list of social and economic challenges. People without bank accounts will find it harder to save and plan for the future, harder to pay for and invest in education and healthcare. Cash earned will often be stored in unsafe, precarious ways, stuffed under a mattress, subject to easy loss or theft. People without a bank account will find it much harder to secure loans to start small businesses which might be stepping stones towards greater prosperity, not just for them, but for entire communities, who might benefit from the products, services and employment that flower from such entrepreneurial seeds. And people who don’t have access to proper banking often fall into predatory clutches of loan sharks when they do need money, finding themselves in a spiral of extortionary interest rates and possibly even violence and intimidation.

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People without bank accounts will find it harder to save and plan for the future, harder to pay for and invest in education and healthcare.

Driving financial inclusion and education in India

One of the major remaining hotspots of financial exclusion is India, second only to China in terms of absolute number of people (190mn) without a bank account. HDFC Bank is India’s largest private bank, and it has been a key player in combatting financial exclusion within the country. One of HDFC’s initiatives is the promotion of financial literacy, where its teams set out in vans to underbanked areas and provide free lessons in the rudiments of finance. HDFC has reached more than 10mn people through these mobile educational tours and conducted almost 1.7mn financial literacy camps. The bank has focused its efforts in poorer areas, and targeted women and disenfranchised communities.

HDFC has facilitated loans to small scale entrepreneurs, helping families who sometimes didn’t previously have enough food for regular daily meals to capitalise on their skills and ambition to set up businesses and become more prosperous. They have invested in individuals who have bought their first spinning machines to weave and export sarees, or loaned money to villagers who have set up small shops selling sweets, or given financial literacy programmes to tailors who have opened their first clothes shop. Some of these people now have multiple employees, enriching their communities, or have moved out of huts and bought their first homes. The impact of this work will ripple across communities, enriching and enabling development.

HDFC Bank has also been a partner of the government in efforts to strengthen India’s financial backbone, helping set up access points for financial, educational and welfare schemes in areas where they are scarce, and also supporting the digitalisation of the Indian financial system through launching myApps in 2019, offering easy, streamlined digital payment services. The progress made towards extending finance across the developing world has been a remarkable one, and the economic harvest in the coming decades will be rich. HDFC Bank has been an important participant in this journey, and we believe it will continue to be one.

Financing innovation in healthcare & environmental solutions

But if providing people in India with their first ever bank accounts or their first micro-loans is one end of the financial spectrum, then providing financial services to cutting edge tech and healthcare start-ups in Silicon Valley may sit at the other. The latter is the key expertise of Silicon Valley Bank (SVB). SVB banks 50% of all US VC-backed tech and life science companies, and 63% of all U.S. VC-backed tech and life science companies that completed at IPO in H1 2021. SVB provides a wide range of products to start-ups, from traditional banking products to capital markets products and personal banking offerings for founders. It wouldn’t be an exaggeration to describe SVB as the key bank for the innovation economy in the United States, helping provide capital and other financial services to businesses in tech, life sciences and other innovation intensive sectors that are themselves pushing innovation and finding sustainable solutions to critical challenges.

SVB has facilitated the survival and growth of companies that are now tackling some of the most important challenges in the world. Within the healthcare space, SVB’s has led large deals into the oncology space, and into companies addressing neurological issues. It has supported businesses making contributions towards surgical innovation, cardiovascular treatments, orthopaedics, medical devices, and many other critical areas.

In the environmental space, it has a client that created the world’s first renewable drinking water system, using the power of the sun to extract an endless supply of reliable drinking water straight from the air. Another of its clients in the food security space is building advanced robotics and data-enabled greenhouses that use natural sunlight to reduce water usage by 90% in the growing of herbs, fruits and vegetables when compared to traditional farming. These are just a handful of examples amongst hundreds of companies that SVB has supported. And many of these businesses are supported at the early, developmental stage where over 90% start-ups don’t survive, meaning SVB is incurring real risk to help support the survival of businesses that could make real contributions to the world.

Final thoughts

In the future, companies in the financial sector will remain key engines for enabling development in the world, whether that is through promoting the financial inclusion that permits individuals to realise their own personal ambitions, or through extending financial services to cutting edge start-ups seeking to change the world. As investors, we want to be part of this nexus of financial improvement, putting our capital into businesses that are promoting sustainable finance.

Risk warnings

The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

Meet Harry Waight

Harry Waight

Meet Harry Waight

Harry joined BMO GAM in 2013, and works as a portfolio manager on the Global Equities team. He focuses on Japan, as well as global stocks contributing to Technological Innovation and Health and Well-Being. Outside of work he is interested in understanding history, as well as mastering Jiu-Jitsu – both of which are proving equally challenging.

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