In Latin America, financial inclusion remains a challenge especially in rural areas; according to World Bank data, about 27% of adults in the region lack access to formal financial services, a figure that is even more pronounced in rural areas, where banking institutions have little presence.
While the problem persists, traditional banking has historically focused on large cities, millions of people in rural communities face barriers such as lack of banking infrastructure, high access costs and poor financial education. This limits not only savings and credit, but also opportunities for economic and social development in these communities.
However, some entities are leading efforts to change this panorama. Organizations such as Accion, Pro Mujer and several fintechs are designing innovative models that leverage technology to reach underserved populations. For example, the use of digital platforms and local banking agents has made it possible to offer services such as microcredit and mobile payments in remote locations.
Recently, Accion launched the $152.5 million Accion Digital Transformation Fund (ADT), which seeks to enable financial institutions to better meet the needs of small businesses that are currently excluded from the financial system by providing growth capital and strategic support for digital transformation.
Financial inclusion and opportunities for SMEs
In an interview with Contxto, Adelina Dasso, a Partner at Accion, explains that the common challenges in financial inclusion issues are centered on the increase in poverty in the wake of situations such as the COVID-19 pandemic.
“In the latter region, the main challenges include an increase in poverty following COVID-19 and financial exclusion, especially among micro, small and medium-sized enterprises (MSMEs). In Latin America, we focused on countries such as Peru, Colombia and Mexico, where we identified significant gaps in access to finance for these enterprises,” says Dasso.
As for the lessons learned, the executive explains that they decided to go for the financial inclusion approach because it allows a more strategic approach, compared to traditional banking: “From regions in Asia, mainly in India and Indonesia, we have learned the importance of being strategic investors. This involves having a seat on the board and working with technical teams on issues such as digital transformation.”
The fund’s initial investments include Annapurna Finance and IKF Finance in India, with up to 12 expected in total. Partners in the fund include British International Investment, the UK development finance institution and impact investor; FMO, the Dutch business development bank; IDB Invest; International Finance Corporation ; Mastercard and the Austrian Development Bank.
When asked about what they look for when investing, Dasso says that they focus on medium to large institutions with stable financial sustainability: “Our investment tickets are between $5 million and $15 million, and we always look for minority positions with a seat on the board. In addition, we evaluate scalability and work with companies to strengthen teams and close strategic gaps.”
Focus on rurality
The fund draws on Accion’s experience in supporting banks and financial companies around the world to connect millions of small businesses and individuals to the digital economy, and is managed by Accion Impact Management. The investments will focus on companies serving micro, small and medium-sized enterprises in South and Southeast Asia, Latin America and Africa.
Dasso also explains that they found themselves in rural areas because of the possibility of growth due to the lack of competition. “We focused on rural institutions because clients tend to be more financially excluded and need more support in digital transformation. In rural regions of Colombia and Peru, we found less competition, which facilitates growth,” Dasso says.
Los Andes focuses on providing loans, savings and insurance to clients in rural areas of Peru. It currently serves 85,000 borrowers and more than 227,000 savers, with plans to significantly expand its client base among Peru’s 2.1 million micro, small and medium-sized enterprises.
While with Banco Contactar, the $15 million investment aims to support the microfinance provider to leverage digital technologies to better serve underserved rural customers across the country.
For the coming year, the fund plans to make two to three additional investments. For now, they will focus on managing the existing portfolio and consolidating our investments in digital transformation and financial inclusion gaps.
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