Note: This article is part of Morningstar Canada's Emerging Markets Week Special Report
The expansion of mobile networks, evolution of digital payments, and improvements in access to credit information are enabling exponential growth in financial activity in emerging markets.
Technology has changed a lot in the world of microfinance, says Gerardo Zamorano, director and member of the emerging markets investment committee at Brandes Investment Partners. Brandes currently has Canada’s only gold-rated mutual fund, Brandes Emerging Market Value Fund.
A type of 'leapfrog effect', microfinance in the information age is ‘banking’ the ‘unbanked’ at great speed through digital systems and solutions, skipping the time and capital required for a bricks-and-mortar approach.
This efficient evolution is formalizing the financial marketplace, says Zamorano, encouraging the entrance of financiers and their supporting system providers. “As the market becomes more formal, the lenders get access to more information.” Bank representatives need only look at their smartphone for the potential price of a farmer’s crop, land and other assets – and their credit.
The capillaries of coverage
Zamorano calls these digital inroads in emerging markets “capillaries of coverage”, a focus of The World Bank and a global, diverse team of 34 partners set on enabling financial access – and investment opportunities – among two billion new account holders by 2020.
Zamorano and his team saw those digital capillaries expand in an early investment in microfinance in Indonesia. “The focus at first was on providing financial access to larger entities including hotels and restaurants. It was a much needed economic development initiative. It’s grown into a large and complex network.”
It’s now enabling peer-to-peer transactions and lending services that are growing exponentially faster than in developed markets.
Whether investors are interested in the networks enabling the flow of information, smartphone apps that provide an interface, or the financiers themselves providing the funds themselves, some degree of risk remains due to the emerging nature of the economies served. People are poorer.
You’ll always face the risk of bad debt, reminds Zamorano, “these loans often have no collateral, no guarantor.” There are improvements around this risk with regards to better coverage and sophistication of credit reporting agencies. It’s also not an inexpensive initiative to set up microfinance networks – which is why many of the players are specialist banks. “It’s very people-intensive and requires very strong internal controls.”
With the progress – capital investments - made so far to improve financial access in emerging markets, digital efficiencies continuing to develop and emerging markets continuing to emerge, it might be the right time to invest in two billion new bank accounts.
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