This Social Investment Insights paper focuses on how social investment can be used to support the financial inclusion sector.
In its broadest sense, financial exclusion is an individual’s inability, difficulty or reluctance to access appropriate mainstream financial services. Over the past few years, rising exclusion of individuals from mainstream financial services in the UK has become a cause for concern for a number of public, private and philanthropic stakeholders.
While cause and effect is hard to establish with financial exclusion, there are broadly four main drivers of financial exclusion for low income individuals:
1. An individual’s inability or reluctance to exercise their full financial capability
2. Lack of access to adequate banking services
3. Lack of access to affordable credit
4. Lack of access to other suitable financial, savings and insurance products
Low income individuals are considered to be those with household incomes in the lowest 10% bracket of the population, the majority of whom are benefit claimants and are deemed to suffer the most from the effects of financial exclusion. In addition, low income individuals are prone to falling into a vicious cycle that exacerbates the effects of financial exclusion. The earlier that an individual’s financial needs are satisfied, the lower the chance of them falling into, or continuing on, the vicious cycle of financial exclusion.
Given that most financial services are not inherently designed to increase an individuals’ level of income (rather, they are tools that help an individual manage their disposable income) reducing unnecessary costs and increasing financial capability are the two main levers that can be used to mitigate the effects of financial exclusion for low income individuals.
There are several types of organisations who are active in this diverse and complex market including: Credit Unions; Community Development Finance Institutions; debt advice providers; new ventures piloting innovative business models; mainstream finance providers; and government agencies and regulators.
Knowing where to focus investment to ‘solve’ financial exclusion is not obvious and finding financially sustainable ways to tackle this issue is challenging. While there are some social investment opportunities, the financial inclusion sector remains fragmented and is transitioning from a history of subsidies. Beyond the provision of capital, social investors can also support the sector through advocacy, research, and collaboration.
In the short term, Big Society Capital will continue working closely with relevant stakeholders and social investors, including intermediaries funded by Big Society Capital, to:
- Signpost organisations looking for investment to suitable sources of capital
- Commission research, advocate for policy and regulation, and encourage collaboration that will support the case for social investment in the financial inclusion sector
In the medium to long term we expect to see the emergence of, and intend to support, dedicated social investment capital pools which are tailored to the needs of the financial inclusion sector.
In addition, we intend to monitor the development of other innovative business models that are potentially suited to social investment, including micro-entrepreneur lending, peer-to-peer lending platforms, home improvement and equity release lending.