An effective organisation needs a sense of purpose and integrity in order to maintain coherent behaviours, create a sense of culture, and maximise its chances of thriving over time. This truth is particularly applicable to financial services firms. Banks and insurance companies are simultaneously some of the most complex corporate bodies in the economy, and remain central to the livelihoods of everyone.
In emerging markets, financial services firms have an additional consideration – inclusivity. For those of us who travel in developing countries, it is eminently clear that people in those countries do not suffer from a misunderstanding of markets, or an inability to utilise them, when given the opportunity. Rather, in poor countries, markets regularly fail to function properly or do not include vast proportions of the population.
In the right institutional environment, and where markets are able to adapt practices to include a broader swathe of society, the circumstances are in place for the disadvantaged to pull themselves out of poverty through participation in the capitalist economy.
Given a reasonable time frame, reaching out to the next set of consumers at an early stage is likely to prove a good investment for listed corporates. It is one which plays out over many years, rather than just a few months or quarters.
For financial services firms operating in emerging markets, adopting a strategy for inclusion is a long-term business strategy, rather than ‘social responsibility’ or an attempt at charity or for positive public relations.
It is a means for insurance companies and financial firms to achieve several objectives all at once: work towards a long-term goal of expanding the addressable market, address the need to generate profits in the medium-term, and fulfil a part of their social requirement, to serve a broad cross-section of society and not just the relatively small affluent population.
A multi-faceted customer
Poverty is far more multi-faceted than the lack of wealth or income. Indian economist and philosopher Amartya Sen famously described it as freedom or, roughly, ‘deprivation in the capability to live a good life’, with ‘development’ thus pertaining to ‘capability expansion’.
If poverty is not the absence of income but the presence of voicelessness, social exclusion and the inability to participate in society fully, it opens up lots of challenging questions. African-American men in Louisiana have a lower life expectancy than men in Egypt or Bangladesh, a higher chance of being illiterate than men in Cuba or Kerala, less political voice and representation than men in Uruguay or Estonia, and a far higher chance of being incarcerated by the state than in any of these places.
Looking at poverty around the globe as a function of where those living on less than $1.25/day are situated, thus misses a lot. Many very relevant social exclusions are nestled within what, from a top-down perspective, are some of the more advanced developing countries. This marginalisation might relate to educational attainment, political empowerment and, most acutely relevant for us as investors, real participation in the economy. These do not always correspond with economic income.
Development levels explain some of the exclusion that poor people face, but industry structures, socioeconomic divisions and historic patterns of inequality are also very important. Over centuries, Mexican society has marginalised certain groups (e.g. indigenous groups in the south) and the banking industry has always been controlled by and thus has developed to serve the needs of others (i.e. European Mexicans in the capital).
Tailoring business models
Established, large and listed businesses can do a lot to help the process of inclusion, by adapting their business models to serve a lower socioeconomic market. Numerous public companies have managed to effectively combine boosting profits with creating positive social change.
Unilever’s Shaktayama program is one of the better-known examples, in which thousands of female entrepreneurs were hired as door-to-door distributors, enabling both employment as well as greater reach for Unilever’s products in rural areas.
Less well-known but no less impactful adaptations of existing products include the fortification of food staples with vitamins and minerals to combat nutritional deficiency, mobile banking and providing affordable insurance policies.
In each case, a small innovation, usually of process rather than technology, improves access to markets for the previously marginalised. In doing so, the lives of the poor are improved as they gain in terms of Sen’s capabilities. Simultaneously, the company in question is likely to see its cash flows boosted and brand strengthened.
The bottom of the pyramid
One area that we at Stewart Investors have been aware of for a few years is inclusive protection at the bottom of the pyramid, through financial products such as micro-insurance.
Micro-insurance is simply health, protection, life or another insurance policy which has been adapted to meet the needs of people whose cash flow is low and/or less reliable, and who have the greatest need for insurance protection and the ability to smooth income over time.
Its aim is to profitably address the need for people with lower incomes to access financial protection, through adept product design, claims infrastructure, collection processes and disbursement techniques.
One of the least understood aspects of life at the bottom of the pyramid is that incomes are not only very low, but that they are very irregular and unpredictable.
Financial products are a means of moving resources through time. The act of saving capital today is deferring it for use in the future, and the act of borrowing is drawing from future wealth to utilise it in the present. This ability to smooth out cash flow over time greatly reduces the risk arising from the vagaries of life. It enables poor families to make decisions like sending a child to school or upgrading agricultural equipment, which will help them climb out of poverty, without fear of an injury or a poor monsoon endangering their ability to put food on the table.
Those with low incomes are thus simultaneously the population which stand to benefit most from financial products and services, and yet are those who have the lowest levels of access. Financial institutions in developing countries have both a deep responsibility as well as a fantastic opportunity in providing products to fit this need and overcome the exclusion aspects of poverty.
As long-term investors in emerging markets, we continue to work to engage with companies to encourage them to take the long-term view, keep a sense of purpose central to decision-making, and ensure inclusive protection is part of their business model for the next ten years.
Jack Nelson is a portfolio manager at Stewart Investors.