Inclusive Business in Financing: Where Commercial Opportunity and Sustainability Converge
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Inclusive Business in Financing - Asian Development Bank
I Poverty and Inequality in Asia
Poverty is multidimensional, involving numerous factors, such as income, social status, socioeconomic position, demographics, purchasing power, degree of vulnerability, security, opportunity, and physical and mental well-being. The World Bank’s general definition of poverty as profound deprivation in well-being
seeks to capture the amorphous mix of factors that challenge the livelihoods of every poor person. With roughly 2 billion of the world’s 4 billion poorest people living in Asia, it is especially important to understand the nuanced causes and aspects of poverty.¹
A. Trends in Inequality in Asia
World Bank data² indicate that four-fifths of Asians live in countries and areas in which inequality has increased over the last 2 decades. Indeed, of 30 countries and areas that have comparable data, nearly 50% record increased disparities in expenditure or income per head, as calculated by the Gini coefficient. The Asian Development Bank (ADB) attributed advances in technology, globalization, and market-oriented reforms to major causes of inequality, largely because they have changed income distribution due to the premium attached to skills leading to reductions in income for unskilled labor. This is also reflected in evolving rural–urban inequality levels.
Table 1: Consumption and Income Levels of the Top 20% of the Population in Asia, 2009–2014
Source: The World Bank Group. PovcalNet Database. http://iresearch.worldbank.org/PovcalNet/povOnDemand.aspx (accessed 10 August 2017).
Figure 1: Ratio of Top 10% to Bottom 10% of Population, 2009–2014
Lao PDR = Lao People’s Democratic Republic, PRC = People’s Republic of China, UK = United Kingdom, x = times, US = United States.
Source: The World Bank Group. PovcalNet Database. http://iresearch.worldbank.org/PovcalNet/povOnDemand.aspx (accessed 10 August 2017).
B. Measuring and Comparing Poverty Levels
³
According to World Bank data,⁴ more than three-quarters of Asia’s population, some 2.7 billion people, live on less than $8.00 per day. Approximately 1 in 3 (i.e., 1.1 billion people) survive on less than $3.10 per day, and 1 in 10 (i.e., 317 million people) on less than $1.90 per day. While these figures are striking, they tell only part of the story of poverty in Asia, as much variation exists within and among countries and areas. For example, the $1.90 per day rate applies to only 3% of Viet Nam’s population, while fully 94% of India’s population falls below the $8.00 per day measure. Meanwhile, the People’s Republic of China (PRC) has nearly twice as many rural poor as urban poor, despite the majority of the population living in urban areas (Figure 2). As a result of buoyant gross domestic product (GDP) growth in the PRC in recent years, the largest share of Asia’s poor now resides in South Asia, a trend amplified at more extreme levels of poverty, in other words, particularly below the $1.90 per day level (Figure 3).
Figure 2: Population Living on $8.00 per Day or Less, People's Republic of China
(million)
Source: The World Bank. PovCalNet.http://iresearch.worldbank.org/PovcalNet/povOnDemand.aspx (accessed 10 August 2017).
Figure 3: Comparative Poverty Indicators in Selected Regions in Asia
(million)
PRC = People’s Republic of China.
Source: The World Bank. PovCalNet.http://iresearch.worldbank.org/PovcalNet/povOnDemand.aspx (accessed 10 August 2017).
While such figures offer a sense of the poverty landscape in Asia, it is important to note that the daily United States dollar amounts are simple monetary averages of the value of consumption. They do not incorporate the variability and unpredictability of income flows experienced by the poor. Informal workers may have only intermittent employment opportunities, or farmers may see months pass between harvests. Both struggle to plan for the future, owing to an acute lack of certainty and security.
Poverty lines represent a purely monetary conception of poverty, whereas human deprivation is multifaceted. The Multidimensional Poverty Index of the Oxford Poverty and Human Development Initiative incorporates several indicators of deprivation that cover three primary dimensions of poverty: health, education, and living standards.⁵ According to this methodology, about 1.1 billion people in Asia are deprived, or poor, again with a notable majority found in South Asia. The initiative also differentiates those living in extreme poverty from those in poverty, while the vulnerable are identified as a separate category meriting attention. Although many poor people may be born into and remain trapped in poverty, it is important to recognize that poverty is dynamic, and that the near-poor must also be prevented from slipping into or back into deprivation.
Figure 4: Population in Multidimensional Poverty
(million)
PRC = People’s Republic of China.
Source: S. Alkire, A. Conconi, G. Robles, and S. Seth. 2015. Multidimensional Poverty Index, Winter 2014/2015: Brief Methodological Note and Results. Oxford Poverty and Human Development Initiative (OPHI) Briefing 27. Oxford, UK: University of Oxford. http://www.ophi.org.uk/wp-content/uploads/MPI-2015-Brief-Methodological-Note_1-5-15.pdf?0a8fd7.
Figure 5: Multidimensional Poverty in Asia
(%)
PRC = People’s Republic of China.
Source: S. Alkire, A. Conconi, G. Robles, and S. Seth. 2015. Multidimensional Poverty Index, Winter 2014/2015: Brief Methodological Note and Results. Oxford Poverty and Human Development Initiative (OPHI) Briefing 27. Oxford, UK: University of Oxford. http://www.ophi.org.uk/wp-content/uploads/MPI-2015-Brief-Methodological-Note_1-5-15.pdf?0a8fd7
Lao PDR = Lao People’s Democratic Republic, PRC = People’s Republic of China.
Source: S. Alkire, A. Conconi, G. Robles, and S. Seth. 2015. Multidimensional Poverty Index, Winter 2014/2015: Brief Methodological Note and Results. Oxford Poverty and Human Development Initiative (OPHI) Briefing 27. Oxford, UK: University of Oxford. http://www.ophi.org.uk/wp-content/uploads/MPI-2015-Brief-Methodological-Note_1-5-15.pdf?0a8fd7
II Defining the Inclusive Business Opportunity in Asia
A. Understanding Inclusive Business Financing
This section establishes working definitions of inclusive business (IB), IB financing, and financial inclusion. Clarity is vital here for two reasons. First, use of the terms ranges from the academic and precise to the colloquial and wide-ranging. Some have acquired general connotations. For example, many associate financial inclusion or access to finance with banking the unbanked or underbanked. Although this is often an accurate description, the term can denote a broader range of activities. Second, the scope of this report is specific: it is about financing IB, or how financial institutions and funds channel capital to IBs for them to grow. It is written from the vantage point of the capital-deploying institution or entity; thus, there can be no confusion about the activity being undertaken. As such, distinctions must be made among IB, IB financing, and financial inclusion, while recognizing the relevance of their interrelationships.
(i) Inclusive business. An IB is one whose model enables individuals, households, entrepreneurs, and micro, small, and medium-sized enterprises (MSMEs) to gain access to affordable goods and services that are vital to meeting basic needs; building secure, sustainable livelihoods; and engaging more effectively and fully in supply and value chains in enduring and beneficial ways.
(ii) Inclusive business financing. IB financing is the provision of capital by a financial institution, nonbank financial institution (NBFI), or investment vehicle, such as a private equity fund,⁶ to an individual, entrepreneur, or MSME to start or expand a business that addresses one or several aspects of exclusion with a commercial strategy; facilitates inclusion of the recipient of capital in a supply or value chain as a producer, supplier, distributor, and/or employee; and/or enables the poor to increase production or to pursue economic opportunities that increase their incomes and security. IB financing also refers to the process of designing and implementing IB products by financial institutions or IB investment strategies by fund managers. It is often accompanied by advisory services or technical assistance (TA), especially in the case of private equity funds.
(iii) Financial inclusion. This term refers to traditional access to finance; in other words, making available financial services, such as loans, bank accounts, or insurance, to anyone excluded on the basis of geography, gender, religion, literacy, documentation, informality, lack of assets, or any other exclusionary criterion or dynamic. It implies the establishment of a relationship where one previously did not exist between an individual and a microfinance institution (MFI), financial institution, or NBFI (e.g., a savings and credit cooperative or a nongovernment organization [NGO]). This said, the meaning of financial inclusion is richer than a simple before-and-after scenario (i.e., Before engaging with a financial institution, Person A could not borrow, after Person A has a loan). In extending financial services, it suggests that a lender perceives there is a bankable opportunity resulting from a gap in the market or a market failure. This perception drives product design and rollout