NBFI INSIGHT SERIES | 6 SEPTEMBER 2022

Non-bank finance
is key in ESG

Monique Pennells Author

Monique Pennells

Head of Non-Bank Financial Institutions, Absa CIB

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While micro-finance and micro-loans have their detractors, they have the potential to be a critical part of the Environmental, Social and Governance (ESG) investment landscape in emerging markets like Africa.

In South Africa, there is a perception that there are only a handful of credit providers, and many people are surprised to hear that there are over 6000 active regulated credit providers. Non-bank lending is a key part of the financial ecosystem and is a sector which requires long term sustainable funding, paired with appropriate regulation, to transform the African economy.

Unfortunately, credit provision by non-bank service providers in South Africa has been contentious in the past, with historic cautioning around an emerging credit bubble. However, counterintuitive to this, we have seen a decreasing trend in household debt to disposable income of households from highs of 79% in 2008 to a current level of 64,5% as of March 2022 (with a short spike in the midst of the COVID-19 hard lockdown), with non performing loans remaining stable across the Micro Finance industry.

Micro-lending on the rest of the African continent tends to be more focused on utilising micro-finance for productive use such as the establishment of small businesses, education and making sustainable choices like access to off-grid solar energy. The African market for debt is still evolving, with emerging convergence with fintech players to provide debt and collect on mobile platforms.

Financial inclusion is of key importance for the African continent and the World Bank points out that financial inclusion is an enabler of 7 of the 17 UN Sustainable Development Goals (SDGs). The African continent has its own unique perspective on this key economic driver as traditional banking in many regions lags, but at the same time mobile adoption has surged.

Major bourses such as the JSE and institutional investors in Africa are on the hunt for innovative projects which offer yield, and the micro-finance and the potential for funding via social bond issuances could present very real opportunities for them – particularly as they begin to embrace sustainable development and ESG reporting metrics. The opportunity lies in that micro finance institutions are providing critical financing resulting in real economic growth, but the Social Development measurements framework still require some maturing to quantify the ESG impact and move this type of funding from an alternative asset class into an ESG sustainable asset class of the future.

A good example of this are the Social bonds issued in the Nordics by Bayport Management Ltd and listed on the Nasdaq Stockholm Sustainable Bond List. Bayport has extensive experience in the micro-finance sector, publishing its first Social Bond Framework in May 2019 and its second updated Social Finance Framework in March 2022. Bayport’s most recent Social Finance Framework is aligned with the Social Bond Principles, ICMA, 2021 and Social Loan Principles, LMA/LSTA/APLMA, 2021 and obtained a strong second party opinion from S&P specifically with respect to the use of loans when providing financial solutions to its broad customer base. Consequently, Bayport has garnered significant understanding of the operating environment across its extensive network of subsidiaries in Africa and Latin America including Botswana, Ghana, Mozambique, Uganda, Zambia, Tanzania, Mexico and Colombia. Bayport’s experience and understanding of these geographies has created funding opportunities by attracting finance from highly reputable International Development Finance Institutions (DFIs) wanting to unlock opportunities for emerging markets in Africa.

As a bank with a significant portfolio in micro-finance across the continent, we see opportunities to continue investing in the sector over the next two years, working closely with our DFI partners. Our goal here is to not only boost liquidity in credit-constrained markets but also provide financial resources to micro-enterprises in need of working capital.

Africa sees credit and micro-finance as an asset to help build wealth and access better quality education and housing. This aligns perfectly with the ESG goals and strategies embraced by Absa and we look forward to partnering with institutions who share this vision.

Monique Pennells Author
Monique Pennells

Head of Non-Bank Financial Institutions, Absa CIB

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