Financial Inclusion Investment Accounting: Reporting on Investments in
Financial Services Aimed at Serving Underserved Communities and
Individuals
Introduction
Financial exclusion remains a significant issue both globally as well as in many developed
nations, with millions still lacking access to basic financial services. As of 2017, an estimated
1.7 billion working age adults worldwide remained without an account at a formal financial
institution (Demirgüç-Kunt et al., 2018). This lack of access translates into significant
financial hardship and barriers to economic opportunity. However, there has also been
growing investment and innovation aimed at expanding access to financial services among
underserved communities and individuals. This has resulted in a need for improved
accounting and reporting standards for organizations making investments specifically aimed
at promoting financial inclusion.
This paper examines the issue of financial inclusion investment accounting - how
organizations can appropriately account for and report on investments specifically targeted at
expanding access to basic financial services among underserved populations. It first provides
context on the problem of financial exclusion globally as well as key rationales for why
expanding financial inclusion is both an economic and social imperative. It then reviews the
types of organizations, business models and initiatives that have emerged focused on
delivering financial services to underserved markets. The paper then analyzes existing
financial accounting standards and frameworks, identifying limitations for financial inclusion
investment accounting. It proposes a framework for financial inclusion investment
accounting focused around dual reporting of both social and financial returns. This would
allow organizations to transparently demonstrate both the developmental impact as well as
financial viability of their inclusive finance initiatives and investments. The paper concludes
by discussing implementation considerations and challenges for adopting financial inclusion
investment accounting standards.
Understanding the Problem of Financial Exclusion
Financial exclusion continues to negatively impact billions globally through lack of access to
basic transaction accounts, savings, credit, and insurance that could help smooth consumption
and facilitate investment in education, health and entrepreneurial activity (Demirgüç-Kunt et
al., 2018; Sarma & Pais, 2011). A reliable transaction account is critical for managing income
flows and making payments. Savings products help build financial resilience to smooth
consumption and absorb shocks, while credit enables productive investments that can lift
individuals, households and small businesses out of poverty. Insurance protects against risks
that could plunge individuals into deeper hardship.
Yet millions remain without access due to various supply and demand side barriers. On the
supply side, traditional financial institutions often find it unprofitable to serve lower income
individuals in remote areas due to the high fixed costs of establishing branches relative to
potential revenues (Beck et al., 2007; Sarma, 2008). Heavy documentation and collateral
requirements also exclude many informal businesses and low-income proprietors. On the
demand side, financial illiteracy, cultural norms, lack of trust in formal institutions as well as
costs including minimum balance requirements create barriers (Aportela, 1999; Honohan,
2008; Sarma, 2008).
The consequences of financial exclusion are significant. Lack of safe transaction and savings
accounts means individuals are forced to store savings in less secure forms while making
them vulnerable to theft. Those dependent on informal lenders face exorbitant interest rates
and terms that can trap them in long-term debt. Absence of insurance leaves households
vulnerable to being plunged into poverty due to health shocks or natural disasters. Lack of
credit constrains entrepreneurship and investment in job creation (Honohan, 2008; Sarma &
Pais, 2011). This disproportionately impacts women who face greater difficulties in accessing
financial services due to socio-cultural norms and legal barriers in some contexts (World
Bank, 2014). Ultimately, financial exclusion undermines broader development goals through
limiting household economic security, resilience and opportunity.
Rationale for Expanding Financial Inclusion
There are strong rationales for why greater investment and policy support is needed to expand
access to basic financial services among underserved populations:
- Poverty reduction: Access to basic savings, credit, payments and insurance products can
help smooth consumption, facilitate investment in livelihoods and protect against risks -
reducing vulnerability to poverty (Beck & De La Torre, 2006; Demirgüç-Kunt et al., 2018).
- Economic growth: Greater financial inclusion facilitates efficient allocation of capital,
enabling more productive small and micro-enterprise investments that fuel job creation and
broader macroeconomic growth (Beck et al., 2007; Honohan, 2008).
- Women's empowerment: Expanding women's access to financial services can boost their
control over assets and autonomy in productive decision-making, with flow on impacts for
household welfare (World Bank, 2014).
- Social resilience: Access to savings, credit, payments and insurance builds households'
ability to better withstand economic and environmental shocks without having to resort to
detrimental coping strategies like child labor or selling productive assets (Sarma & Pais,
2011).
- Government service delivery: Digital financial services can reduce costs and increase
efficiency of delivering social transfers, wages, pensions and subsidies to citizens (AFI, 2013;
IFMR, 2018).
- Financial system development: Financial inclusion fosters a more stable, competitive and
innovative financial system overall as greater numbers of individuals participate (Beck et al.,
2007; Seibel, 2003).
Thus from both an economic and social welfare perspective, increasing access to appropriate
financial products and services for underserved populations has become a key development
priority globally (Demirgüç-Kunt et al., 2018; Sarma & Pais, 2011; World Bank, 2014). This
has spurred growing investment targeting the delivery of inclusive finance.
Approaches and Models for Delivering Inclusive Finance
A range of specialized organizations and business models have emerged focused on
delivering appropriate, affordable financial services to low-income and financially excluded
individuals:
Microfinance Institutions (MFIs) – Many MFIs initially focused on microcredit but now offer
diverse products including savings, insurance, payments. Models include Grameen Bank,
BRAC. Some operate as non-profits while others evolved into regulated deposit-taking
microfinance banks.
Digital Financial Services (DFS) – Mobile money platforms like M-Pesa in Kenya have
transformed payments while branchless/agent banking models expand access to deposits,
credit, insurance via digital channels in partnership with telcos and retailers.
FinTechs – Startups are innovating new digital solutions for lending (Lenddo, Kabbage),
digital savings (M-Shwari), insurance (Bima, Pikwoto), payments (Paytm) tailored for
underserved populations using alternative data and technology.
Social/Impact Investors – Funds, impact investors and DFIs provide capital and support to
help scale inclusive finance providers through equity, debt or risk participation. Examples
include Acumen, LGT VP, Catalyst Fund.
National/Regional Networks – Entities like Microfinance Africa, ASEAN Finance Network
support sector development, training, research, advocacy and promotion of innovative, client-
focused models.
Policy Level Support – National financial inclusion strategies, regulations and frameworks
developed with multilateral support aim to develop a conducive environment enabling pro-
poor finance. Examples include national financial inclusion commissions.
Together these organizations, business models and enabling policies are helping expand
access, with the global unbanked population reducing from around 2 billion to 1.7 billion
between 2011-2017 (Demirgüç-Kunt et al., 2018). However, providing transparent
accounting on both social impact and financial sustainability remains a challenge.
Limitations of Existing Accounting Frameworks
Mainstream financial accounting frameworks primarily focus on reporting the financial
position and performance of for-profit enterprises (IASB, 2018). However, inclusive finance
providers, social investors and development organizations aim for both social impact and
sustainable commercial operations. Existing standards do not fully meet their information
needs. Key limitations include:
- Social Impact Not Quantified – Financial reports do not systematically capture quantitative
and qualitative data on beneficiaries reached, products used, impact outcomes achieved
relating to objectives like poverty reduction, resilience or empowerment.
- Multiple Bottom Lines Not Distinct – Providers seek a double or triple bottom line
incorporating social, environmental and financial returns. Yet frameworks aggregate all items
into single monetary amounts lacking transparency on distinct returns.
- Development Finance Unique Needs – Social investors require contextualized
understanding of how capital is used, risks faced and development additionality achieved in
underserved markets addressed by inclusive finance providers. Standard financial statements
fall short.
- Aggregated Figures Lack Context – Figures like outreach, arrear rates are more meaningful
when disaggregated by product, demographic or geographic segment to understand what is
and isn't working for whom.
- Sustainability and Scale Issues – Standard measures like return on assets or equity do not
sufficiently analyze viability issues pertinent to organizations with explicit developmental
missions including subsidy dependence, cost structures at scale.
A framework tailored to the information needs of organizations delivering inclusive finance
is needed to transparently report and evaluate both developmental impacts achieved as well
as commercial sustainability. This is necessary for accountability to beneficiaries,
performance management, and informed decision making for funders and investors.
A Financial Inclusion Investment Accounting Framework
Based on the shortcomings of existing frameworks, this paper proposes a financial inclusion
investment accounting model focusing on dual financial and social return reporting. Key
elements include:
Social Performance Reporting
- Standardized indicators capturing outreach (customers, savers, borrowers), quality of use
(average balances, utilization rates), impact outcomes (income, assets, resilience).
- Disaggregation by relevant segments (gender, poverty level, region).
- Qualitative reporting on developmental effectiveness, challenges.
Financial Performance Reporting
- Consolidated income statement, balance sheet, cash flow statement.
- Ratio analysis (operational self-sufficiency, portfolio at risk).
- Development finance metrics (subsidy reliance, cost-income).
- Reporting of reserves, impairments, investment sources.
Reconciling Social and Financial Performance
- Analysis of contribution margins by product to understand viability of developmental
offerings.
- Sensitivity analysis evaluating viability risks at scale from mission drift or increased
targeting of poorer segments.
- Subsidy attribution assessing how donor funds specifically contributed to outreach/impact.
This framework builds on good practices from existing standards and reporting initiatives like
the Smart Campaign Client Protection, Universal Standards for Social Performance
Management, Global Impact Investing Network metrics while focusing financial inclusion
investment accounting needs. Key benefits include:
- Transparently demonstrates developmental additionality achieved by investment capital.
- Enables viability assessment of inclusive business models targeting underserved markets.
- Facilitates performance evaluation, management, organizational learning and
accountability.
- Provides informed decision making for capital allocation by funders and investors.
- Potential benchmarking of inclusive finance providers on mission achievement and
commercial viability.
Some challenges remain around standardization, controls and verification given diversity of
inclusive finance providers. But improved transparency in financial inclusion impact
investing can help scale flows to where they are needed most.
Implementing Financial Inclusion Investment Accounting
Adopting the proposed financial inclusion investment accounting framework requires:
Alignment with Regulators - National financial regulators may need to update reporting
requirements or provide guidelines for inclusive finance providers to dual report on
standardized social and financial metrics.
Capacity Building - Technical assistance is needed to build capabilities in data collection,
analysis, verification and integrated reporting especially for community-based organizations.
Technology Solutions - Many providers lack IT systems to track, aggregate and report
standardized social performance data at scale across operations necessitating tech upgrades or
partnerships.
Common Definitions - Standardizing definitions, methodologies and periodicity across all
indicators reported on is needed to facilitate aggregation, benchmarking and transparency.
Independent Assurance - Reliable data requires strengthening internal controls and engaging
qualified external auditors/verifiers to ensure accuracy, validity especially for impact metrics
reported externally.
Gradual Implementation - A phased approach beginning with core social outreach and
financial metrics may reduce initial compliance burden while progressively integrating
additional recommended indicators each period.
Promoting Transparency - Funders could require use of framework in Requests for Proposals
and disclose results publicly to drive transparency and organizational learning across the
sector over time.
Collective Action - Standard setting bodies, networks like AFI, networks like MIX together
with inclusive finance providers and social investors can help align on guidelines, build buy-
in and address implementation challenges through collaboration.
With appropriate capacity building support and enabling regulatory environments,
implementing financial inclusion investment accounting using a consistent global framework
can help scale flows of capital to where it is needed most to expand access to underserved
populations worldwide. Improved transparency also holds inclusive finance providers and
funders more accountable for achieving both social impact and commercial viability.
Conclusion
Financial exclusion remains a pressing global issue with billions still lacking access to basic
financial services critical for managing livelihoods, smoothing consumption and spurring
broader development. There has however been growing investment and innovation focused
on delivering inclusive finance aimed at low-income and other financially excluded groups
through diverse providers and business models. Evaluating performance and allocating
capital effectively requires a standardized framework to transparently report on both
developmental impact achieved as well as commercial viability of these financial inclusion
investments and initiatives.
By comprehensively measuring and disclosing quantitative social outreach, product usage
and qualitative impact outcomes achieved together with conventional financial reporting, the
proposed financial inclusion investment accounting framework aims to meet these needs.
Doing so in a globally consistent manner can promote transparency, informed capital
allocation decision making, benchmarking and overall scaling of successful pro-poor finance
models. With appropriate implementation support and regulatory buy-in, adopting this
inclusive finance-specific framework could help expand access further for billions still left
behind by mainstream financial systems worldwide, contributing significantly to broader
development goals.
Financial exclusion remains a significant issue both globally as well as in many developed
nations, with millions still lacking access to basic financial services. As of 2017, an estimated
1.7 billion working age adults worldwide remained without an account at a formal financial
institution (Demirgüç-Kunt et al., 2018). This lack of access translates into significant
financial hardship and barriers to economic opportunity. However, there has also been
growing investment and innovation aimed at expanding access to financial services among
underserved communities and individuals. This has resulted in a need for improved
accounting and reporting standards for organizations making investments specifically aimed
at promoting financial inclusion.
This paper examines the issue of financial inclusion investment accounting - how
organizations can appropriately account for and report on investments specifically targeted at
expanding access to basic financial services among underserved populations. It first provides
context on the problem of financial exclusion globally as well as key rationales for why
expanding financial inclusion is both an economic and social imperative. It then reviews the
types of organizations, business models and initiatives that have emerged focused on
delivering financial services to underserved markets. The paper then analyzes existing
financial accounting standards and frameworks, identifying limitations for financial inclusion
investment accounting. It proposes a framework for financial inclusion investment
accounting focused around dual reporting of both social and financial returns. This would
allow organizations to transparently demonstrate both the developmental impact as well as
financial viability of their inclusive finance initiatives and investments. The paper concludes
by discussing implementation considerations and challenges for adopting financial inclusion
investment accounting standards.
Understanding the Problem of Financial Exclusion
Financial exclusion continues to negatively impact billions globally through lack of access to
basic transaction accounts, savings, credit, and insurance that could help smooth consumption
and facilitate investment in education, health and entrepreneurial activity (Demirgüç-Kunt et
al., 2018; Sarma & Pais, 2011). A reliable transaction account is critical for managing income
flows and making payments. Savings products help build financial resilience to smooth
consumption and absorb shocks, while credit enables productive investments that can lift
individuals, households and small businesses out of poverty. Insurance protects against risks
that could plunge individuals into deeper hardship.
Yet millions remain without access due to various supply and demand side barriers. On the
supply side, traditional financial institutions often find it unprofitable to serve lower income
individuals in remote areas due to the high fixed costs of establishing branches relative to
potential revenues (Beck et al., 2007; Sarma, 2008). Heavy documentation and collateral
requirements also exclude many informal businesses and low-income proprietors. On the
demand side, financial illiteracy, cultural norms, lack of trust in formal institutions as well as
costs including minimum balance requirements create barriers (Aportela, 1999; Honohan,
2008; Sarma, 2008).
The consequences of financial exclusion are significant. Lack of safe transaction and savings
accounts means individuals are forced to store savings in less secure forms while making
them vulnerable to theft. Those dependent on informal lenders face exorbitant interest rates
and terms that can trap them in long-term debt. Absence of insurance leaves households
vulnerable to being plunged into poverty due to health shocks or natural disasters. Lack of
credit constrains entrepreneurship and investment in job creation (Honohan, 2008; Sarma &
Pais, 2011). This disproportionately impacts women who face greater difficulties in accessing
financial services due to socio-cultural norms and legal barriers in some contexts (World
Bank, 2014). Ultimately, financial exclusion undermines broader development goals through
limiting household economic security, resilience and opportunity.
Rationale for Expanding Financial Inclusion
There are strong rationales for why greater investment and policy support is needed to expand
access to basic financial services among underserved populations:
- Poverty reduction: Access to basic savings, credit, payments and insurance products can
help smooth consumption, facilitate investment in livelihoods and protect against risks -
reducing vulnerability to poverty (Beck & De La Torre, 2006; Demirgüç-Kunt et al., 2018).
- Economic growth: Greater financial inclusion facilitates efficient allocation of capital,
enabling more productive small and micro-enterprise investments that fuel job creation and
broader macroeconomic growth (Beck et al., 2007; Honohan, 2008).
- Women's empowerment: Expanding women's access to financial services can boost their
control over assets and autonomy in productive decision-making, with flow on impacts for
household welfare (World Bank, 2014).
- Social resilience: Access to savings, credit, payments and insurance builds households'
ability to better withstand economic and environmental shocks without having to resort to
detrimental coping strategies like child labor or selling productive assets (Sarma & Pais,
2011).
- Government service delivery: Digital financial services can reduce costs and increase
efficiency of delivering social transfers, wages, pensions and subsidies to citizens (AFI, 2013;
IFMR, 2018).
- Financial system development: Financial inclusion fosters a more stable, competitive and
innovative financial system overall as greater numbers of individuals participate (Beck et al.,
2007; Seibel, 2003).
Thus from both an economic and social welfare perspective, increasing access to appropriate
financial products and services for underserved populations has become a key development
priority globally (Demirgüç-Kunt et al., 2018; Sarma & Pais, 2011; World Bank, 2014). This
has spurred growing investment targeting the delivery of inclusive finance.
Approaches and Models for Delivering Inclusive Finance
A range of specialized organizations and business models have emerged focused on
delivering appropriate, affordable financial services to low-income and financially excluded
individuals:
Microfinance Institutions (MFIs) – Many MFIs initially focused on microcredit but now offer
diverse products including savings, insurance, payments. Models include Grameen Bank,
BRAC. Some operate as non-profits while others evolved into regulated deposit-taking
microfinance banks.
Digital Financial Services (DFS) – Mobile money platforms like M-Pesa in Kenya have
transformed payments while branchless/agent banking models expand access to deposits,
credit, insurance via digital channels in partnership with telcos and retailers.
FinTechs – Startups are innovating new digital solutions for lending (Lenddo, Kabbage),
digital savings (M-Shwari), insurance (Bima, Pikwoto), payments (Paytm) tailored for
underserved populations using alternative data and technology.
Social/Impact Investors – Funds, impact investors and DFIs provide capital and support to
help scale inclusive finance providers through equity, debt or risk participation. Examples
include Acumen, LGT VP, Catalyst Fund.
National/Regional Networks – Entities like Microfinance Africa, ASEAN Finance Network
support sector development, training, research, advocacy and promotion of innovative, client-
focused models.
Policy Level Support – National financial inclusion strategies, regulations and frameworks
developed with multilateral support aim to develop a conducive environment enabling pro-
poor finance. Examples include national financial inclusion commissions.
Together these organizations, business models and enabling policies are helping expand
access, with the global unbanked population reducing from around 2 billion to 1.7 billion
between 2011-2017 (Demirgüç-Kunt et al., 2018). However, providing transparent
accounting on both social impact and financial sustainability remains a challenge.
Limitations of Existing Accounting Frameworks
Mainstream financial accounting frameworks primarily focus on reporting the financial
position and performance of for-profit enterprises (IASB, 2018). However, inclusive finance
providers, social investors and development organizations aim for both social impact and
sustainable commercial operations. Existing standards do not fully meet their information
needs. Key limitations include:
- Social Impact Not Quantified – Financial reports do not systematically capture quantitative
and qualitative data on beneficiaries reached, products used, impact outcomes achieved
relating to objectives like poverty reduction, resilience or empowerment.
- Multiple Bottom Lines Not Distinct – Providers seek a double or triple bottom line
incorporating social, environmental and financial returns. Yet frameworks aggregate all items
into single monetary amounts lacking transparency on distinct returns.
- Development Finance Unique Needs – Social investors require contextualized
understanding of how capital is used, risks faced and development additionality achieved in
underserved markets addressed by inclusive finance providers. Standard financial statements
fall short.
- Aggregated Figures Lack Context – Figures like outreach, arrear rates are more meaningful
when disaggregated by product, demographic or geographic segment to understand what is
and isn't working for whom.
- Sustainability and Scale Issues – Standard measures like return on assets or equity do not
sufficiently analyze viability issues pertinent to organizations with explicit developmental
missions including subsidy dependence, cost structures at scale.
A framework tailored to the information needs of organizations delivering inclusive finance
is needed to transparently report and evaluate both developmental impacts achieved as well
as commercial sustainability. This is necessary for accountability to beneficiaries,
performance management, and informed decision making for funders and investors.
A Financial Inclusion Investment Accounting Framework
Based on the shortcomings of existing frameworks, this paper proposes a financial inclusion
investment accounting model focusing on dual financial and social return reporting. Key
elements include:
Social Performance Reporting
- Standardized indicators capturing outreach (customers, savers, borrowers), quality of use
(average balances, utilization rates), impact outcomes (income, assets, resilience).
- Disaggregation by relevant segments (gender, poverty level, region).
- Qualitative reporting on developmental effectiveness, challenges.
Financial Performance Reporting
- Consolidated income statement, balance sheet, cash flow statement.
- Ratio analysis (operational self-sufficiency, portfolio at risk).
- Development finance metrics (subsidy reliance, cost-income).
- Reporting of reserves, impairments, investment sources.
Reconciling Social and Financial Performance
- Analysis of contribution margins by product to understand viability of developmental
offerings.
- Sensitivity analysis evaluating viability risks at scale from mission drift or increased
targeting of poorer segments.
- Subsidy attribution assessing how donor funds specifically contributed to outreach/impact.
This framework builds on good practices from existing standards and reporting initiatives like
the Smart Campaign Client Protection, Universal Standards for Social Performance
Management, Global Impact Investing Network metrics while focusing financial inclusion
investment accounting needs. Key benefits include:
- Transparently demonstrates developmental additionality achieved by investment capital.
- Enables viability assessment of inclusive business models targeting underserved markets.
- Facilitates performance evaluation, management, organizational learning and
accountability.
- Provides informed decision making for capital allocation by funders and investors.
- Potential benchmarking of inclusive finance providers on mission achievement and
commercial viability.
Some challenges remain around standardization, controls and verification given diversity of
inclusive finance providers. But improved transparency in financial inclusion impact
investing can help scale flows to where they are needed most.
Implementing Financial Inclusion Investment Accounting
Adopting the proposed financial inclusion investment accounting framework requires:
Alignment with Regulators - National financial regulators may need to update reporting
requirements or provide guidelines for inclusive finance providers to dual report on
standardized social and financial metrics.
Capacity Building - Technical assistance is needed to build capabilities in data collection,
analysis, verification and integrated reporting especially for community-based organizations.
Technology Solutions - Many providers lack IT systems to track, aggregate and report
standardized social performance data at scale across operations necessitating tech upgrades or
partnerships.
Common Definitions - Standardizing definitions, methodologies and periodicity across all
indicators reported on is needed to facilitate aggregation, benchmarking and transparency.
Independent Assurance - Reliable data requires strengthening internal controls and engaging
qualified external auditors/verifiers to ensure accuracy, validity especially for impact metrics
reported externally.
Gradual Implementation - A phased approach beginning with core social outreach and
financial metrics may reduce initial compliance burden while progressively integrating
additional recommended indicators each period.
Promoting Transparency - Funders could require use of framework in Requests for Proposals
and disclose results publicly to drive transparency and organizational learning across the
sector over time.
Collective Action - Standard setting bodies, networks like AFI, networks like MIX together
with inclusive finance providers and social investors can help align on guidelines, build buy-
in and address implementation challenges through collaboration.
With appropriate capacity building support and enabling regulatory environments,
implementing financial inclusion investment accounting using a consistent global framework
can help scale flows of capital to where it is needed most to expand access to underserved
populations worldwide. Improved transparency also holds inclusive finance providers and
funders more accountable for achieving both social impact and commercial viability.
Conclusion
Financial exclusion remains a pressing global issue with billions still lacking access to basic
financial services critical for managing livelihoods, smoothing consumption and spurring
broader development. There has however been growing investment and innovation focused
on delivering inclusive finance aimed at low-income and other financially excluded groups
through diverse providers and business models. Evaluating performance and allocating
capital effectively requires a standardized framework to transparently report on both
developmental impact achieved as well as commercial viability of these financial inclusion
investments and initiatives.
By comprehensively measuring and disclosing quantitative social outreach, product usage
and qualitative impact outcomes achieved together with conventional financial reporting, the
proposed financial inclusion investment accounting framework aims to meet these needs.
Doing so in a globally consistent manner can promote transparency, informed capital
allocation decision making, benchmarking and overall scaling of successful pro-poor finance
models. With appropriate implementation support and regulatory buy-in, adopting this
inclusive finance-specific framework could help expand access further for billions still left
behind by mainstream financial systems worldwide, contributing significantly to broader
development goals.
Financial exclusion remains a significant issue both globally as well as in many developed
nations, with millions still lacking access to basic financial services. As of 2017, an estimated
1.7 billion working age adults worldwide remained without an account at a formal financial
institution (Demirgüç-Kunt et al., 2018). This lack of access translates into significant
financial hardship and barriers to economic opportunity. However, there has also been
growing investment and innovation aimed at expanding access to financial services among
underserved communities and individuals. This has resulted in a need for improved
accounting and reporting standards for organizations making investments specifically aimed
at promoting financial inclusion.
This paper examines the issue of financial inclusion investment accounting - how
organizations can appropriately account for and report on investments specifically targeted at
expanding access to basic financial services among underserved populations. It first provides
context on the problem of financial exclusion globally as well as key rationales for why
expanding financial inclusion is both an economic and social imperative. It then reviews the
types of organizations, business models and initiatives that have emerged focused on
delivering financial services to underserved markets. The paper then analyzes existing
financial accounting standards and frameworks, identifying limitations for financial inclusion
investment accounting. It proposes a framework for financial inclusion investment
accounting focused around dual reporting of both social and financial returns. This would
allow organizations to transparently demonstrate both the developmental impact as well as
financial viability of their inclusive finance initiatives and investments. The paper concludes
by discussing implementation considerations and challenges for adopting financial inclusion
investment accounting standards.
Understanding the Problem of Financial Exclusion
Financial exclusion continues to negatively impact billions globally through lack of access to
basic transaction accounts, savings, credit, and insurance that could help smooth consumption
and facilitate investment in education, health and entrepreneurial activity (Demirgüç-Kunt et
al., 2018; Sarma & Pais, 2011). A reliable transaction account is critical for managing income
flows and making payments. Savings products help build financial resilience to smooth
consumption and absorb shocks, while credit enables productive investments that can lift
individuals, households and small businesses out of poverty. Insurance protects against risks
that could plunge individuals into deeper hardship.
Yet millions remain without access due to various supply and demand side barriers. On the
supply side, traditional financial institutions often find it unprofitable to serve lower income
individuals in remote areas due to the high fixed costs of establishing branches relative to
potential revenues (Beck et al., 2007; Sarma, 2008). Heavy documentation and collateral
requirements also exclude many informal businesses and low-income proprietors. On the
demand side, financial illiteracy, cultural norms, lack of trust in formal institutions as well as
costs including minimum balance requirements create barriers (Aportela, 1999; Honohan,
2008; Sarma, 2008).
The consequences of financial exclusion are significant. Lack of safe transaction and savings
accounts means individuals are forced to store savings in less secure forms while making
them vulnerable to theft. Those dependent on informal lenders face exorbitant interest rates
and terms that can trap them in long-term debt. Absence of insurance leaves households
vulnerable to being plunged into poverty due to health shocks or natural disasters. Lack of
credit constrains entrepreneurship and investment in job creation (Honohan, 2008; Sarma &
Pais, 2011). This disproportionately impacts women who face greater difficulties in accessing
financial services due to socio-cultural norms and legal barriers in some contexts (World
Bank, 2014). Ultimately, financial exclusion undermines broader development goals through
limiting household economic security, resilience and opportunity.
Rationale for Expanding Financial Inclusion
There are strong rationales for why greater investment and policy support is needed to expand
access to basic financial services among underserved populations:
- Poverty reduction: Access to basic savings, credit, payments and insurance products can
help smooth consumption, facilitate investment in livelihoods and protect against risks -
reducing vulnerability to poverty (Beck & De La Torre, 2006; Demirgüç-Kunt et al., 2018).
- Economic growth: Greater financial inclusion facilitates efficient allocation of capital,
enabling more productive small and micro-enterprise investments that fuel job creation and
broader macroeconomic growth (Beck et al., 2007; Honohan, 2008).
- Women's empowerment: Expanding women's access to financial services can boost their
control over assets and autonomy in productive decision-making, with flow on impacts for
household welfare (World Bank, 2014).
- Social resilience: Access to savings, credit, payments and insurance builds households'
ability to better withstand economic and environmental shocks without having to resort to
detrimental coping strategies like child labor or selling productive assets (Sarma & Pais,
2011).
- Government service delivery: Digital financial services can reduce costs and increase
efficiency of delivering social transfers, wages, pensions and subsidies to citizens (AFI, 2013;
IFMR, 2018).
- Financial system development: Financial inclusion fosters a more stable, competitive and
innovative financial system overall as greater numbers of individuals participate (Beck et al.,
2007; Seibel, 2003).
Thus from both an economic and social welfare perspective, increasing access to appropriate
financial products and services for underserved populations has become a key development
priority globally (Demirgüç-Kunt et al., 2018; Sarma & Pais, 2011; World Bank, 2014). This
has spurred growing investment targeting the delivery of inclusive finance.
Approaches and Models for Delivering Inclusive Finance
A range of specialized organizations and business models have emerged focused on
delivering appropriate, affordable financial services to low-income and financially excluded
individuals:
Microfinance Institutions (MFIs) – Many MFIs initially focused on microcredit but now offer
diverse products including savings, insurance, payments. Models include Grameen Bank,
BRAC. Some operate as non-profits while others evolved into regulated deposit-taking
microfinance banks.
Digital Financial Services (DFS) – Mobile money platforms like M-Pesa in Kenya have
transformed payments while branchless/agent banking models expand access to deposits,
credit, insurance via digital channels in partnership with telcos and retailers.
FinTechs – Startups are innovating new digital solutions for lending (Lenddo, Kabbage),
digital savings (M-Shwari), insurance (Bima, Pikwoto), payments (Paytm) tailored for
underserved populations using alternative data and technology.
Social/Impact Investors – Funds, impact investors and DFIs provide capital and support to
help scale inclusive finance providers through equity, debt or risk participation. Examples
include Acumen, LGT VP, Catalyst Fund.
National/Regional Networks – Entities like Microfinance Africa, ASEAN Finance Network
support sector development, training, research, advocacy and promotion of innovative, client-
focused models.
Policy Level Support – National financial inclusion strategies, regulations and frameworks
developed with multilateral support aim to develop a conducive environment enabling pro-
poor finance. Examples include national financial inclusion commissions.
Together these organizations, business models and enabling policies are helping expand
access, with the global unbanked population reducing from around 2 billion to 1.7 billion
between 2011-2017 (Demirgüç-Kunt et al., 2018). However, providing transparent
accounting on both social impact and financial sustainability remains a challenge.
Limitations of Existing Accounting Frameworks
Mainstream financial accounting frameworks primarily focus on reporting the financial
position and performance of for-profit enterprises (IASB, 2018). However, inclusive finance
providers, social investors and development organizations aim for both social impact and
sustainable commercial operations. Existing standards do not fully meet their information
needs. Key limitations include:
- Social Impact Not Quantified – Financial reports do not systematically capture quantitative
and qualitative data on beneficiaries reached, products used, impact outcomes achieved
relating to objectives like poverty reduction, resilience or empowerment.
- Multiple Bottom Lines Not Distinct – Providers seek a double or triple bottom line
incorporating social, environmental and financial returns. Yet frameworks aggregate all items
into single monetary amounts lacking transparency on distinct returns.
- Development Finance Unique Needs – Social investors require contextualized
understanding of how capital is used, risks faced and development additionality achieved in
underserved markets addressed by inclusive finance providers. Standard financial statements
fall short.
- Aggregated Figures Lack Context – Figures like outreach, arrear rates are more meaningful
when disaggregated by product, demographic or geographic segment to understand what is
and isn't working for whom.
- Sustainability and Scale Issues – Standard measures like return on assets or equity do not
sufficiently analyze viability issues pertinent to organizations with explicit developmental
missions including subsidy dependence, cost structures at scale.
A framework tailored to the information needs of organizations delivering inclusive finance
is needed to transparently report and evaluate both developmental impacts achieved as well
as commercial sustainability. This is necessary for accountability to beneficiaries,
performance management, and informed decision making for funders and investors.
A Financial Inclusion Investment Accounting Framework
Based on the shortcomings of existing frameworks, this paper proposes a financial inclusion
investment accounting model focusing on dual financial and social return reporting. Key
elements include:
Social Performance Reporting
- Standardized indicators capturing outreach (customers, savers, borrowers), quality of use
(average balances, utilization rates), impact outcomes (income, assets, resilience).
- Disaggregation by relevant segments (gender, poverty level, region).
- Qualitative reporting on developmental effectiveness, challenges.
Financial Performance Reporting
- Consolidated income statement, balance sheet, cash flow statement.
- Ratio analysis (operational self-sufficiency, portfolio at risk).
- Development finance metrics (subsidy reliance, cost-income).
- Reporting of reserves, impairments, investment sources.
Reconciling Social and Financial Performance
- Analysis of contribution margins by product to understand viability of developmental
offerings.
- Sensitivity analysis evaluating viability risks at scale from mission drift or increased
targeting of poorer segments.
- Subsidy attribution assessing how donor funds specifically contributed to outreach/impact.
This framework builds on good practices from existing standards and reporting initiatives like
the Smart Campaign Client Protection, Universal Standards for Social Performance
Management, Global Impact Investing Network metrics while focusing financial inclusion
investment accounting needs. Key benefits include:
- Transparently demonstrates developmental additionality achieved by investment capital.
- Enables viability assessment of inclusive business models targeting underserved markets.
- Facilitates performance evaluation, management, organizational learning and
accountability.
- Provides informed decision making for capital allocation by funders and investors.
- Potential benchmarking of inclusive finance providers on mission achievement and
commercial viability.
Some challenges remain around standardization, controls and verification given diversity of
inclusive finance providers. But improved transparency in financial inclusion impact
investing can help scale flows to where they are needed most.
Implementing Financial Inclusion Investment Accounting
Adopting the proposed financial inclusion investment accounting framework requires:
Alignment with Regulators - National financial regulators may need to update reporting
requirements or provide guidelines for inclusive finance providers to dual report on
standardized social and financial metrics.
Capacity Building - Technical assistance is needed to build capabilities in data collection,
analysis, verification and integrated reporting especially for community-based organizations.
Technology Solutions - Many providers lack IT systems to track, aggregate and report
standardized social performance data at scale across operations necessitating tech upgrades or
partnerships.
Common Definitions - Standardizing definitions, methodologies and periodicity across all
indicators reported on is needed to facilitate aggregation, benchmarking and transparency.
Independent Assurance - Reliable data requires strengthening internal controls and engaging
qualified external auditors/verifiers to ensure accuracy, validity especially for impact metrics
reported externally.
Gradual Implementation - A phased approach beginning with core social outreach and
financial metrics may reduce initial compliance burden while progressively integrating
additional recommended indicators each period.
Promoting Transparency - Funders could require use of framework in Requests for Proposals
and disclose results publicly to drive transparency and organizational learning across the
sector over time.
Collective Action - Standard setting bodies, networks like AFI, networks like MIX together
with inclusive finance providers and social investors can help align on guidelines, build buy-
in and address implementation challenges through collaboration.
With appropriate capacity building support and enabling regulatory environments,
implementing financial inclusion investment accounting using a consistent global framework
can help scale flows of capital to where it is needed most to expand access to underserved
populations worldwide. Improved transparency also holds inclusive finance providers and
funders more accountable for achieving both social impact and commercial viability.
Conclusion
Financial exclusion remains a pressing global issue with billions still lacking access to basic
financial services critical for managing livelihoods, smoothing consumption and spurring
broader development. There has however been growing investment and innovation focused
on delivering inclusive finance aimed at low-income and other financially excluded groups
through diverse providers and business models. Evaluating performance and allocating
capital effectively requires a standardized framework to transparently report on both
developmental impact achieved as well as commercial viability of these financial inclusion
investments and initiatives.
By comprehensively measuring and disclosing quantitative social outreach, product usage
and qualitative impact outcomes achieved together with conventional financial reporting, the
proposed financial inclusion investment accounting framework aims to meet these needs.
Doing so in a globally consistent manner can promote transparency, informed capital
allocation decision making, benchmarking and overall scaling of successful pro-poor finance
models. With appropriate implementation support and regulatory buy-in, adopting this
inclusive finance-specific framework could help expand access further for billions still left
behind by mainstream financial systems worldwide, contributing significantly to broader
development goals.
Financial exclusion remains a significant issue both globally as well as in many developed
nations, with millions still lacking access to basic financial services. As of 2017, an estimated
1.7 billion working age adults worldwide remained without an account at a formal financial
institution (Demirgüç-Kunt et al., 2018). This lack of access translates into significant
financial hardship and barriers to economic opportunity. However, there has also been
growing investment and innovation aimed at expanding access to financial services among
underserved communities and individuals. This has resulted in a need for improved
accounting and reporting standards for organizations making investments specifically aimed
at promoting financial inclusion.
This paper examines the issue of financial inclusion investment accounting - how
organizations can appropriately account for and report on investments specifically targeted at
expanding access to basic financial services among underserved populations. It first provides
context on the problem of financial exclusion globally as well as key rationales for why
expanding financial inclusion is both an economic and social imperative. It then reviews the
types of organizations, business models and initiatives that have emerged focused on
delivering financial services to underserved markets. The paper then analyzes existing
financial accounting standards and frameworks, identifying limitations for financial inclusion
investment accounting. It proposes a framework for financial inclusion investment
accounting focused around dual reporting of both social and financial returns. This would
allow organizations to transparently demonstrate both the developmental impact as well as
financial viability of their inclusive finance initiatives and investments. The paper concludes
by discussing implementation considerations and challenges for adopting financial inclusion
investment accounting standards.
Understanding the Problem of Financial Exclusion
Financial exclusion continues to negatively impact billions globally through lack of access to
basic transaction accounts, savings, credit, and insurance that could help smooth consumption
and facilitate investment in education, health and entrepreneurial activity (Demirgüç-Kunt et
al., 2018; Sarma & Pais, 2011). A reliable transaction account is critical for managing income
flows and making payments. Savings products help build financial resilience to smooth
consumption and absorb shocks, while credit enables productive investments that can lift
individuals, households and small businesses out of poverty. Insurance protects against risks
that could plunge individuals into deeper hardship.
Yet millions remain without access due to various supply and demand side barriers. On the
supply side, traditional financial institutions often find it unprofitable to serve lower income
individuals in remote areas due to the high fixed costs of establishing branches relative to
potential revenues (Beck et al., 2007; Sarma, 2008). Heavy documentation and collateral
requirements also exclude many informal businesses and low-income proprietors. On the
demand side, financial illiteracy, cultural norms, lack of trust in formal institutions as well as
costs including minimum balance requirements create barriers (Aportela, 1999; Honohan,
2008; Sarma, 2008).
The consequences of financial exclusion are significant. Lack of safe transaction and savings
accounts means individuals are forced to store savings in less secure forms while making
them vulnerable to theft. Those dependent on informal lenders face exorbitant interest rates
and terms that can trap them in long-term debt. Absence of insurance leaves households
vulnerable to being plunged into poverty due to health shocks or natural disasters. Lack of
credit constrains entrepreneurship and investment in job creation (Honohan, 2008; Sarma &
Pais, 2011). This disproportionately impacts women who face greater difficulties in accessing
financial services due to socio-cultural norms and legal barriers in some contexts (World
Bank, 2014). Ultimately, financial exclusion undermines broader development goals through
limiting household economic security, resilience and opportunity.
Rationale for Expanding Financial Inclusion
There are strong rationales for why greater investment and policy support is needed to expand
access to basic financial services among underserved populations:
- Poverty reduction: Access to basic savings, credit, payments and insurance products can
help smooth consumption, facilitate investment in livelihoods and protect against risks -
reducing vulnerability to poverty (Beck & De La Torre, 2006; Demirgüç-Kunt et al., 2018).
- Economic growth: Greater financial inclusion facilitates efficient allocation of capital,
enabling more productive small and micro-enterprise investments that fuel job creation and
broader macroeconomic growth (Beck et al., 2007; Honohan, 2008).
- Women's empowerment: Expanding women's access to financial services can boost their
control over assets and autonomy in productive decision-making, with flow on impacts for
household welfare (World Bank, 2014).
- Social resilience: Access to savings, credit, payments and insurance builds households'
ability to better withstand economic and environmental shocks without having to resort to
detrimental coping strategies like child labor or selling productive assets (Sarma & Pais,
2011).
- Government service delivery: Digital financial services can reduce costs and increase
efficiency of delivering social transfers, wages, pensions and subsidies to citizens (AFI, 2013;
IFMR, 2018).
- Financial system development: Financial inclusion fosters a more stable, competitive and
innovative financial system overall as greater numbers of individuals participate (Beck et al.,
2007; Seibel, 2003).
Thus from both an economic and social welfare perspective, increasing access to appropriate
financial products and services for underserved populations has become a key development
priority globally (Demirgüç-Kunt et al., 2018; Sarma & Pais, 2011; World Bank, 2014). This
has spurred growing investment targeting the delivery of inclusive finance.
Approaches and Models for Delivering Inclusive Finance
A range of specialized organizations and business models have emerged focused on
delivering appropriate, affordable financial services to low-income and financially excluded
individuals:
Microfinance Institutions (MFIs) – Many MFIs initially focused on microcredit but now offer
diverse products including savings, insurance, payments. Models include Grameen Bank,
BRAC. Some operate as non-profits while others evolved into regulated deposit-taking
microfinance banks.
Digital Financial Services (DFS) – Mobile money platforms like M-Pesa in Kenya have
transformed payments while branchless/agent banking models expand access to deposits,
credit, insurance via digital channels in partnership with telcos and retailers.
FinTechs – Startups are innovating new digital solutions for lending (Lenddo, Kabbage),
digital savings (M-Shwari), insurance (Bima, Pikwoto), payments (Paytm) tailored for
underserved populations using alternative data and technology.
Social/Impact Investors – Funds, impact investors and DFIs provide capital and support to
help scale inclusive finance providers through equity, debt or risk participation. Examples
include Acumen, LGT VP, Catalyst Fund.
National/Regional Networks – Entities like Microfinance Africa, ASEAN Finance Network
support sector development, training, research, advocacy and promotion of innovative, client-
focused models.
Policy Level Support – National financial inclusion strategies, regulations and frameworks
developed with multilateral support aim to develop a conducive environment enabling pro-
poor finance. Examples include national financial inclusion commissions.
Together these organizations, business models and enabling policies are helping expand
access, with the global unbanked population reducing from around 2 billion to 1.7 billion
between 2011-2017 (Demirgüç-Kunt et al., 2018). However, providing transparent
accounting on both social impact and financial sustainability remains a challenge.
Limitations of Existing Accounting Frameworks
Mainstream financial accounting frameworks primarily focus on reporting the financial
position and performance of for-profit enterprises (IASB, 2018). However, inclusive finance
providers, social investors and development organizations aim for both social impact and
sustainable commercial operations. Existing standards do not fully meet their information
needs. Key limitations include:
- Social Impact Not Quantified – Financial reports do not systematically capture quantitative
and qualitative data on beneficiaries reached, products used, impact outcomes achieved
relating to objectives like poverty reduction, resilience or empowerment.
- Multiple Bottom Lines Not Distinct – Providers seek a double or triple bottom line
incorporating social, environmental and financial returns. Yet frameworks aggregate all items
into single monetary amounts lacking transparency on distinct returns.
- Development Finance Unique Needs – Social investors require contextualized
understanding of how capital is used, risks faced and development additionality achieved in
underserved markets addressed by inclusive finance providers. Standard financial statements
fall short.
- Aggregated Figures Lack Context – Figures like outreach, arrear rates are more meaningful
when disaggregated by product, demographic or geographic segment to understand what is
and isn't working for whom.
- Sustainability and Scale Issues – Standard measures like return on assets or equity do not
sufficiently analyze viability issues pertinent to organizations with explicit developmental
missions including subsidy dependence, cost structures at scale.
A framework tailored to the information needs of organizations delivering inclusive finance
is needed to transparently report and evaluate both developmental impacts achieved as well
as commercial sustainability. This is necessary for accountability to beneficiaries,
performance management, and informed decision making for funders and investors.
A Financial Inclusion Investment Accounting Framework
Based on the shortcomings of existing frameworks, this paper proposes a financial inclusion
investment accounting model focusing on dual financial and social return reporting. Key
elements include:
Social Performance Reporting
- Standardized indicators capturing outreach (customers, savers, borrowers), quality of use
(average balances, utilization rates), impact outcomes (income, assets, resilience).
- Disaggregation by relevant segments (gender, poverty level, region).
- Qualitative reporting on developmental effectiveness, challenges.
Financial Performance Reporting
- Consolidated income statement, balance sheet, cash flow statement.
- Ratio analysis (operational self-sufficiency, portfolio at risk).
- Development finance metrics (subsidy reliance, cost-income).
- Reporting of reserves, impairments, investment sources.
Reconciling Social and Financial Performance
- Analysis of contribution margins by product to understand viability of developmental
offerings.
- Sensitivity analysis evaluating viability risks at scale from mission drift or increased
targeting of poorer segments.
- Subsidy attribution assessing how donor funds specifically contributed to outreach/impact.
This framework builds on good practices from existing standards and reporting initiatives like
the Smart Campaign Client Protection, Universal Standards for Social Performance
Management, Global Impact Investing Network metrics while focusing financial inclusion
investment accounting needs. Key benefits include:
- Transparently demonstrates developmental additionality achieved by investment capital.
- Enables viability assessment of inclusive business models targeting underserved markets.
- Facilitates performance evaluation, management, organizational learning and
accountability.
- Provides informed decision making for capital allocation by funders and investors.
- Potential benchmarking of inclusive finance providers on mission achievement and
commercial viability.
Some challenges remain around standardization, controls and verification given diversity of
inclusive finance providers. But improved transparency in financial inclusion impact
investing can help scale flows to where they are needed most.
Implementing Financial Inclusion Investment Accounting
Adopting the proposed financial inclusion investment accounting framework requires:
Alignment with Regulators - National financial regulators may need to update reporting
requirements or provide guidelines for inclusive finance providers to dual report on
standardized social and financial metrics.
Capacity Building - Technical assistance is needed to build capabilities in data collection,
analysis, verification and integrated reporting especially for community-based organizations.
Technology Solutions - Many providers lack IT systems to track, aggregate and report
standardized social performance data at scale across operations necessitating tech upgrades or
partnerships.
Common Definitions - Standardizing definitions, methodologies and periodicity across all
indicators reported on is needed to facilitate aggregation, benchmarking and transparency.
Independent Assurance - Reliable data requires strengthening internal controls and engaging
qualified external auditors/verifiers to ensure accuracy, validity especially for impact metrics
reported externally.
Gradual Implementation - A phased approach beginning with core social outreach and
financial metrics may reduce initial compliance burden while progressively integrating
additional recommended indicators each period.
Promoting Transparency - Funders could require use of framework in Requests for Proposals
and disclose results publicly to drive transparency and organizational learning across the
sector over time.
Collective Action - Standard setting bodies, networks like AFI, networks like MIX together
with inclusive finance providers and social investors can help align on guidelines, build buy-
in and address implementation challenges through collaboration.
With appropriate capacity building support and enabling regulatory environments,
implementing financial inclusion investment accounting using a consistent global framework
can help scale flows of capital to where it is needed most to expand access to underserved
populations worldwide. Improved transparency also holds inclusive finance providers and
funders more accountable for achieving both social impact and commercial viability.
Conclusion
Financial exclusion remains a pressing global issue with billions still lacking access to basic
financial services critical for managing livelihoods, smoothing consumption and spurring
broader development. There has however been growing investment and innovation focused
on delivering inclusive finance aimed at low-income and other financially excluded groups
through diverse providers and business models. Evaluating performance and allocating
capital effectively requires a standardized framework to transparently report on both
developmental impact achieved as well as commercial viability of these financial inclusion
investments and initiatives.
By comprehensively measuring and disclosing quantitative social outreach, product usage
and qualitative impact outcomes achieved together with conventional financial reporting, the
proposed financial inclusion investment accounting framework aims to meet these needs.
Doing so in a globally consistent manner can promote transparency, informed capital
allocation decision making, benchmarking and overall scaling of successful pro-poor finance
models. With appropriate implementation support and regulatory buy-in, adopting this
inclusive finance-specific framework could help expand access further for billions still left
behind by mainstream financial systems worldwide, contributing significantly to broader
development goals.
Financial exclusion remains a significant issue both globally as well as in many developed
nations, with millions still lacking access to basic financial services. As of 2017, an estimated
1.7 billion working age adults worldwide remained without an account at a formal financial
institution (Demirgüç-Kunt et al., 2018). This lack of access translates into significant
financial hardship and barriers to economic opportunity. However, there has also been
growing investment and innovation aimed at expanding access to financial services among
underserved communities and individuals. This has resulted in a need for improved
accounting and reporting standards for organizations making investments specifically aimed
at promoting financial inclusion.
This paper examines the issue of financial inclusion investment accounting - how
organizations can appropriately account for and report on investments specifically targeted at
expanding access to basic financial services among underserved populations. It first provides
context on the problem of financial exclusion globally as well as key rationales for why
expanding financial inclusion is both an economic and social imperative. It then reviews the
types of organizations, business models and initiatives that have emerged focused on
delivering financial services to underserved markets. The paper then analyzes existing
financial accounting standards and frameworks, identifying limitations for financial inclusion
investment accounting. It proposes a framework for financial inclusion investment
accounting focused around dual reporting of both social and financial returns. This would
allow organizations to transparently demonstrate both the developmental impact as well as
financial viability of their inclusive finance initiatives and investments. The paper concludes
by discussing implementation considerations and challenges for adopting financial inclusion
investment accounting standards.
Understanding the Problem of Financial Exclusion
Financial exclusion continues to negatively impact billions globally through lack of access to
basic transaction accounts, savings, credit, and insurance that could help smooth consumption
and facilitate investment in education, health and entrepreneurial activity (Demirgüç-Kunt et
al., 2018; Sarma & Pais, 2011). A reliable transaction account is critical for managing income
flows and making payments. Savings products help build financial resilience to smooth
consumption and absorb shocks, while credit enables productive investments that can lift
individuals, households and small businesses out of poverty. Insurance protects against risks
that could plunge individuals into deeper hardship.
Yet millions remain without access due to various supply and demand side barriers. On the
supply side, traditional financial institutions often find it unprofitable to serve lower income
individuals in remote areas due to the high fixed costs of establishing branches relative to
potential revenues (Beck et al., 2007; Sarma, 2008). Heavy documentation and collateral
requirements also exclude many informal businesses and low-income proprietors. On the
demand side, financial illiteracy, cultural norms, lack of trust in formal institutions as well as
costs including minimum balance requirements create barriers (Aportela, 1999; Honohan,
2008; Sarma, 2008).
The consequences of financial exclusion are significant. Lack of safe transaction and savings
accounts means individuals are forced to store savings in less secure forms while making
them vulnerable to theft. Those dependent on informal lenders face exorbitant interest rates
and terms that can trap them in long-term debt. Absence of insurance leaves households
vulnerable to being plunged into poverty due to health shocks or natural disasters. Lack of
credit constrains entrepreneurship and investment in job creation (Honohan, 2008; Sarma &
Pais, 2011). This disproportionately impacts women who face greater difficulties in accessing
financial services due to socio-cultural norms and legal barriers in some contexts (World
Bank, 2014). Ultimately, financial exclusion undermines broader development goals through
limiting household economic security, resilience and opportunity.
Rationale for Expanding Financial Inclusion
There are strong rationales for why greater investment and policy support is needed to expand
access to basic financial services among underserved populations:
- Poverty reduction: Access to basic savings, credit, payments and insurance products can
help smooth consumption, facilitate investment in livelihoods and protect against risks -
reducing vulnerability to poverty (Beck & De La Torre, 2006; Demirgüç-Kunt et al., 2018).
- Economic growth: Greater financial inclusion facilitates efficient allocation of capital,
enabling more productive small and micro-enterprise investments that fuel job creation and
broader macroeconomic growth (Beck et al., 2007; Honohan, 2008).
- Women's empowerment: Expanding women's access to financial services can boost their
control over assets and autonomy in productive decision-making, with flow on impacts for
household welfare (World Bank, 2014).
- Social resilience: Access to savings, credit, payments and insurance builds households'
ability to better withstand economic and environmental shocks without having to resort to
detrimental coping strategies like child labor or selling productive assets (Sarma & Pais,
2011).
- Government service delivery: Digital financial services can reduce costs and increase
efficiency of delivering social transfers, wages, pensions and subsidies to citizens (AFI, 2013;
IFMR, 2018).
- Financial system development: Financial inclusion fosters a more stable, competitive and
innovative financial system overall as greater numbers of individuals participate (Beck et al.,
2007; Seibel, 2003).
Thus from both an economic and social welfare perspective, increasing access to appropriate
financial products and services for underserved populations has become a key development
priority globally (Demirgüç-Kunt et al., 2018; Sarma & Pais, 2011; World Bank, 2014). This
has spurred growing investment targeting the delivery of inclusive finance.
Approaches and Models for Delivering Inclusive Finance
A range of specialized organizations and business models have emerged focused on
delivering appropriate, affordable financial services to low-income and financially excluded
individuals:
Microfinance Institutions (MFIs) – Many MFIs initially focused on microcredit but now offer
diverse products including savings, insurance, payments. Models include Grameen Bank,
BRAC. Some operate as non-profits while others evolved into regulated deposit-taking
microfinance banks.
Digital Financial Services (DFS) – Mobile money platforms like M-Pesa in Kenya have
transformed payments while branchless/agent banking models expand access to deposits,
credit, insurance via digital channels in partnership with telcos and retailers.
FinTechs – Startups are innovating new digital solutions for lending (Lenddo, Kabbage),
digital savings (M-Shwari), insurance (Bima, Pikwoto), payments (Paytm) tailored for
underserved populations using alternative data and technology.
Social/Impact Investors – Funds, impact investors and DFIs provide capital and support to
help scale inclusive finance providers through equity, debt or risk participation. Examples
include Acumen, LGT VP, Catalyst Fund.
National/Regional Networks – Entities like Microfinance Africa, ASEAN Finance Network
support sector development, training, research, advocacy and promotion of innovative, client-
focused models.
Policy Level Support – National financial inclusion strategies, regulations and frameworks
developed with multilateral support aim to develop a conducive environment enabling pro-
poor finance. Examples include national financial inclusion commissions.
Together these organizations, business models and enabling policies are helping expand
access, with the global unbanked population reducing from around 2 billion to 1.7 billion
between 2011-2017 (Demirgüç-Kunt et al., 2018). However, providing transparent
accounting on both social impact and financial sustainability remains a challenge.
Limitations of Existing Accounting Frameworks
Mainstream financial accounting frameworks primarily focus on reporting the financial
position and performance of for-profit enterprises (IASB, 2018). However, inclusive finance
providers, social investors and development organizations aim for both social impact and
sustainable commercial operations. Existing standards do not fully meet their information
needs. Key limitations include:
- Social Impact Not Quantified – Financial reports do not systematically capture quantitative
and qualitative data on beneficiaries reached, products used, impact outcomes achieved
relating to objectives like poverty reduction, resilience or empowerment.
- Multiple Bottom Lines Not Distinct – Providers seek a double or triple bottom line
incorporating social, environmental and financial returns. Yet frameworks aggregate all items
into single monetary amounts lacking transparency on distinct returns.
- Development Finance Unique Needs – Social investors require contextualized
understanding of how capital is used, risks faced and development additionality achieved in
underserved markets addressed by inclusive finance providers. Standard financial statements
fall short.
- Aggregated Figures Lack Context – Figures like outreach, arrear rates are more meaningful
when disaggregated by product, demographic or geographic segment to understand what is
and isn't working for whom.
- Sustainability and Scale Issues – Standard measures like return on assets or equity do not
sufficiently analyze viability issues pertinent to organizations with explicit developmental
missions including subsidy dependence, cost structures at scale.
A framework tailored to the information needs of organizations delivering inclusive finance
is needed to transparently report and evaluate both developmental impacts achieved as well
as commercial sustainability. This is necessary for accountability to beneficiaries,
performance management, and informed decision making for funders and investors.
A Financial Inclusion Investment Accounting Framework
Based on the shortcomings of existing frameworks, this paper proposes a financial inclusion
investment accounting model focusing on dual financial and social return reporting. Key
elements include:
Social Performance Reporting
- Standardized indicators capturing outreach (customers, savers, borrowers), quality of use
(average balances, utilization rates), impact outcomes (income, assets, resilience).
- Disaggregation by relevant segments (gender, poverty level, region).
- Qualitative reporting on developmental effectiveness, challenges.
Financial Performance Reporting
- Consolidated income statement, balance sheet, cash flow statement.
- Ratio analysis (operational self-sufficiency, portfolio at risk).
- Development finance metrics (subsidy reliance, cost-income).
- Reporting of reserves, impairments, investment sources.
Reconciling Social and Financial Performance
- Analysis of contribution margins by product to understand viability of developmental
offerings.
- Sensitivity analysis evaluating viability risks at scale from mission drift or increased
targeting of poorer segments.
- Subsidy attribution assessing how donor funds specifically contributed to outreach/impact.
This framework builds on good practices from existing standards and reporting initiatives like
the Smart Campaign Client Protection, Universal Standards for Social Performance
Management, Global Impact Investing Network metrics while focusing financial inclusion
investment accounting needs. Key benefits include:
- Transparently demonstrates developmental additionality achieved by investment capital.
- Enables viability assessment of inclusive business models targeting underserved markets.
- Facilitates performance evaluation, management, organizational learning and
accountability.
- Provides informed decision making for capital allocation by funders and investors.
- Potential benchmarking of inclusive finance providers on mission achievement and
commercial viability.
Some challenges remain around standardization, controls and verification given diversity of
inclusive finance providers. But improved transparency in financial inclusion impact
investing can help scale flows to where they are needed most.
Implementing Financial Inclusion Investment Accounting
Adopting the proposed financial inclusion investment accounting framework requires:
Alignment with Regulators - National financial regulators may need to update reporting
requirements or provide guidelines for inclusive finance providers to dual report on
standardized social and financial metrics.
Capacity Building - Technical assistance is needed to build capabilities in data collection,
analysis, verification and integrated reporting especially for community-based organizations.
Technology Solutions - Many providers lack IT systems to track, aggregate and report
standardized social performance data at scale across operations necessitating tech upgrades or
partnerships.
Common Definitions - Standardizing definitions, methodologies and periodicity across all
indicators reported on is needed to facilitate aggregation, benchmarking and transparency.
Independent Assurance - Reliable data requires strengthening internal controls and engaging
qualified external auditors/verifiers to ensure accuracy, validity especially for impact metrics
reported externally.
Gradual Implementation - A phased approach beginning with core social outreach and
financial metrics may reduce initial compliance burden while progressively integrating
additional recommended indicators each period.
Promoting Transparency - Funders could require use of framework in Requests for Proposals
and disclose results publicly to drive transparency and organizational learning across the
sector over time.
Collective Action - Standard setting bodies, networks like AFI, networks like MIX together
with inclusive finance providers and social investors can help align on guidelines, build buy-
in and address implementation challenges through collaboration.
With appropriate capacity building support and enabling regulatory environments,
implementing financial inclusion investment accounting using a consistent global framework
can help scale flows of capital to where it is needed most to expand access to underserved
populations worldwide. Improved transparency also holds inclusive finance providers and
funders more accountable for achieving both social impact and commercial viability.
Conclusion
Financial exclusion remains a pressing global issue with billions still lacking access to basic
financial services critical for managing livelihoods, smoothing consumption and spurring
broader development. There has however been growing investment and innovation focused
on delivering inclusive finance aimed at low-income and other financially excluded groups
through diverse providers and business models. Evaluating performance and allocating
capital effectively requires a standardized framework to transparently report on both
developmental impact achieved as well as commercial viability of these financial inclusion
investments and initiatives.
By comprehensively measuring and disclosing quantitative social outreach, product usage
and qualitative impact outcomes achieved together with conventional financial reporting, the
proposed financial inclusion investment accounting framework aims to meet these needs.
Doing so in a globally consistent manner can promote transparency, informed capital
allocation decision making, benchmarking and overall scaling of successful pro-poor finance
models. With appropriate implementation support and regulatory buy-in, adopting this
inclusive finance-specific framework could help expand access further for billions still left
behind by mainstream financial systems worldwide, contributing significantly to broader
development goals.
Financial exclusion remains a significant issue both globally as well as in many developed
nations, with millions still lacking access to basic financial services. As of 2017, an estimated
1.7 billion working age adults worldwide remained without an account at a formal financial
institution (Demirgüç-Kunt et al., 2018). This lack of access translates into significant
financial hardship and barriers to economic opportunity. However, there has also been
growing investment and innovation aimed at expanding access to financial services among
underserved communities and individuals. This has resulted in a need for improved
accounting and reporting standards for organizations making investments specifically aimed
at promoting financial inclusion.
This paper examines the issue of financial inclusion investment accounting - how
organizations can appropriately account for and report on investments specifically targeted at
expanding access to basic financial services among underserved populations. It first provides
context on the problem of financial exclusion globally as well as key rationales for why
expanding financial inclusion is both an economic and social imperative. It then reviews the
types of organizations, business models and initiatives that have emerged focused on
delivering financial services to underserved markets. The paper then analyzes existing
financial accounting standards and frameworks, identifying limitations for financial inclusion
investment accounting. It proposes a framework for financial inclusion investment
accounting focused around dual reporting of both social and financial returns. This would
allow organizations to transparently demonstrate both the developmental impact as well as
financial viability of their inclusive finance initiatives and investments. The paper concludes
by discussing implementation considerations and challenges for adopting financial inclusion
investment accounting standards.
Understanding the Problem of Financial Exclusion
Financial exclusion continues to negatively impact billions globally through lack of access to
basic transaction accounts, savings, credit, and insurance that could help smooth consumption
and facilitate investment in education, health and entrepreneurial activity (Demirgüç-Kunt et
al., 2018; Sarma & Pais, 2011). A reliable transaction account is critical for managing income
flows and making payments. Savings products help build financial resilience to smooth
consumption and absorb shocks, while credit enables productive investments that can lift
individuals, households and small businesses out of poverty. Insurance protects against risks
that could plunge individuals into deeper hardship.
Yet millions remain without access due to various supply and demand side barriers. On the
supply side, traditional financial institutions often find it unprofitable to serve lower income
individuals in remote areas due to the high fixed costs of establishing branches relative to
potential revenues (Beck et al., 2007; Sarma, 2008). Heavy documentation and collateral
requirements also exclude many informal businesses and low-income proprietors. On the
demand side, financial illiteracy, cultural norms, lack of trust in formal institutions as well as
costs including minimum balance requirements create barriers (Aportela, 1999; Honohan,
2008; Sarma, 2008).
The consequences of financial exclusion are significant. Lack of safe transaction and savings
accounts means individuals are forced to store savings in less secure forms while making
them vulnerable to theft. Those dependent on informal lenders face exorbitant interest rates
and terms that can trap them in long-term debt. Absence of insurance leaves households
vulnerable to being plunged into poverty due to health shocks or natural disasters. Lack of
credit constrains entrepreneurship and investment in job creation (Honohan, 2008; Sarma &
Pais, 2011). This disproportionately impacts women who face greater difficulties in accessing
financial services due to socio-cultural norms and legal barriers in some contexts (World
Bank, 2014). Ultimately, financial exclusion undermines broader development goals through
limiting household economic security, resilience and opportunity.
Rationale for Expanding Financial Inclusion
There are strong rationales for why greater investment and policy support is needed to expand
access to basic financial services among underserved populations:
- Poverty reduction: Access to basic savings, credit, payments and insurance products can
help smooth consumption, facilitate investment in livelihoods and protect against risks -
reducing vulnerability to poverty (Beck & De La Torre, 2006; Demirgüç-Kunt et al., 2018).
- Economic growth: Greater financial inclusion facilitates efficient allocation of capital,
enabling more productive small and micro-enterprise investments that fuel job creation and
broader macroeconomic growth (Beck et al., 2007; Honohan, 2008).
- Women's empowerment: Expanding women's access to financial services can boost their
control over assets and autonomy in productive decision-making, with flow on impacts for
household welfare (World Bank, 2014).
- Social resilience: Access to savings, credit, payments and insurance builds households'
ability to better withstand economic and environmental shocks without having to resort to
detrimental coping strategies like child labor or selling productive assets (Sarma & Pais,
2011).
- Government service delivery: Digital financial services can reduce costs and increase
efficiency of delivering social transfers, wages, pensions and subsidies to citizens (AFI, 2013;
IFMR, 2018).
- Financial system development: Financial inclusion fosters a more stable, competitive and
innovative financial system overall as greater numbers of individuals participate (Beck et al.,
2007; Seibel, 2003).
Thus from both an economic and social welfare perspective, increasing access to appropriate
financial products and services for underserved populations has become a key development
priority globally (Demirgüç-Kunt et al., 2018; Sarma & Pais, 2011; World Bank, 2014). This
has spurred growing investment targeting the delivery of inclusive finance.
Approaches and Models for Delivering Inclusive Finance
A range of specialized organizations and business models have emerged focused on
delivering appropriate, affordable financial services to low-income and financially excluded
individuals:
Microfinance Institutions (MFIs) – Many MFIs initially focused on microcredit but now offer
diverse products including savings, insurance, payments. Models include Grameen Bank,
BRAC. Some operate as non-profits while others evolved into regulated deposit-taking
microfinance banks.
Digital Financial Services (DFS) – Mobile money platforms like M-Pesa in Kenya have
transformed payments while branchless/agent banking models expand access to deposits,
credit, insurance via digital channels in partnership with telcos and retailers.
FinTechs – Startups are innovating new digital solutions for lending (Lenddo, Kabbage),
digital savings (M-Shwari), insurance (Bima, Pikwoto), payments (Paytm) tailored for
underserved populations using alternative data and technology.
Social/Impact Investors – Funds, impact investors and DFIs provide capital and support to
help scale inclusive finance providers through equity, debt or risk participation. Examples
include Acumen, LGT VP, Catalyst Fund.
National/Regional Networks – Entities like Microfinance Africa, ASEAN Finance Network
support sector development, training, research, advocacy and promotion of innovative, client-
focused models.
Policy Level Support – National financial inclusion strategies, regulations and frameworks
developed with multilateral support aim to develop a conducive environment enabling pro-
poor finance. Examples include national financial inclusion commissions.
Together these organizations, business models and enabling policies are helping expand
access, with the global unbanked population reducing from around 2 billion to 1.7 billion
between 2011-2017 (Demirgüç-Kunt et al., 2018). However, providing transparent
accounting on both social impact and financial sustainability remains a challenge.
Limitations of Existing Accounting Frameworks
Mainstream financial accounting frameworks primarily focus on reporting the financial
position and performance of for-profit enterprises (IASB, 2018). However, inclusive finance
providers, social investors and development organizations aim for both social impact and
sustainable commercial operations. Existing standards do not fully meet their information
needs. Key limitations include:
- Social Impact Not Quantified – Financial reports do not systematically capture quantitative
and qualitative data on beneficiaries reached, products used, impact outcomes achieved
relating to objectives like poverty reduction, resilience or empowerment.
- Multiple Bottom Lines Not Distinct – Providers seek a double or triple bottom line
incorporating social, environmental and financial returns. Yet frameworks aggregate all items
into single monetary amounts lacking transparency on distinct returns.
- Development Finance Unique Needs – Social investors require contextualized
understanding of how capital is used, risks faced and development additionality achieved in
underserved markets addressed by inclusive finance providers. Standard financial statements
fall short.
- Aggregated Figures Lack Context – Figures like outreach, arrear rates are more meaningful
when disaggregated by product, demographic or geographic segment to understand what is
and isn't working for whom.
- Sustainability and Scale Issues – Standard measures like return on assets or equity do not
sufficiently analyze viability issues pertinent to organizations with explicit developmental
missions including subsidy dependence, cost structures at scale.
A framework tailored to the information needs of organizations delivering inclusive finance
is needed to transparently report and evaluate both developmental impacts achieved as well
as commercial sustainability. This is necessary for accountability to beneficiaries,
performance management, and informed decision making for funders and investors.
A Financial Inclusion Investment Accounting Framework
Based on the shortcomings of existing frameworks, this paper proposes a financial inclusion
investment accounting model focusing on dual financial and social return reporting. Key
elements include:
Social Performance Reporting
- Standardized indicators capturing outreach (customers, savers, borrowers), quality of use
(average balances, utilization rates), impact outcomes (income, assets, resilience).
- Disaggregation by relevant segments (gender, poverty level, region).
- Qualitative reporting on developmental effectiveness, challenges.
Financial Performance Reporting
- Consolidated income statement, balance sheet, cash flow statement.
- Ratio analysis (operational self-sufficiency, portfolio at risk).
- Development finance metrics (subsidy reliance, cost-income).
- Reporting of reserves, impairments, investment sources.
Reconciling Social and Financial Performance
- Analysis of contribution margins by product to understand viability of developmental
offerings.
- Sensitivity analysis evaluating viability risks at scale from mission drift or increased
targeting of poorer segments.
- Subsidy attribution assessing how donor funds specifically contributed to outreach/impact.
This framework builds on good practices from existing standards and reporting initiatives like
the Smart Campaign Client Protection, Universal Standards for Social Performance
Management, Global Impact Investing Network metrics while focusing financial inclusion
investment accounting needs. Key benefits include:
- Transparently demonstrates developmental additionality achieved by investment capital.
- Enables viability assessment of inclusive business models targeting underserved markets.
- Facilitates performance evaluation, management, organizational learning and
accountability.
- Provides informed decision making for capital allocation by funders and investors.
- Potential benchmarking of inclusive finance providers on mission achievement and
commercial viability.
Some challenges remain around standardization, controls and verification given diversity of
inclusive finance providers. But improved transparency in financial inclusion impact
investing can help scale flows to where they are needed most.
Implementing Financial Inclusion Investment Accounting
Adopting the proposed financial inclusion investment accounting framework requires:
Alignment with Regulators - National financial regulators may need to update reporting
requirements or provide guidelines for inclusive finance providers to dual report on
standardized social and financial metrics.
Capacity Building - Technical assistance is needed to build capabilities in data collection,
analysis, verification and integrated reporting especially for community-based organizations.
Technology Solutions - Many providers lack IT systems to track, aggregate and report
standardized social performance data at scale across operations necessitating tech upgrades or
partnerships.
Common Definitions - Standardizing definitions, methodologies and periodicity across all
indicators reported on is needed to facilitate aggregation, benchmarking and transparency.
Independent Assurance - Reliable data requires strengthening internal controls and engaging
qualified external auditors/verifiers to ensure accuracy, validity especially for impact metrics
reported externally.
Gradual Implementation - A phased approach beginning with core social outreach and
financial metrics may reduce initial compliance burden while progressively integrating
additional recommended indicators each period.
Promoting Transparency - Funders could require use of framework in Requests for Proposals
and disclose results publicly to drive transparency and organizational learning across the
sector over time.
Collective Action - Standard setting bodies, networks like AFI, networks like MIX together
with inclusive finance providers and social investors can help align on guidelines, build buy-
in and address implementation challenges through collaboration.
With appropriate capacity building support and enabling regulatory environments,
implementing financial inclusion investment accounting using a consistent global framework
can help scale flows of capital to where it is needed most to expand access to underserved
populations worldwide. Improved transparency also holds inclusive finance providers and
funders more accountable for achieving both social impact and commercial viability.
Conclusion
Financial exclusion remains a pressing global issue with billions still lacking access to basic
financial services critical for managing livelihoods, smoothing consumption and spurring
broader development. There has however been growing investment and innovation focused
on delivering inclusive finance aimed at low-income and other financially excluded groups
through diverse providers and business models. Evaluating performance and allocating
capital effectively requires a standardized framework to transparently report on both
developmental impact achieved as well as commercial viability of these financial inclusion
investments and initiatives.
By comprehensively measuring and disclosing quantitative social outreach, product usage
and qualitative impact outcomes achieved together with conventional financial reporting, the
proposed financial inclusion investment accounting framework aims to meet these needs.
Doing so in a globally consistent manner can promote transparency, informed capital
allocation decision making, benchmarking and overall scaling of successful pro-poor finance
models. With appropriate implementation support and regulatory buy-in, adopting this
inclusive finance-specific framework could help expand access further for billions still left
behind by mainstream financial systems worldwide, contributing significantly to broader
development goals.
Financial exclusion remains a significant issue both globally as well as in many developed
nations, with millions still lacking access to basic financial services. As of 2017, an estimated
1.7 billion working age adults worldwide remained without an account at a formal financial
institution (Demirgüç-Kunt et al., 2018). This lack of access translates into significant
financial hardship and barriers to economic opportunity. However, there has also been
growing investment and innovation aimed at expanding access to financial services among
underserved communities and individuals. This has resulted in a need for improved
accounting and reporting standards for organizations making investments specifically aimed
at promoting financial inclusion.
This paper examines the issue of financial inclusion investment accounting - how
organizations can appropriately account for and report on investments specifically targeted at
expanding access to basic financial services among underserved populations. It first provides
context on the problem of financial exclusion globally as well as key rationales for why
expanding financial inclusion is both an economic and social imperative. It then reviews the
types of organizations, business models and initiatives that have emerged focused on
delivering financial services to underserved markets. The paper then analyzes existing
financial accounting standards and frameworks, identifying limitations for financial inclusion
investment accounting. It proposes a framework for financial inclusion investment
accounting focused around dual reporting of both social and financial returns. This would
allow organizations to transparently demonstrate both the developmental impact as well as
financial viability of their inclusive finance initiatives and investments. The paper concludes
by discussing implementation considerations and challenges for adopting financial inclusion
investment accounting standards.
Understanding the Problem of Financial Exclusion
Financial exclusion continues to negatively impact billions globally through lack of access to
basic transaction accounts, savings, credit, and insurance that could help smooth consumption
and facilitate investment in education, health and entrepreneurial activity (Demirgüç-Kunt et
al., 2018; Sarma & Pais, 2011). A reliable transaction account is critical for managing income
flows and making payments. Savings products help build financial resilience to smooth
consumption and absorb shocks, while credit enables productive investments that can lift
individuals, households and small businesses out of poverty. Insurance protects against risks
that could plunge individuals into deeper hardship.
Yet millions remain without access due to various supply and demand side barriers. On the
supply side, traditional financial institutions often find it unprofitable to serve lower income
individuals in remote areas due to the high fixed costs of establishing branches relative to
potential revenues (Beck et al., 2007; Sarma, 2008). Heavy documentation and collateral
requirements also exclude many informal businesses and low-income proprietors. On the
demand side, financial illiteracy, cultural norms, lack of trust in formal institutions as well as
costs including minimum balance requirements create barriers (Aportela, 1999; Honohan,
2008; Sarma, 2008).
The consequences of financial exclusion are significant. Lack of safe transaction and savings
accounts means individuals are forced to store savings in less secure forms while making
them vulnerable to theft. Those dependent on informal lenders face exorbitant interest rates
and terms that can trap them in long-term debt. Absence of insurance leaves households
vulnerable to being plunged into poverty due to health shocks or natural disasters. Lack of
credit constrains entrepreneurship and investment in job creation (Honohan, 2008; Sarma &
Pais, 2011). This disproportionately impacts women who face greater difficulties in accessing
financial services due to socio-cultural norms and legal barriers in some contexts (World
Bank, 2014). Ultimately, financial exclusion undermines broader development goals through
limiting household economic security, resilience and opportunity.
Rationale for Expanding Financial Inclusion
There are strong rationales for why greater investment and policy support is needed to expand
access to basic financial services among underserved populations:
- Poverty reduction: Access to basic savings, credit, payments and insurance products can
help smooth consumption, facilitate investment in livelihoods and protect against risks -
reducing vulnerability to poverty (Beck & De La Torre, 2006; Demirgüç-Kunt et al., 2018).
- Economic growth: Greater financial inclusion facilitates efficient allocation of capital,
enabling more productive small and micro-enterprise investments that fuel job creation and
broader macroeconomic growth (Beck et al., 2007; Honohan, 2008).
- Women's empowerment: Expanding women's access to financial services can boost their
control over assets and autonomy in productive decision-making, with flow on impacts for
household welfare (World Bank, 2014).
- Social resilience: Access to savings, credit, payments and insurance builds households'
ability to better withstand economic and environmental shocks without having to resort to
detrimental coping strategies like child labor or selling productive assets (Sarma & Pais,
2011).
- Government service delivery: Digital financial services can reduce costs and increase
efficiency of delivering social transfers, wages, pensions and subsidies to citizens (AFI, 2013;
IFMR, 2018).
- Financial system development: Financial inclusion fosters a more stable, competitive and
innovative financial system overall as greater numbers of individuals participate (Beck et al.,
2007; Seibel, 2003).
Thus from both an economic and social welfare perspective, increasing access to appropriate
financial products and services for underserved populations has become a key development
priority globally (Demirgüç-Kunt et al., 2018; Sarma & Pais, 2011; World Bank, 2014). This
has spurred growing investment targeting the delivery of inclusive finance.
Approaches and Models for Delivering Inclusive Finance
A range of specialized organizations and business models have emerged focused on
delivering appropriate, affordable financial services to low-income and financially excluded
individuals:
Microfinance Institutions (MFIs) – Many MFIs initially focused on microcredit but now offer
diverse products including savings, insurance, payments. Models include Grameen Bank,
BRAC. Some operate as non-profits while others evolved into regulated deposit-taking
microfinance banks.
Digital Financial Services (DFS) – Mobile money platforms like M-Pesa in Kenya have
transformed payments while branchless/agent banking models expand access to deposits,
credit, insurance via digital channels in partnership with telcos and retailers.
FinTechs – Startups are innovating new digital solutions for lending (Lenddo, Kabbage),
digital savings (M-Shwari), insurance (Bima, Pikwoto), payments (Paytm) tailored for
underserved populations using alternative data and technology.
Social/Impact Investors – Funds, impact investors and DFIs provide capital and support to
help scale inclusive finance providers through equity, debt or risk participation. Examples
include Acumen, LGT VP, Catalyst Fund.
National/Regional Networks – Entities like Microfinance Africa, ASEAN Finance Network
support sector development, training, research, advocacy and promotion of innovative, client-
focused models.
Policy Level Support – National financial inclusion strategies, regulations and frameworks
developed with multilateral support aim to develop a conducive environment enabling pro-
poor finance. Examples include national financial inclusion commissions.
Together these organizations, business models and enabling policies are helping expand
access, with the global unbanked population reducing from around 2 billion to 1.7 billion
between 2011-2017 (Demirgüç-Kunt et al., 2018). However, providing transparent
accounting on both social impact and financial sustainability remains a challenge.
Limitations of Existing Accounting Frameworks
Mainstream financial accounting frameworks primarily focus on reporting the financial
position and performance of for-profit enterprises (IASB, 2018). However, inclusive finance
providers, social investors and development organizations aim for both social impact and
sustainable commercial operations. Existing standards do not fully meet their information
needs. Key limitations include:
- Social Impact Not Quantified – Financial reports do not systematically capture quantitative
and qualitative data on beneficiaries reached, products used, impact outcomes achieved
relating to objectives like poverty reduction, resilience or empowerment.
- Multiple Bottom Lines Not Distinct – Providers seek a double or triple bottom line
incorporating social, environmental and financial returns. Yet frameworks aggregate all items
into single monetary amounts lacking transparency on distinct returns.
- Development Finance Unique Needs – Social investors require contextualized
understanding of how capital is used, risks faced and development additionality achieved in
underserved markets addressed by inclusive finance providers. Standard financial statements
fall short.
- Aggregated Figures Lack Context – Figures like outreach, arrear rates are more meaningful
when disaggregated by product, demographic or geographic segment to understand what is
and isn't working for whom.
- Sustainability and Scale Issues – Standard measures like return on assets or equity do not
sufficiently analyze viability issues pertinent to organizations with explicit developmental
missions including subsidy dependence, cost structures at scale.
A framework tailored to the information needs of organizations delivering inclusive finance
is needed to transparently report and evaluate both developmental impacts achieved as well
as commercial sustainability. This is necessary for accountability to beneficiaries,
performance management, and informed decision making for funders and investors.
A Financial Inclusion Investment Accounting Framework
Based on the shortcomings of existing frameworks, this paper proposes a financial inclusion
investment accounting model focusing on dual financial and social return reporting. Key
elements include:
Social Performance Reporting
- Standardized indicators capturing outreach (customers, savers, borrowers), quality of use
(average balances, utilization rates), impact outcomes (income, assets, resilience).
- Disaggregation by relevant segments (gender, poverty level, region).
- Qualitative reporting on developmental effectiveness, challenges.
Financial Performance Reporting
- Consolidated income statement, balance sheet, cash flow statement.
- Ratio analysis (operational self-sufficiency, portfolio at risk).
- Development finance metrics (subsidy reliance, cost-income).
- Reporting of reserves, impairments, investment sources.
Reconciling Social and Financial Performance
- Analysis of contribution margins by product to understand viability of developmental
offerings.
- Sensitivity analysis evaluating viability risks at scale from mission drift or increased
targeting of poorer segments.
- Subsidy attribution assessing how donor funds specifically contributed to outreach/impact.
This framework builds on good practices from existing standards and reporting initiatives like
the Smart Campaign Client Protection, Universal Standards for Social Performance
Management, Global Impact Investing Network metrics while focusing financial inclusion
investment accounting needs. Key benefits include:
- Transparently demonstrates developmental additionality achieved by investment capital.
- Enables viability assessment of inclusive business models targeting underserved markets.
- Facilitates performance evaluation, management, organizational learning and
accountability.
- Provides informed decision making for capital allocation by funders and investors.
- Potential benchmarking of inclusive finance providers on mission achievement and
commercial viability.
Some challenges remain around standardization, controls and verification given diversity of
inclusive finance providers. But improved transparency in financial inclusion impact
investing can help scale flows to where they are needed most.
Implementing Financial Inclusion Investment Accounting
Adopting the proposed financial inclusion investment accounting framework requires:
Alignment with Regulators - National financial regulators may need to update reporting
requirements or provide guidelines for inclusive finance providers to dual report on
standardized social and financial metrics.
Capacity Building - Technical assistance is needed to build capabilities in data collection,
analysis, verification and integrated reporting especially for community-based organizations.
Technology Solutions - Many providers lack IT systems to track, aggregate and report
standardized social performance data at scale across operations necessitating tech upgrades or
partnerships.
Common Definitions - Standardizing definitions, methodologies and periodicity across all
indicators reported on is needed to facilitate aggregation, benchmarking and transparency.
Independent Assurance - Reliable data requires strengthening internal controls and engaging
qualified external auditors/verifiers to ensure accuracy, validity especially for impact metrics
reported externally.
Gradual Implementation - A phased approach beginning with core social outreach and
financial metrics may reduce initial compliance burden while progressively integrating
additional recommended indicators each period.
Promoting Transparency - Funders could require use of framework in Requests for Proposals
and disclose results publicly to drive transparency and organizational learning across the
sector over time.
Collective Action - Standard setting bodies, networks like AFI, networks like MIX together
with inclusive finance providers and social investors can help align on guidelines, build buy-
in and address implementation challenges through collaboration.
With appropriate capacity building support and enabling regulatory environments,
implementing financial inclusion investment accounting using a consistent global framework
can help scale flows of capital to where it is needed most to expand access to underserved
populations worldwide. Improved transparency also holds inclusive finance providers and
funders more accountable for achieving both social impact and commercial viability.
Conclusion
Financial exclusion remains a pressing global issue with billions still lacking access to basic
financial services critical for managing livelihoods, smoothing consumption and spurring
broader development. There has however been growing investment and innovation focused
on delivering inclusive finance aimed at low-income and other financially excluded groups
through diverse providers and business models. Evaluating performance and allocating
capital effectively requires a standardized framework to transparently report on both
developmental impact achieved as well as commercial viability of these financial inclusion
investments and initiatives.
By comprehensively measuring and disclosing quantitative social outreach, product usage
and qualitative impact outcomes achieved together with conventional financial reporting, the
proposed financial inclusion investment accounting framework aims to meet these needs.
Doing so in a globally consistent manner can promote transparency, informed capital
allocation decision making, benchmarking and overall scaling of successful pro-poor finance
models. With appropriate implementation support and regulatory buy-in, adopting this
inclusive finance-specific framework could help expand access further for billions still left
behind by mainstream financial systems worldwide, contributing significantly to broader
development goals.
Financial exclusion remains a significant issue both globally as well as in many developed
nations, with millions still lacking access to basic financial services. As of 2017, an estimated
1.7 billion working age adults worldwide remained without an account at a formal financial
institution (Demirgüç-Kunt et al., 2018). This lack of access translates into significant
financial hardship and barriers to economic opportunity. However, there has also been
growing investment and innovation aimed at expanding access to financial services among
underserved communities and individuals. This has resulted in a need for improved
accounting and reporting standards for organizations making investments specifically aimed
at promoting financial inclusion.
This paper examines the issue of financial inclusion investment accounting - how
organizations can appropriately account for and report on investments specifically targeted at
expanding access to basic financial services among underserved populations. It first provides
context on the problem of financial exclusion globally as well as key rationales for why
expanding financial inclusion is both an economic and social imperative. It then reviews the
types of organizations, business models and initiatives that have emerged focused on
delivering financial services to underserved markets. The paper then analyzes existing
financial accounting standards and frameworks, identifying limitations for financial inclusion
investment accounting. It proposes a framework for financial inclusion investment
accounting focused around dual reporting of both social and financial returns. This would
allow organizations to transparently demonstrate both the developmental impact as well as
financial viability of their inclusive finance initiatives and investments. The paper concludes
by discussing implementation considerations and challenges for adopting financial inclusion
investment accounting standards.
Understanding the Problem of Financial Exclusion
Financial exclusion continues to negatively impact billions globally through lack of access to
basic transaction accounts, savings, credit, and insurance that could help smooth consumption
and facilitate investment in education, health and entrepreneurial activity (Demirgüç-Kunt et
al., 2018; Sarma & Pais, 2011). A reliable transaction account is critical for managing income
flows and making payments. Savings products help build financial resilience to smooth
consumption and absorb shocks, while credit enables productive investments that can lift
individuals, households and small businesses out of poverty. Insurance protects against risks
that could plunge individuals into deeper hardship.
Yet millions remain without access due to various supply and demand side barriers. On the
supply side, traditional financial institutions often find it unprofitable to serve lower income
individuals in remote areas due to the high fixed costs of establishing branches relative to
potential revenues (Beck et al., 2007; Sarma, 2008). Heavy documentation and collateral
requirements also exclude many informal businesses and low-income proprietors. On the
demand side, financial illiteracy, cultural norms, lack of trust in formal institutions as well as
costs including minimum balance requirements create barriers (Aportela, 1999; Honohan,
2008; Sarma, 2008).
The consequences of financial exclusion are significant. Lack of safe transaction and savings
accounts means individuals are forced to store savings in less secure forms while making
them vulnerable to theft. Those dependent on informal lenders face exorbitant interest rates
and terms that can trap them in long-term debt. Absence of insurance leaves households
vulnerable to being plunged into poverty due to health shocks or natural disasters. Lack of
credit constrains entrepreneurship and investment in job creation (Honohan, 2008; Sarma &
Pais, 2011). This disproportionately impacts women who face greater difficulties in accessing
financial services due to socio-cultural norms and legal barriers in some contexts (World
Bank, 2014). Ultimately, financial exclusion undermines broader development goals through
limiting household economic security, resilience and opportunity.
Rationale for Expanding Financial Inclusion
There are strong rationales for why greater investment and policy support is needed to expand
access to basic financial services among underserved populations:
- Poverty reduction: Access to basic savings, credit, payments and insurance products can
help smooth consumption, facilitate investment in livelihoods and protect against risks -
reducing vulnerability to poverty (Beck & De La Torre, 2006; Demirgüç-Kunt et al., 2018).
- Economic growth: Greater financial inclusion facilitates efficient allocation of capital,
enabling more productive small and micro-enterprise investments that fuel job creation and
broader macroeconomic growth (Beck et al., 2007; Honohan, 2008).
- Women's empowerment: Expanding women's access to financial services can boost their
control over assets and autonomy in productive decision-making, with flow on impacts for
household welfare (World Bank, 2014).
- Social resilience: Access to savings, credit, payments and insurance builds households'
ability to better withstand economic and environmental shocks without having to resort to
detrimental coping strategies like child labor or selling productive assets (Sarma & Pais,
2011).
- Government service delivery: Digital financial services can reduce costs and increase
efficiency of delivering social transfers, wages, pensions and subsidies to citizens (AFI, 2013;
IFMR, 2018).
- Financial system development: Financial inclusion fosters a more stable, competitive and
innovative financial system overall as greater numbers of individuals participate (Beck et al.,
2007; Seibel, 2003).
Thus from both an economic and social welfare perspective, increasing access to appropriate
financial products and services for underserved populations has become a key development
priority globally (Demirgüç-Kunt et al., 2018; Sarma & Pais, 2011; World Bank, 2014). This
has spurred growing investment targeting the delivery of inclusive finance.
Approaches and Models for Delivering Inclusive Finance
A range of specialized organizations and business models have emerged focused on
delivering appropriate, affordable financial services to low-income and financially excluded
individuals:
Microfinance Institutions (MFIs) – Many MFIs initially focused on microcredit but now offer
diverse products including savings, insurance, payments. Models include Grameen Bank,
BRAC. Some operate as non-profits while others evolved into regulated deposit-taking
microfinance banks.
Digital Financial Services (DFS) – Mobile money platforms like M-Pesa in Kenya have
transformed payments while branchless/agent banking models expand access to deposits,
credit, insurance via digital channels in partnership with telcos and retailers.
FinTechs – Startups are innovating new digital solutions for lending (Lenddo, Kabbage),
digital savings (M-Shwari), insurance (Bima, Pikwoto), payments (Paytm) tailored for
underserved populations using alternative data and technology.
Social/Impact Investors – Funds, impact investors and DFIs provide capital and support to
help scale inclusive finance providers through equity, debt or risk participation. Examples
include Acumen, LGT VP, Catalyst Fund.
National/Regional Networks – Entities like Microfinance Africa, ASEAN Finance Network
support sector development, training, research, advocacy and promotion of innovative, client-
focused models.
Policy Level Support – National financial inclusion strategies, regulations and frameworks
developed with multilateral support aim to develop a conducive environment enabling pro-
poor finance. Examples include national financial inclusion commissions.
Together these organizations, business models and enabling policies are helping expand
access, with the global unbanked population reducing from around 2 billion to 1.7 billion
between 2011-2017 (Demirgüç-Kunt et al., 2018). However, providing transparent
accounting on both social impact and financial sustainability remains a challenge.
Limitations of Existing Accounting Frameworks
Mainstream financial accounting frameworks primarily focus on reporting the financial
position and performance of for-profit enterprises (IASB, 2018). However, inclusive finance
providers, social investors and development organizations aim for both social impact and
sustainable commercial operations. Existing standards do not fully meet their information
needs. Key limitations include:
- Social Impact Not Quantified – Financial reports do not systematically capture quantitative
and qualitative data on beneficiaries reached, products used, impact outcomes achieved
relating to objectives like poverty reduction, resilience or empowerment.
- Multiple Bottom Lines Not Distinct – Providers seek a double or triple bottom line
incorporating social, environmental and financial returns. Yet frameworks aggregate all items
into single monetary amounts lacking transparency on distinct returns.
- Development Finance Unique Needs – Social investors require contextualized
understanding of how capital is used, risks faced and development additionality achieved in
underserved markets addressed by inclusive finance providers. Standard financial statements
fall short.
- Aggregated Figures Lack Context – Figures like outreach, arrear rates are more meaningful
when disaggregated by product, demographic or geographic segment to understand what is
and isn't working for whom.
- Sustainability and Scale Issues – Standard measures like return on assets or equity do not
sufficiently analyze viability issues pertinent to organizations with explicit developmental
missions including subsidy dependence, cost structures at scale.
A framework tailored to the information needs of organizations delivering inclusive finance
is needed to transparently report and evaluate both developmental impacts achieved as well
as commercial sustainability. This is necessary for accountability to beneficiaries,
performance management, and informed decision making for funders and investors.
A Financial Inclusion Investment Accounting Framework
Based on the shortcomings of existing frameworks, this paper proposes a financial inclusion
investment accounting model focusing on dual financial and social return reporting. Key
elements include:
Social Performance Reporting
- Standardized indicators capturing outreach (customers, savers, borrowers), quality of use
(average balances, utilization rates), impact outcomes (income, assets, resilience).
- Disaggregation by relevant segments (gender, poverty level, region).
- Qualitative reporting on developmental effectiveness, challenges.
Financial Performance Reporting
- Consolidated income statement, balance sheet, cash flow statement.
- Ratio analysis (operational self-sufficiency, portfolio at risk).
- Development finance metrics (subsidy reliance, cost-income).
- Reporting of reserves, impairments, investment sources.
Reconciling Social and Financial Performance
- Analysis of contribution margins by product to understand viability of developmental
offerings.
- Sensitivity analysis evaluating viability risks at scale from mission drift or increased
targeting of poorer segments.
- Subsidy attribution assessing how donor funds specifically contributed to outreach/impact.
This framework builds on good practices from existing standards and reporting initiatives like
the Smart Campaign Client Protection, Universal Standards for Social Performance
Management, Global Impact Investing Network metrics while focusing financial inclusion
investment accounting needs. Key benefits include:
- Transparently demonstrates developmental additionality achieved by investment capital.
- Enables viability assessment of inclusive business models targeting underserved markets.
- Facilitates performance evaluation, management, organizational learning and
accountability.
- Provides informed decision making for capital allocation by funders and investors.
- Potential benchmarking of inclusive finance providers on mission achievement and
commercial viability.
Some challenges remain around standardization, controls and verification given diversity of
inclusive finance providers. But improved transparency in financial inclusion impact
investing can help scale flows to where they are needed most.
Implementing Financial Inclusion Investment Accounting
Adopting the proposed financial inclusion investment accounting framework requires:
Alignment with Regulators - National financial regulators may need to update reporting
requirements or provide guidelines for inclusive finance providers to dual report on
standardized social and financial metrics.
Capacity Building - Technical assistance is needed to build capabilities in data collection,
analysis, verification and integrated reporting especially for community-based organizations.
Technology Solutions - Many providers lack IT systems to track, aggregate and report
standardized social performance data at scale across operations necessitating tech upgrades or
partnerships.
Common Definitions - Standardizing definitions, methodologies and periodicity across all
indicators reported on is needed to facilitate aggregation, benchmarking and transparency.
Independent Assurance - Reliable data requires strengthening internal controls and engaging
qualified external auditors/verifiers to ensure accuracy, validity especially for impact metrics
reported externally.
Gradual Implementation - A phased approach beginning with core social outreach and
financial metrics may reduce initial compliance burden while progressively integrating
additional recommended indicators each period.
Promoting Transparency - Funders could require use of framework in Requests for Proposals
and disclose results publicly to drive transparency and organizational learning across the
sector over time.
Collective Action - Standard setting bodies, networks like AFI, networks like MIX together
with inclusive finance providers and social investors can help align on guidelines, build buy-
in and address implementation challenges through collaboration.
With appropriate capacity building support and enabling regulatory environments,
implementing financial inclusion investment accounting using a consistent global framework
can help scale flows of capital to where it is needed most to expand access to underserved
populations worldwide. Improved transparency also holds inclusive finance providers and
funders more accountable for achieving both social impact and commercial viability.
Conclusion
Financial exclusion remains a pressing global issue with billions still lacking access to basic
financial services critical for managing livelihoods, smoothing consumption and spurring
broader development. There has however been growing investment and innovation focused
on delivering inclusive finance aimed at low-income and other financially excluded groups
through diverse providers and business models. Evaluating performance and allocating
capital effectively requires a standardized framework to transparently report on both
developmental impact achieved as well as commercial viability of these financial inclusion
investments and initiatives.
By comprehensively measuring and disclosing quantitative social outreach, product usage
and qualitative impact outcomes achieved together with conventional financial reporting, the
proposed financial inclusion investment accounting framework aims to meet these needs.
Doing so in a globally consistent manner can promote transparency, informed capital
allocation decision making, benchmarking and overall scaling of successful pro-poor finance
models. With appropriate implementation support and regulatory buy-in, adopting this
inclusive finance-specific framework could help expand access further for billions still left
behind by mainstream financial systems worldwide, contributing significantly to broader
development goals.
