Financial services are a force for good in the world

Financial services are seen as a vampire on society – sucking the life out of everything around them, whilst creating vast amounts of personal wealth. In reality, financial services are the lubricating oil for the machine of society - without finance, our world would grind to a halt.

I’ve never thought I would end up in finance. But after spending 6 years experiencing the impact finance really has on peoples lives throughout the world. I came to the realisation that financial services are massively understood by most.

Finance has an image problem

Nobody understands financial services - they are consistently ranked as the least trusted industry, and bankers typically rank alongside politicians in trustworthiness. It is hard to trust financial companies when nobody really knows what they do. This was shown by a study from the University of Nebraska which found that the more people learn about what is really going on inside an organisation, the more favourably that organisation is judged.¹

Finance doesn’t produce anything - there is a shared mental model that work produces artefacts, and anything that doesn’t produce tangible things, therefore, can’t be work. Finance doesn’t produce any real artefacts you can see: their primary output is digital - it is all just moving numbers around on spreadsheets. They can do their job with very little, the scale at which this is done is often staggering – it is not uncommon for billions of pounds to be managed on spreadsheets.

There is a default assumption that financial services are a zero-sum game – for someone to win, someone else has to lose. There is a perception that all the players in finance make all of their money by taking it from others. The reality is that the only way finance can sustainably work is by creating net-additional value.

But Finance is crucial to society

Imagine you borrow money from the bank to purchase an old house and some tools. You then spend the next few weeks working away, painting the walls, changing the floors, fixing the electrics. You can now sell that home for more than the money that you borrowed - the loan helped you create brand new value in the economy. That is the value that the bank will capture a share for taking the risk of providing you with the capital.

Financial services are the lubricating oil for the machine of society. They aren’t the machinery - they don’t manufacture anything “real”. But what they do is make the creation of value by other industries much easier.

This isn’t to say that everyone in financial services is acting with pure and noble intentions. There are always bad actors that are playing to their own short term incentives in any industry - like the Volkswagen emissions scandal. That is the place for regulation to protect society and create effective disincentives.

In developed countries, having access to world-class financial services is normal, just like breathing oxygen. But there are 1.7 billion people² who are unbanked and have no access to formal financial services. Such a large part of our lives are enabled by easy and equal access to these services.

Bank accounts

In 2007, Kenya was a country where 98%³ of the population had no formal bank account and relied on physical cash for everything. It also has strong cultural ties to people’s ancestral lands - so it is common to work in the city but keep the family back home. This created a huge problem - how to send money back home - which often resulted in that money being carried home. This is obviously incredibly inefficient - imagine having to sit on a bus for 12 hours - each way - every week. So that you can provide for your family.

M-Pesa was launched by Vodafone to enable people to send and receive funds instantly through their mobile phones. They utilised the network of agents who would sell airtime for the phones to manage the physical cash-in / cash-out. In 2018 after 11 years of operating, M-Pesa boosted the Kenyan GDP by 6.5%.⁴ Today M-Pesa has 17 million accounts and has lifted 194,000 households (2% of Kenyan households) out of poverty.⁵

Loans

In 1974, Bangladesh suffered a famine that resulted in 1.5 million deaths, this famine didn’t impact society equally and that inspired the creation of Grameen (Bengali for “Rural”) Bank. Grameen Bank was founded in 1983 with the goal of making small loans available to a larger population to stimulate businesses and reduce the widespread rural poverty in Bangladesh.

These small loans are used to help fund the education of children or investments in a business – e.g. purchase of agricultural equipment and livestock. Over the past 37 years, they have lent $7.6 billion, to over 9 million borrowers of which 97% are women.⁵ As much as 5 per cent of households lift their families out of poverty every year and as a result, boosted the Bangladeshi GDP by 1.3%.⁶

Insurance

India even in 2019 has a society where 43.9% of the population’s livelihoods are supported by agriculture and this is made up of 138 million farms, 119 million of which are less than two hectares.7 These millions of families are dependent on the income these farms generate - but this income is always at risk due to crop failure.

In 2016 the government introduce a new micro-insurance scheme which private insurance companies operate. Since its implementation, 41% of farmers have been covered under a policy and 13.7 million farmers have benefited. That is 13.7 million households that had their primary income protected through insurance.⁷

Finance provides hope of a better future

Financial services fundamentally shift our perspective towards the future - a hopeful future that will be better than today - whether you are saving for a rainy day in the future in a bank account, or protecting your future self from risks with insurance, or investing in education or starting a business by taking out loans.

Those of us in more developed countries can’t even imagine a life without access to these products and services. But I will always remember the stories of the people I’ve spoken to in Egypt, Uganda and Bangladesh whose hard lives are made so much harder because they don’t have what we take for granted.

Financial services give people hope, and oil the machinery of society - that is why they are a force for good in the world.

  1. PytlikZillig, L., Kimbrough, C., Shockley, E., Neal, T., Herian, M., Hamm, J., Bornstein, B. and Tomkins, A. (2017). A longitudinal and experimental study of the impact of knowledge on the bases of institutional trust. PLOS ONE, 12(4), p.e0175387.
  2. Demirguc-Kunt, A., Klapper, L., Singer, D., Ansar, S. and Hess, J. (2020). The Global Findex Database 2017 : Measuring Financial Inclusion and the Fintech Revolution. [online] Documents.worldbank.org. Available at: http://documents.worldbank.org/curated/en/332881525873182837/The-Global-Findex-Database-2017-Measuring-Financial-Inclusion-and-the-Fintech-Revolution [Accessed 4 Mar. 2020].
  3. MIT News. (2020). Study: Mobile-money services lift Kenyans out of poverty. [online] Available at: http://news.mit.edu/2016/mobile-money-kenyans-out-poverty-1208 [Accessed 4 Mar. 2020].
  4. Kenyan Wallstreet. (2020). Safaricom Contribution To Kenyan GDP Stands At 6.5% - Report - Kenyan Wallstreet. [online] Available at: https://kenyanwallstreet.com/safaricom-contribution-to-kenyan-gdp-stands-at-6-5-report/ [Accessed 4 Mar. 2020].
  5. En.wikipedia.org. (2020). Grameen Bank. [online] Available at: https://en.wikipedia.org/wiki/Grameen_Bank [Accessed 4 Mar. 2020].
  6. Mainsah, E. and R. Heuer, S. (2004). Grameen Bank: Taking Capitalism to the Poor. Chazen Web Journal Of International Business. [online] Available at: https://www0.gsb.columbia.edu/mygsb/faculty/research/pubfiles/848/Grameen_Bank_v04.pdf [Accessed 4 Mar. 2020].
  7. Kumar Ghosh, R. (2020). Performance evaluation of pradhan mantri fasal bima yojana (pmfby). [online] Available at: https://www.iima.ac.in/c/document_library/get_file?uuid=ae2019ae-6e67-4ad8-964b-93c464f2223b&groupId=62390&filename=PMFBY%20(Part-I)%202018%20-%20Final%20Report%20-%20sent%20to%20MoA [Accessed 4 Mar. 2020].


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