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Topic of the month March 2016: Innovative Sustainable Finance

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Innovative Sustainable Finance

FinTech - From emerging markets to Western economy

Whereas a new wave of Financial Technology (FinTech) startups is gaining momentum these days in shaping the future of finance in the Western world, social entrepreneurs in emerging markets had already taken the lead on financial innovation as early as a decade ago in the field of Microfinance. Their objective was the financial inclusion of those excluded from the traditional banking system which still remains one of the biggest global challenges in ending poverty. As traditional banking infrastructure is often non-existent and cash holdings are vulnerable to theft, the establishment of electronic payment ecosystems gave way to new solutions for consumers at the bottom-of-the-pyramid. Digital finance proves to foster life-changing impact by overcoming traditional banking barriers and provides unbanked individuals as well as Small and Medium Enterprises with profoundly needed financial services.

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Digital finance solutions for consumers at the bottom-of-the-pyramid


Digital financial services are deployed through different types of innovations such as mobile money, products scored through air-time, point of sale devices and smart cards, inter-bank mobile payment mechanisms or insurances sold through mobile wallets. Furthermore, digital finance helps to ease the challenging data collection: Mobile phones are increasingly used as channel for surveys and inquiries through Interactive Voice Response (IVR) technology.

Mobile banking can be seen as a pioneer financial innovation in developing countries. Even though most communities still lack in basic needs like running water or electricity, a growing number of inhabitants owns a basic, affordable cellphone which can be used as money transfer, savings, credit and insurance scheme. To get access to mobile money, users only need to sign up and handle over an amount of cash to an agent, who credits the money into the account. Mobile banking proves to be an easy way to transfer money quick and safe from and to remote places with simple text messages.

The example of the Maasai, one of Kenya’s oldest tribes, who preserve their distinctive traditional culture and yet embrace modern technology, shows in a stunning way how mobile phones lead to social empowerment even in most remote locations. Tribesmen are able to check market prices, get information about where to graze their cattle in periods of drought and thereby avoid days of travel. They can recharge their phones through solar chargers or panels and overcome lacking electricity infrastructure.

Kenya and Tanzania are indeed leading success stories: A recent survey on Mobile Banking, published by the Consultative Group to Assist the Poor (CGAP) in December 2015, shows that respectively 58% and 34% of population already have an active mobile money account. Regulators’ fast approval and effective marketing campaigns allowed these new schemes to flourish rapidly. The study shows that such new technologies are also effective in Ghana and Rwanda.

In emerging countries, banking was essentially revolutionized and driven forward by the telecommunications industry with the intention to reach more customers through simplified transactions, fastened-up processes and reductions in customer and operational cost. Whereas mobile money has been slow to catch up in European developed and developing countries, a study by the GSM Association shows that adoption rates are significantly high in South Asia and Sub-Saharan Africa.

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Addressing critical challenges


Even though FinTech offers promising solutions for financial inclusion, challenges remain: Illiteracy, unawareness, weak regulatory frameworks, fraud and remoteness can slow down or compromise technology adaptation. Country-specific circumstances can affect implementation in other countries and consumer protection raises another issue. However, those challenges can partly be addressed through new financial innovations such as biometric terminals who allow the validation of customer identities to prevent fraud and secure the financial ecosystem. Furthermore, state support and favorable regulatory frameworks can act as innovation drivers: In India, the government prioritizes financial inclusion and is constructing a landscape for FinTech, attracting high capital for startups as well as boosting sustainable and innovative financial solutions.

How to ensure transparency in an innovative Responsible Investing market

Financial innovation has highly contributed to the evolution of Sustainable Finance and in particular Responsible Investing (RI) in the financial industry. Product innovation is at the forefront with investors showing a growing demand for RI products. Impact investing focusing on social and environmental impact alongside a financial return is increasingly adopted as innovative investment approach. Impact investments are deployed through structures like Microfinance, Crowdfunding, Philanthropy or Social Enterprises. Impact themes such as green energy, clean water or education can be combined with Microfinance solutions to allow sustainable development of underserved communities.

As the Responsible Investing sector is moving mainstream, transparency becomes a critical requirement in the assessment of RI products. Investors are seeking simplicity and understanding of investment funds and want to make sure that they really invest in a responsible manner. To create this highly needed transparency, LuxFLAG, an independent and international labelling agency, awards transparent Labels to eligible investment funds in Microfinance, Environment and ESG (Environment, Social, Governance). Their objective is to provide clarity to investors and reassure them that the labelled fund invests in a responsible manner. To unlock capital for social innovation, the agency promotes products in Impact investing through its Microfinance Label. To be granted a LuxFLAG Label, applicant investment funds have to meet predefined eligibility criteria assessed by independent Eligibility Committees composed of industry experts, academicians and analysts. LuxFLAG Labels are available for internationally distributed funds irrespective of their country of domicile. The agency is an integral part of the Luxembourg global funds industry, which is the largest in Europe and the second-largest worldwide after the US.




The LUXEMBOURG FUND LABELLING AGENCY (LuxFLAG) is an independent and international, non profit making, association created in Luxembourg in July 2006 by seven founding partners who are the Charter Members.

The Agency aims to promote the raising of capital for Responsible Investment sectors by awarding a recognisable label to investment funds. Its objective is to reassure investors that the applicant investment fund invests, directly or indirectly, in the responsible investment sector. The applicant fund may be domiciled in any jurisdiction that is subject to a level of national supervision equivalent to that available in European Union countries.
For more information, visit us at www.luxflag.org






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