Why financial inclusion needs commitment across the capital markets value chain

1 Mar 2022

Financial inclusion plays a critical role in supporting sustainable and resilient capital market environments, particularly in emerging markets. How are infrastructure providers creating more inclusive capital markets?

Capital market infrastructure providers have a long tradition of supporting and protecting investors through an emphasis on investor education and financial literacy. With Covid-19 turning a spotlight on the importance of diversity in building sustainable capital markets, calls are growing for advancing the objective of financial inclusion: that is, giving individuals and businesses better access to affordable financial products and services that meet their needs.

It is our view that enhancing investor diversity is vital because inclusion plays a fundamental role in creating resilient capital markets, particularly in emerging economies. With this in mind, we recently approached securities exchanges and depositories in Africa and the Middle East to understand how these infrastructure providers drive financial inclusion and discuss efforts to create more inclusive capital markets.

Making a meaningful contribution

While everyone surveyed recognised their general obligation, respondents had mixed views about their ability to take on full responsibility for creating an inclusive future. On the one hand, some argued that removing the key impediments to broader market participation was beyond their sphere of influence. On the other, some believed market infrastructure providers were in a strong position to drive inclusion because of the mutually beneficial and non-competing nature of their interactions with other market participants.

Between these two polar views, respondents acknowledged they could control several operational, commercial and strategic levers – such as cost, product diversity, investor education, technology and strategic partnerships – to make markets more inclusive.

In this article we share some insights on how depositories and exchanges are pulling these levers to reach a broader client base and drive financial inclusion.

Market costs

Cost being a key consideration, depositories and exchanges have taken strong measures to improve operational efficiencies and reduce fees. For instance, in South Africa, securities depository Strate has turned to e-voting to significantly lower costs for issuers and intermediaries. In Zimbabwe, Chengetedzai provides free demat services and electronic accounts to investors.

Egypt’s stock exchange has proposed a 20% trading fee reduction for H2 2022, while Nasdaq Dubai has waived the minimum trading fee and minimum clearing/CSD and settlement fees for equity trades. The Abu Dhabi Securities Exchange introduced a 22% reduction in trading fees in February 2021.

While doubtless welcome by participants, the highly intermediated structure of capital markets makes it challenging to validate the impact of these initiatives in enabling financial inclusion.

Product diversity

Exchanges typically encourage participation by offering products and services that serve a broad range of investors. Inclusion is further supported by creating small and medium enterprise (SME) boards that allow a wider range of companies to raise capital. In addition, exchanges are beginning to offer various innovative services.

These include Zimbabwe Stock Exchange’s Receivables Marketplace platform, which provides working capital solutions by selling quality receivables to financiers – an effective solution for a region where access to financing is a major hurdle for SME growth.

Additionally, nine stock exchanges in the Middle East and North Africa have joined the Refinitiv AFE Low Carbon Select Index, which allows investors to assess the Environmental, Social, and Corporate Governance (ESG) practices of listed companies. Such tools help address the absence of verified ESG credentials, which limit opportunities for issuers and investors, and ensure markets become more inclusive.

Depositories, which have traditionally served financial intermediaries such as custodians, brokers and issuers, are also evolving. Many have introduced products and services that offer direct access to retail investors, enabling them to open and manage their own accounts, and avoid intermediaries designed to serve institutional investors. For example, in Kenya, the equities depository has developed a facility for investors to use their CSD balances as collateral for cash loans. In South Africa and Bahrain, depositories are using established platforms to deliver registry services to smaller issuers of unlisted securities.

These measures not only create new revenue streams for infrastructure providers but also improve asset safety and offer greater processing efficiency to issuers and investors in unlisted financial assets. Moreover, deploying institutional-grade infrastructure in unlisted and private markets creates opportunities for the collateralisation of financial assets in unlisted entities and potentially improves market participation.

Investor education

The efforts of infrastructure providers in promoting financial literacy and investor education include combining traditional initiatives, such as global investor days, “ring the bell” campaigns, masterclasses and training courses, and social media influencer campaigns. Exchanges, supported by government agencies and regulators, are leading this charge.

Young people are a crucial demographic and infrastructure providers are fueling their interest with initiatives that involve gaming, coding and film-making. For example, Mauritius held a financial literacy and personal finance app design contest, and a documentary/short-fiction competition addressing the impact of digital transformation on the financial services sector.

Technology enablement and strategic partnerships

The capital market infrastructure landscape has grown to include fintechs and start-ups that offer products and services across the value chain. Exchanges and depositories are forming strategic partnerships with these entities to adopt new technologies that help enhance access to previously underserved customer segments at lower costs. 

For instance, in Nigeria, the CSCS is pursuing a promising financial inclusion strategy that includes onboarding two fintechs as depository participants and collaborating with the central bank’s Debt Management Office to augment its retail offerings to reach both young investors and those in the informal sector.

Looking ahead

The examples in this article illustrate how depositories and exchanges have made several incremental contributions to financial inclusion. Capital market infrastructure providers continue to strive to deliver cost-efficient and safe solutions – even though ensuring the value is delivered to where it’s needed the most may be beyond their control.

In addition, the opacity of current commercial structures makes it difficult to ascertain the collective impact of interventions on inclusion. In the circumstances, measuring the impact of interventions and transparency across the investment lifecycle will be crucial to driving inclusion in the post-trade industry. The participation and commitment of economic players across the entire capital markets value chain, including investors at all levels, is required to make meaningful progress on financial inclusion.

As one respondent said: “It will take the sum of all players in an intermediated environment to create and sustain an inclusive system.”