The early microfinance revolution dramatically improved global access to financial services, especially credit. People previously excluded from formal credit systems were given opportunities through microfinance institutions, receiving small loans that allowed them to start businesses and attempt to increase financial security. Yet, decades later, the issue of credit access persists, as only about 1 in 3 people have access to traditional credit. In many cases, microfinance loans may no longer be the right solution.
Meanwhile, data and technology have swept through developed markets, with banks, funds, and lenders using cutting-edge methods to manage risk in credit. However, these advancements have not fully reached emerging markets, where the financing gap stubbornly remains. According to the International Finance Corporation (IFC), 1.6 billion people and 200 million small businesses in emerging markets still lack access to formal financial services. Closing this gap will likely require innovative ideas and methods to bring credit to those who remain excluded.
Accial Capital Management, a US-based fund manager committed to expanding financial access for low- and middle-income borrowers in developing countries, believes it has found a solution. This fund represents a pioneering effort to use data and technology to close the persistent financing gap, particularly in Latin America. It is designed as a FinTech investment manager to select and underwrite credit for an emerging set of lenders targeting the “un-approvable frontier” of prospective borrowers. We recently had the opportunity to engage with Jared Miller, CEO of Accial Capital Management, who shared valuable insights on what is needed for the next wave of microfinance to take hold.
The Problem of Financial Exclusion
The “microfinance revolution” has left unfinished business. In emerging markets, microfinance has helped increase the number of bank accounts and accounts at regulated microfinance institutions or credit unions. Between 2011 and 2021, the global average rate of account ownership rose from 51% to 76%, with developing economies increasing to 71%. While account ownership is a catalyst for using other financial services such as borrowing, saving, and investing, many individuals still face barriers when it comes to securing additional funds—whether for unexpected expenses or business ventures. In emerging markets, formal credit access is about one-third of the levels seen in the U.S., where domestic credit to the private sector is around 216% of GDP, according to the World Bank. This figure is 101% in Europe and 193% in Japan. In Latin America, credit to the private sector is around 53% of GDP, similar to India (56%) and double that of Sub-Saharan Africa (25%).
For small and medium-sized enterprises (SMEs), the disparity is even greater. Around 50% of SMEs in developed markets have access to bank loans or lines of credit, while in developing markets, this figure drops to just 20-30%. The IFC estimates that 40% of micro, small, and medium enterprises in emerging markets face credit constraints, resulting in a USD 5.3 trillion financing gap.
Traditional banks typically assess client risk by reviewing credit records, real asset values and transaction histories—data and assets that are often unavailable or incomplete in emerging markets. This prevents banks from lending to individuals or businesses that may have a good repayment history but lack the formal documentation to prove it or real assets to serve as collateral. Furthermore, banks may be less inclined to pursue smaller clients due to higher operating costs, leading to higher fixed transaction fees or minimum balance requirements that borrowers are unwilling or unable to meet. These challenges contribute to the persistent financing gap, hindering both economic growth and individual financial wellness.
Building on Microfinance
In many ways, microfinance was intended to fill this gap. Through responsible lending frameworks and client protection principles, microfinance institutions have provided responsible credit to micro, small, and medium enterprises in emerging markets. Despite its successes, however, a significant gap in financial inclusion remains. New approaches are now aiming to build on the achievements of microfinance while adapting to the opportunities presented by the technological era. Notably, while 2 in 3 people without access to formal financial services in developing countries do have access to a mobile phone, digitalization of financial services could potentially boost emerging markets’ GDP by USD 3.7 trillion by 2025, according to BNP Paribas.
As Jared Miller explained, “The early microfinance revolution was a remarkable step forward for financial inclusion globally. It was the first big wave. Data and technology are the second big wave, helping to fulfill the promise and potential of the original microfinance revolution.”
In recent years, advanced markets have used novel data analytics techniques with increased speed, power, and accuracy to create a more comprehensive view of credit portfolios, minimizing risk and allowing for timely interventions. Accial Capital employs similar techniques, bringing structured credit methods from developed markets to segregate cash flows and mitigate bankruptcy risk in emerging markets. FinTechs like Accial are leveraging technology to set themselves apart from traditional microfinance institutions by providing a new level of data management and oversight. According to Miller, Accial’s ORCA (Ongoing Risk and Cashflow Analytics) system allows the firm to achieve a new level of data granularity by “capturing every original loan schedule and every payment from every borrower ever, every day” allowing for risk control that was unavailable even a few years back.
This sophisticated data asset, built by triangulating multiple data sources, enhances the firm’s ability to predict, recognize, and address potential issues before they become significant, thus minimizing negative impacts. The system also prevents fraudulent data reporting, ensuring that the firm has access to accurate, real-time information. Over 85% of Accial’s portfolio consists of small and medium-sized enterprises, with an average loan size of USD 2,000—similar in nature to the clients served by microfinance and FinTech firms. This ultimately provides borrowers with more options and a greater chance of achieving financial wellness.
According to Miller, technology is just one reason for Accial’s success. “An important part of our success is due to the expertise and guidance we receive from investors and advisors, such as Broadpeak, whose insights help us to navigate challenges and grow in order to make meaningful impact.”
Bringing Impact Measurement Forward
Industry standards, such as IRIS+ metrics, have helped standardize impact evaluation across investment firms and fund managers by considering social, environmental, and financial outcomes. According to Miller, Accial’s “ability to report highly accurate IRIS+ metrics is unique in the industry because we can track exact, not inferred, numbers of client outcomes.” Rather than sharing median or summary-level impact measures, advanced data techniques allow for a more precise and accurate assessment of a fund’s impact.
However, Miller sees even greater potential for improving impact measurement and evaluation. “The emergent frontier in the industry is to approach financial wellness, not just financial inclusion. In impact measurement, the underlying clients should have a vote on the impact achieved.” By incorporating the perspectives of borrowers and using detailed data to measure success and failure, firms can take a more holistic and impactful approach to closing the financing gap.
The Forward Outlook
While many new firms are born digital, mature firms are increasingly recognizing the need to integrate technology into their strategies. However, borrowers may not yet be fully accustomed to a digital-first operating environment. FinTech users must be protected from privacy breaches, identity theft, and fraud, as a lack of trust in digital financial services could undermine adoption. Client protection is essential in this new era. As Miller explained, “We had to learn what client protection meant in the embryonic years of microfinance. Today we can stand on the shoulders of the microfinance giants and integrate their client protection principles into all of our analyses.”
Particularly in developing markets, ensuring trust in how personal data is used and managed will be critical for the future of financial inclusion. Borrowers must have safeguards, such as appropriate product designs, transparent pricing, and protections against over-indebtedness. Policy will also likely play a role in ensuring consumer protection, privacy, efficiency, competition, and financial stability. As more people gain access to credit through advanced technology, prioritizing these protections at both the firm and policymaking levels will be essential to achieving financial wellness for all.
