A January 2017 report issued by Oxfam found that the eight richest individuals in the world have a net wealth of $426 billion–equivalent to the total amount of wealth held by the poorest 50% of the global population (some 3.7 billion people). That same report found that the world’s 10 largest corporations together have revenue greater than the 180 poorest countries combined.
Impact investing has a role to play in addressing this shocking inequality of wealth. Although many tools are necessary to reduce wealth disparities, participation banking and trade finance are especially promising and should be supported by the investor community.
Participation banks: Serving the underserved
Public perception of the finance industry holds that it only exists to benefit the rich, exacerbating the wealth gap and entrenching inequality. While this may be true in many cases, participation banking is different. Part of the community banking movement, participation banking requires financial institutions share responsibility for the poor in society. Each bank takes part in socially responsible activities by setting aside a certain amount of its total funding sources to serve the community in which it operates. One example of the better banking behavior common among participation banks is providing interest-free loans to those who otherwise couldn’t afford financing.
In its ideal form, participation banking is an ethical banking system that operates not only to earn income for owners of capital but also to help the general public. It has grown in response to rising global inequality, becoming especially popular in countries like Malaysia, Indonesia, and Turkey. For example, the Participation Banks Association of Turkey reported that total assets in five Turkish participation banks grew by more than 15% from the previous year to more than $33 billion in 2015, the most recent year for which statistics are available.
Today, participation banks are often involved in programs like education programming, health care funding, and microfinance grants. The primary focus is to make money in a way that maintains social justice.
Trade finance: Now more than ever
According to the World Bank, extreme poverty has fallen dramatically in emerging economies since the 1980s. The world attained the first Millennium Development Goal target—to cut the 1990 poverty rate in half by 2015—five years ahead of schedule, in 2010. Trade has been a primary factor in this poverty alleviation. It can do a great deal more in the years to come, but we have to make sure that the poor feel the full benefits of trade.
Impact investors are in a privileged position to be able to help advance this cause through ethical trade finance deals. Up to 80% of global trade is supported by some sort of financing or credit insurance. But developing countries are not only still suffering from the consequences of the 2008 financial crisis; the benefits of global trade have come under intense criticism due to a rising tide of nationalism in parts of the developed world. As a result, there continue to be major financing gaps, particularly in Africa and Asia, parts of which are home to some of the world’s most vulnerable.
Through ethical trade finance deals (those offering zero rates of interest and advance payment to sellers), impact investors can provide the fuel entrepreneurs need to grow, leveraging the power of trade as a means of development and poverty alleviation.
Each of us has an obligation to right the wrongs stemming from wealth inequality in our way, but it’s more important to tackle the root causes. The impact investing community, which has a history of bringing innovative, responsible solutions to market, is poised to do just that. Let’s start by promoting participation banking and trade finance solutions as a response to this global dilemma.
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