Social investors can lend to anyone they like as long as they don’t need the money

Like the Queen, social investment wholesale finance institution Big Society Capital (BSC) has at least two birthdays. So, while I wished them many happy returns in April, the celebrations have continued well into May.

The outward facing side of things is going pretty well with the Prime Minister, David Cameron, preparing to spend some of the next year telling his G8 colleagues about what, in political terms at least, seems like the proverbial silver bullet. And given that the rest of the meetings will mostly be about ongoing global economic crises and intractable civil wars, it’s hard to begrudge the PM a few hours of enthusiastic chat about social impact bonds (SIBs) to lighten the mood.

Whether or not you’re excited about the rise of SIBs (or if you’re reserving judgment), there’s broad agreement that BSC has some work to do in terms of fulfilling the wider mission outlined by Minister for Civil Society, Nick Hurd, last year. Speaking at the launch, Hurd said: “For many years, charities and social enterprises have been telling government how hard it is to access long-term capital. We have listened and within two years have delivered a new institution that will make it easier.

It’s not going too well so far, at least in terms of getting finance to charities and social enterprises who can’t get investment from conventional sources. As BSC chief executive, Nick O’Donohoe, explained recently: “One product in very short supply but, we believe, in significant demand is unsecured loans for charities and social enterprises.

He added that: “We already have visibility of proposals in our pipeline that would increase availability by such products. We are also working hard to understand the risk profile of this sort of lending and the link between pricing and demand.

There’s no reason to doubt that BSC’s team are working hard on this but, despite the fact I’m neither a risk analyst nor a cartoonist, I’m not sure I’d need to spend too long doing the necessary research to produce a half-decent illustration of that risk profile in the form of a short comic strip.

Sam Collin, of intermediary umbrella body, Community Development Finance Association (CDFA), is responsible for this week’s (unfortunately very necessary) statement of the blindingly obvious pointing out that: “Both Big Society Capital and the newly formed Business Bank are keen to improve access to finance for social enterprises and SMEs. But both will only provide capital at commercial rates.

She poses the question: “if CDFIs are becoming more “ruthless” in their lending decisions, will this limit the range of social enterprises that can access finance to start up or grow?

Followed by the inevitable answer that: “They’re not going to take a punt on you because they think the positive impact you’ll have on the community is worth the risk.

The whole premise of (small scale) social investment at ‘commercial rates’ is based on somebody somewhere having a rabbit in their hat that, once pulled out, will explain how relatively small social investment intermediaries will be able to make relatively small, relatively risky investments in small social enterprises without being subsidised to do so.

There isn’t currently any reliable data on how many social enterprises in the UK are viable trading businesses but we do know that, when considered collectively, entrants to the SE100 competition for fast growing social enterprises, receive £8 in grants for every £1 generated in profit.

In the absence of talking rabbits boasting outstanding financial acumen, both BSC and those social enterprise leaders who thought social  investment at ‘commercial rates’ could work for small social enterprises are still as far away as they’ve ever been from even having a serious hypothesis to match their assertions, let alone a practical solution that would make their dreams a reality. It seems quite possible that guarantees might help to increase lending in situations where risk is uncertain but that doesn’t solve the problem of the many situations where investment could have a significant social impact but the risk is quite obviously high.

There’s a few different ways this debate could go. One is that, as suggested by Rodney Schwartz, the social investment industry focuses primarily on the goal of delivering successful social investments even if this involves ‘helping the least needy’.

Another is for the government to follow CDFA’s (implied) suggestion is that it should give their members grant subsidies to support the provision of risky investments in areas of high social need but – if government is going to give out grants to intermediaries to enable them to provide risky loans – wouldn’t it be better off cutting out the middle people and just funding risky social ventures with grants?

It seems unlikely that 2013-14 will see BSC make a decisive leap in any particular direction – it will continue to attempt to accommodate a wide range of different (and often conflicting) ideas about what social investment could be under its £600milllion banner. Either way, creating a social investment market that is (a) commercially sustainable and (b) socially useful remains as big a challenge as ever. The challenge for the social enterprise movement is to make sure that the process of trying leads to as much positive social change as possible.



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2 responses to “Social investors can lend to anyone they like as long as they don’t need the money

  1. With your notable exception David, the Guardian social enterprise hub isn’t a place where many writer engage with their reader. I responded to Sam Collin as you may see, with an extract from our business plan for a self sustaining business which invests 50% of profit in a CDFI:

    ” Fifty percent of annual surplus will remain in each local community where income is derived, by way of deposit into a local community development bank serving that location. In that locales are part of EU and therefore subject to well-developed rule of law, corruption issues should not present insurmountable barriers such as in Crimea.

    Fifty percent of surplus will be retained by P-CED for growth and expansion. Along the way, all employees of P-CED are to be paid at minimum a wage sufficient to guarantee a decent standard of living in accordance with the International Covenant of Economic, Social and Cultural Rights.”

    Work in Crimea, followied the success of sourcing a community development bank in Russia, which became self sustaining in it’s second year, we’d proposed linking the self sustaining ‘community funding ehterprise’ with a local CDFI for mutual benefit. It brought USAID to the table with 40 milion dollars:

    “In all cases, a certain amount of outside funding is needed to get things started. I proposed a strategy for this starting phase: at least one enterprise in a community, the function of which is to provide profit to be used in the community to grow more businesses. Most of the net profit from this community-funding enterprise would be placed into a community development fund such as a credit union. The balance of profit is invested into the business for growth. The community fund is then used by people who have most need, rather than the conventional practice of returning the money to the pockets of only a few people. Those few people tend to become wealthy to the point that they do not actually need more money, while many people in any given community probably do need the money. In this regard, this strategy of directing profits for use by people who have the greatest need might be called “social capitalism.”

    “The limitation of a bank or credit union is making enough money in the process of lending money to sustain itself. This money is made by charging interest rates, which must be high for micro loans. It requires much more time, work and therefore cost to lend one million dollars among a thousand different people than lending the same amount to one person, for example. As a result, the interest rates for micro loans need to be high in order to cover the operating costs of making these loans. Even with high interest rates – up to 35% in the present case – it remains difficult to earn sufficient profits to be able to make loans across a wide region such as Crimea where potential borrowers are spread out in remote areas across the region. The cost of outreach, training and multiple visits in that process can exceed 35% interest ultimately earned on micro-loans to remote areas.

    By combining a community-funding enterprise (CFE) with a micro-credit union, the limitations inherent in each one is greatly diminished. The CFE provides sufficient funding to ensure the operating costs of the credit union, reducing the risk that the credit union will have any need to use its capital to sustain itself. The credit union immediately makes available sufficient loan money to match the needs of the community, thereby eliminating the time needed for the CFE to generate the same amounts of money. Additionally, CFE profits over and above what is needed to help with the operating costs of the credit union can be put directly into the credit union. Over time, the amount of money used to originally fund the creation of the CFE is offset by CFE contributions to the credit union. The credit union is increased so that larger amounts of money become available either to make larger loans or to service more borrowers. Together, the CFE and credit union create an enterprise where the original funding not only remains but also increases with time. They complement and balance each other by addressing the economic goals both have in common and offsetting each other’s limitations.”

    This self sustaining model of social enterprise was obliged to focus elsewhere and the impact was reported for the SE 100 Index.

    “We are the only UK and international body to independently prove that a business is putting people and planet alongside profit” say the people at the Social Enterprise Mark.

    I’m the Urban Spaceman, David – here comes the twist – I don’t exist.


  2. The influence of PR on social innovation has become difficult to ignore of late. These were used for example while we campaigned in Ukraine for social investment into childcare and an Orange Revolution was overturned with the assistance of Davis Manafort.

    We see this in action today as Sir Ronald Cohen speaks of the invisible hand and the invisible heart, He isn’t saying anything social capitalists don’t understand or haven’t already put into action.

    You may note the ‘I did it all myself tone of his presentation’


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