Two interesting articles today. The discussion on social lending mirrors a variation on SIB practice while the other article is interesting albeit struggling to come to terms with the well-proven notion that actually private capital almost invariably outperforms any form of government investment…

How Banks Should Finance The Social Sector

Today’s financial markets are not working for charities and social enterprises. Most traditional financial intermediaries, like banks, are focused on short-term returns and deem unsecured lending to social enterprises to be too risky.

This lack of affordable funding limits the ability of social organisations to deliver on their missions, hampers their ability to grow and constrains their impact on society.

Banks have a role to play in the social sector. But it isn’t the one you might think. Instead of developing a business case to justify the provision of unsecured loans to higher-risk charities, banks should use their own philanthropic capital to implement the new models that others have developed to address this market failure.
CAF Venturesome, the social investment arm of London’s Charities Aid Foundation, offers one such model.

To bridge the gap between traditional bank loans and grant funding we provide ‘’patient capital’’ in the form of long-term unsecured loans to charities and social enterprises. We use donors’ philanthropic capital to offer unsecured loans ranging from 25,000 pounds to 250,000 pounds ($39,000 to $395,000). To date, we’ve loaned over 22 million pounds to over 280 charities and social enterprises in Britain. Our default rate is less than 6 percent.

Social Change In the Face of Austerity
Huffington Post

The increasing popularity of “social finance” and “social enterprise” may be symptomatic of a growing impatience with government response rates in making essential changes. It also is a sign of a modern societal eagerness to accomplish good at a pace accustomed to the Internet Age. Today’s generation has little tolerance for artificial structures and bureaucratic rationales for why something can or cannot be done.

The notion that private businesses must function within bottom-line financial silos is simply no longer true. Moreover, the idea that government funded not-for-profits altruistically exist to solely support the welfare state is equally deemed absurd. It has been widely acknowledged that we now live in a reality where there is a sector-wide responsibility to achieve sustainable gains across all financial, social and environmental domains. This new reality has brought into question the role of government and the value proposition of neoclassical liberalism in the face of austerity.

Neoclassical liberalism is a political ideology that advocates civil liberties and political freedom, limited government and a belief in the free market. This stance largely aligns with the social finance and social enterprise movement. Impact investors and social entrepreneurs want to accomplish good in a sustainable manner without the bureaucratic vehicle of politics slowing them down.

The idea of these high net-worth individuals and empowered citizens taking action into their own hands is exciting, but what does this mean for our society as a whole? What if one impact investor can provide a greater social return on investment than an elected government? What if a single social entrepreneur can provide poverty-alleviation faster than an entire team of policy experts from a dedicated department? What if a successful capitalist is more effective at achieving social outcomes than an elected president or prime minister? Or alternatively, what happens if these new influential individual investors, entrepreneurs and capitalists make a mistake or abuse their influence?