Last week saw a report issued by Social Spider’s on social investment “The Forest for the Trees”.
Do banks understand charities?
One of the issues that the report highlights is that mainstream banks have got a bad reputation when it comes to lending to charities and social enterprises. It has been a consistent narrative that high street banks do not ‘get’ the sector. As a consequence, they are not providing the services that charities and social enterprises particularly in terms of lending. On the back of this, there has been a push to create a ‘social investment’ market.
This narrative have been effective so far, and has convinced policy makers to invest hundreds of millions into the development of social investment market from the creation of Big Society Capital to programmes such as the Investment and Contract Readiness Fund.
There is certainly some truth that some mainstream banks lack an understanding of the charity sector. In a consultation with our members earlier this year on banking, a number of charities commented at the lack of understanding within banks. However, a number of members also commented on how they had a good understanding from their bank – particularly those with a relationship manager.
The truth is somewhat greyer, with banks that have dedicated charities teams and relationship managers more likely to have a better understanding of their clients than those that don’t. It is also true that the bigger charities and social enterprises tend to be better understood by their banks. Charities should engage with their banks and understand whether there are products on offer that may benefit them.
However, while this is an interesting issue, a critical point is whether this lack of understanding has prevented banks from being effective at lending to charities?
Charities are borrowing significant amounts outside of social investment market
According to the best estimate that we have, NCVO Civil Society Almanac, charities currently owe around £2.7bn in loans in 2013/14. This is down a bit from the £4bn that charities owed in 2011/12.
The social investment market, by contrast, is estimated to be worth around £1.5bn in 2015 – although it is hard to know exactly what this means and what is classified as social investment. However, on face value this would appear that social investment has been relatively successful.
Yet, this report is a welcome reminder that social investment is small compared with the existing financial relationships that charities have. According to their data, mainstream bank lending to organisations could be offering around £620m a year in loans and overdraft facilities to the sector each year. This is around three and half times the level that social lenders and other social investors made in 2015.
Not only this, but data from RBS indicates that the bank is making loans of a range of sizes – big and small. In fact, it seems to be making small loans under £250,000 to some clients, which the social investment market appears not to be able to make without the aid of grant funding from the Access Foundation (i.e. less than £250,000). It is likely that other mainstream banks are similarly providing smaller loans to charities.
This begs the question: do we need the social investment market to be focused on small loans (secured or unsecured) to charities and social enterprises?
Mainstream banks have significant size and scale this enables them to provider smaller loans on a mass scale, keeping rates lower. They also have, in many cases, long term relationships with charities and social enterprises as well as dedicated teams of support.
Would it not be more effective to help mainstream banks identify these opportunities to lend to charities and social enterprises and focus social investment money on those areas where, due to risk and complexity, the mainstream banks are not in a place to develop effective products?
Where can social investment be transformational?
As I argued recently in a piece for Charity Finance magazine, I think that there needs to be a serious rethink of how we have approached social investment so far. In that article, I said:
“One particular area where growth has been lacking is “equity-like” capital, which is useful for charities without assets to borrow against. These are products which see repayments based on performance such as profit or turnover. This suits the risk profile of many charities, which want to grow but are not in a position to “go for broke” and risk leaving their beneficiaries with nothing if they fail. Research from BSC indicates that there have only been a handful of deals in this area, with the total “equity-like” market standing at £32m. Some would argue that this is better than nothing, but in a £1.5bn marketplace it is quite disappointing.”
There may be a role in Big Society Capital and others capitalising social lenders, particularly given their approach to supporting a more sustainable sector. But could mainstream banks actually be best placed to take the lead on loans for small and medium sized charities and social enterprises.
Should the social investment market shift form 46% being focused on small loans (replicating on a smaller scale the work of mainstream banks) towards risker products such as ‘equity-like’ capital, which make up only 2% of the current market place?
Arguably, it is at the riskier end that the use of public money is most justified and could add value to the work of the charity sector.
If mainstream banks are encouraged to give more small and medium sized loans, then this would free up more funding to be used to develop the financial capability of charities. This would leave them able to access a range of different funding sources including riskier social investment products and more traditional mainstream bank lending.
Opportunity to leave a lasting legacy
Government is not going to keep funding social investment forever. There are two legacies that institutions that are working in the social investment market should be focused on:
- The research and development of products which other funders can support further down the line.
- A more financially resilient sector which can understand how to use debt to support their charitable objectives.
Hopefully this report will encourage a rethink within the social investment world on how best precious resources can be deployed.