In June we published a report about Scope’s new redevelopment project that will be partly financed by 0% interest loans from donors. Loans and other types of social investment are hot stuff at the moment, and one of the ways the government reckons it can finance the Big Society. The Big Society Bank, for example—a Labour party initiative adopted by the Coalition government—will use £60m unclaimed assets to help charities and social enterprises invest in new buildings or scale up their operations.*
But social investment is not just the preserve of government. One of the aims of the Big Society Bank is to leverage in funds from other investors. Some of these other investors, the government believes, should be philanthropists.
This makes sense. Social investment by its nature involves an element of philanthropy because, more often than not, social investors accept a lower rate of return than they would from purely financial investments.
There are compelling reasons why donors should consider lending as another way to support a charity, alongside donations or volunteering. Loans can be used to fund the purchase of a new building, or to invest in new services, or to give a charity greater financial stability by helping with their cash flow. And, because donors get their investment back, it can be recycled many times, meaning that donors and charities can make the same money go further.
Yet it’s hard to see what there is to entice donors to the world of social investment. The last UK government hoped to encourage investors by introducing a Community Investment Tax Relief (CITR) on investments made to a group of snappily named Community Development Finance Institutions (CDFIs) that lend money to charities and social enterprises, as well as individuals and small businesses.
This might appeal to institutional investors looking for investments that have a social as well as a financial return, or to donors with a special interest in community finance. But it would take an extremely strategic donor who would choose to give to a CFDI rather than directly to a cause or organisation they really care about.
The problem is that it’s just not very easy for donors and philanthropists to lend to charities directly. Organisations like Scope that are taking the initiative and developing their own loan products may be on the increase, but they are still few and far between. And, from our research, it appears that where donors have provided charities with loans this seems to be an ad hoc arrangement, often at the initiative of the donor.
If we really want to scale up social investment by donors and philanthropists, we need something that connects donors that want to give loans with charities that need them––perhaps a charity version of the website Kiva.
Kiva is a microfinance project that allows donors to make small loans to individual entrepreneurs in developing countries, which are then repaid, sometimes with interest.What makes Kiva so exciting is that it makes loan finance accessible and attractive to people who might not otherwise consider lending. Donors can choose an entrepreneur to support and see the difference that their loan has made.
It strikes me that this model could be replicated without too much trouble for the charity sector, and could help engage more donors in social investment. If it works for entrepreneurs in the developing world, why not for charities?