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 organizations 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.

Our investment model offers donors an innovative way to achieve greater impact.

When you make an investment using your philanthropic capital, we use it to make an unsecured loan to a charity. When that charity pays us back, we then loan that money out again to another charity – a “recycling” process that we repeat until we can pay back your original investment (as per your agreement with us).

Bank CEOs are under increasing scrutiny to demonstrate the ‘’good side’’ of their industry. Innovation in social finance should be an integral part of that story. Banks already have the necessary evaluation processes, talent and global reach.

And they also have sophisticated corporate philanthropy and social responsibility programs. By combining these resources in a new unsecured-lending-to-charities model, banks could achieve much more social impact than they do today.

Strategic corporate philanthropy requires CEOs to take a hard look at their organizational resources, to mobilize them to achieve the greatest social impact and to act boldly. Anything less falls short.

(John Canady is the director of philanthropy at Charities Aid Foundation in London.)