A recent report from RBS said UK banks are lending over £3bn to social organisations. Geetha Rabindrakumar responds saying that social investment aims to fill those gaps not met by mainstream lending.
The recent report Forest for the Trees is a new step in transparency - RBS have opened up and shared their data to demonstrate a clearer picture of their lending to the social sector. This is welcomed and as the report highlights, there is more that we and others could be doing on this. We’ll be providing updated deal level data as part of our transparency commitments in a few weeks, so watch this space…
The report estimates that there could be £3bn outstanding loans to the social sector by mainstream banks – this seems consistent with the estimate of commercial bank loans to the sector in our report earlier this year (primarily based on NCVO Almanac data that has been available for some time). It’s great news if banks are equally willing to lend to the social sector as to commercial businesses – so what is it that social investment is doing? And why are the 3,000 organisations currently using £1.5bn of social investment not accessing loans from mainstream banks instead?
Using social investment may be the only option
Social investment is mainly intended to fill a gap where the proposition is unlikely to meet a mainstream lending criteria (but could still sustain repayable finance).
One of the big data gaps flagged is whether RBS loans provided are secured or unsecured. It’s likely that most bank loans will take some form of security (hence generally cheapest source of borrowing). Many charities and social enterprises won’t hold sufficient fixed assets to be able provide security, and will rightly not want their board members to provide personal guarantees (which is sometimes requested as an alternative) - unsecured social investment can help meet this need.
During my time at Scope, in 2009, we faced a dual challenge of managing ongoing financial pressures combined with an ambition to develop new services - we accessed a £6m loan via the Social Investment Business to support this, which a mainstream bank at that time wouldn’t have provided. This isn’t uncommon from talking to many other organisations.
Wider factors in decision making
If you’re fortunate in having several options on where to access finance, there can be multiple factors in any investment decision for your charity or social enterprise based on what you judge to be in the best interests of the organisation and its beneficiaries. Cost effectiveness and speed of decision making (which social investors don’t always live up to) are often the key considerations and if a cheaper alternative from a mainstream bank is available, many will rightly take it.
Some organisations will also have a strong desire to work with lenders that they feel are aligned to their values and where their fees and repayments are being redirected within the social economy. Mainstream banks are also considering how their operations could be better aligned to the social sector values, which is to be welcomed. Some organisations are looking to engage wider stakeholders who could become longer term supporters of the mission (as we did at Scope with our charity bond in 2012). Some value the role that an active social investor can take in supporting the development of the social business, as the care co-operative CASA has shown. Some are seeking a more flexible, risk taking form of finance (e.g. where repayments are linked to income or surpluses, or where covenants and repayment profile are better tailored to the sector’s operations), which may be better provided by social investors.
It’s not either or
Mainstream banking and social investment are not mutually exclusive. Some organisations like 4 Children have combined both mainstream finance and a loan from a social lender to get the full package they need to scale their organisation or develop property based services.
Social investment can enable the initial riskier development of some projects, with mainstream banks playing a key role in refinancing projects over the longer term, once set up and proven to be sustainable – for example in community led solar projects, like those supported by Pure Leapfrog.
Ensuring charities are informed about the options available
We want to see charities and social enterprises making the right choices for them – our outreach work highlights the spectrum of options they can consider and where they can be accessed which of course includes mainstream banks. We are developing a website to support organisations exploring use of repayable finance (GoodFinance.org.uk), and this report is a good reminder that the website needs to include tools that highlight the role of mainstream banks.
Banks having wider involvement in social investment
Banks are supporting social investment more broadly. Most obviously, the big 4 UK banks have committed to invest £200m into Big Society Capital (!) to grow the social investment market. They have also invested their capital into social investment funds for organisations that probably wouldn’t access mainstream loans, as HBSC did with Big Issue Invest SEIF earlier this year, and with the RBS Social Enterprise Fund. Banks could perhaps find other ways to partner with social investors to increase what they can offer charities and social enterprises, as Charity Bank and Social and Sustainable Capital have done to offer a 100% loan product, or to support social investment providers with scale and distribution which are challenges for social investment.
We know banks are considering how to utilise their relationships with individuals to facilitate more investment from individuals using the Social Investment Tax Relief which could be of huge benefit to the sector, particularly for smaller investments that take more risk. This has been an acknowledged gap in supply, which other initiatives like Access and crowdfunding using SITR will also start to better fill.
Lloyds Bank Foundation’s charity mentoring programme with their banking colleagues shows that social investors don’t have a monopoly on adding value to the social sector, and it would be great to see how bank staff expertise could be harnessed more broadly in capacity building the sector around use of repayable finance.
Overall, it’s positive that social investment is a growing proportion of the finance available to the sector, and from what we see, this capital is generally meeting needs that wouldn’t be financed solely through mainstream banks. The strong support of mainstream banks can amplify the benefits of the growing amount, diversity and reach of social investment – which should mean more opportunities for charities and social enterprises to access the finance they need, which is ultimately what we’re here for.
Geetha Rabindrakumar is head of social sector engagement at Big Society Capital
