Global Financial Crisis Silver Lining: European Banks Commit Funding for Social Enterprise

The recent financial crisis has led to banks in Ireland expanding funding for social enterprise.  Now the UK banks are poised to follow suit.

In late November London’s Financial Times reported that Britain’s banks could commit  £1.5bn to Prime Minister’s David Cameron’s  “Big Society Bank” as part of a “charm offensive” to “end the war between politicians and bankers that has raged since the crash of 2008.” Leading the project is John Varley, chief executive of Barclays.

In 2009 the Irish legislation that bailed out the Irish banks included a mandate to fund social enterprise through the Social Finance Foundation, newly created by the government.

In the UK the idea of a “Big Society Bank” originated as the Social Investment Bank in the 2006 recommendation by Sir Ronald Cohen’s Commission on Unclaimed Assets. CUA called on the UK government to use unclaimed assets held by the banks to capitalize a wholesale bank serving the social enterprise sector.

“Given that investment and entrepreneurship go hand in hand in the third sector as much as in the mainstream economy,” said Cohen, “attracting capital and resources to finance social activity is key to its success. That is why we are proposing setting up the ‘Social Investment Bank’.”

The Commission’s recommendation received support from a wide range of UK groups including the National Council of Voluntary Organizations, the Community Development Finance Association, and the Development Trusts Association. It was endorsed, but not acted upon, by Gordon Brown’s Labour government.

Immediately prior to the May UK general elections, Conservative leader David Cameron picked up on Sir Ronald Cohen’s recommendation but changed the bank’s name.  In its April 2010 policy platform, The Conservative Manifesto 2010, the Conservative Party stated: “We will strengthen and support social enterprises to help deliver our public service reforms by creating a Big Society Bank, funded from unclaimed bank assets, to provide new finance for neighbourhood groups, charities, social enterprises and other non-governmental bodies.

“This will provide social enterprises with the start-up funding and support they need to bid for government contracts or work towards delivering services under a payment by results model.”

In July Prime Minister Cameron committed to launching the bank by April 2011, pledging that the bank would unlock “hundreds of millions of pounds” for the third sector.

In early November Nick Hurd, Conservative MP and Minister for Civil Society, explained the government’s ambitions to involve the private sector in a speech to JP Morgan’s annual philanthropy conference: “The fledgling social investment market can give charities and social enterprises access to capital finance so they can grow their organisations at the right time. Investors will get new opportunities to build more balanced portfolios and contribute to society in a way that will show the social value of their investment.

“Government and civil society are working to make all this happen but we can’t do it alone. The Big Society Bank, to be funded with money from dormant bank accounts, will be a catalyst for the market but we also need mainstream financial leaders to step up to the challenge and offer their expertise and finance to drive this project forwards.(emphasis added)

Bringing the private banks to the table is not a new idea.

In 1977 the USA created the Community Reinvestment Act to incentivize banks to invest in communities suffering from financial exclusion.

In 2000 the UK’s Social Investment Task Force called on the UK banks to voluntarily disclose their lending “to encourage action by banks and other financial institutions to increase the flow of capital to areas of deprivation.”  In 2010, the Task Force’s final report lamented that while “some banks have improved their transparency…the sector as a whole still does not systematically disclose lending.  It is thus impossible to undertake meaningful analysis and comparison.”

As a result, the UK Task Force shifted away from voluntary measures. In April 2010 it declared: “it is time for legislation to ensure that the pattern of lending and other investment by banks in under-invested communities is disclosed systematically, by borough, ward, type of loan and borrower.”

Ireland’s new finance institution for social enterprise, the Social Finance Foundation, is receiving tens of millions of Euros Ireland’s bailed out banks.

According to the SFF, its future funding requirements “have been secured by means of a new funding arrangement put in place by the country’s retail banks. This will see €72 million being provided over the coming years by the banks at a discounted rate of interest, enabling the Foundation to lend onward at competitive rates in support of social and community projects and micro-enterprises all over the country.”  The €72 million agreement is for a social enterprise marketplace serving a population of less than 4.5 million people in the Irish Republic. (To place the amount committed in context, the proportional amount of funding for Canada would be over $700 million.)

The 12-year loan agreement is with Ireland’s 13 retail banks including: Bank of Ireland, Anglo Irish Bank, National Irish Bank, Bank of Scotland – Ireland, Halifax, KBC, and AIB. “The length of the funding agreement with the Banks is tailored to match the long-term lending by the Foundation, which is a feature of social finance,” says SFF.

Final note: The Conservatives’ commitment to the Big Society Bank should not be confused with its recent creation of a £100million Transition Fund to support charities, voluntary groups and social enterprises affected by public spending reductions.

According to the Office for Civil Society (the renamed Office for the Third Sector that is part of the Cabinet Office): “The fund is available to organisations with a turnover between £50,000 and £10 million which have derived much of their funding from state sources. It will provide grants of between £12,500 and £500,000 to enable organisations to make the changes they need to become sustainable in the longer-term.  The Transition Fund is managed by the Big Fund, the non-lottery funding arm of the Big Lottery Fund.”

A charity research organization, New Philanthropy Capital recently reported that in 2008-2009 total UK central government funding to the voluntary sector totalled £12.8 billion. They project announced government cuts will mean a funding reduction to the sector of between £3.2 billion to £5.1 billion.  Like what happened in Canada in the 1990’s, the UK government is downloading cuts to lower levels of government, like local councils.

Speaking in the House of Commons on September 15th, 2010, the Conservative Prime Minister warned local governments: “When it comes to looking at and trimming your budgets, don’t do the easy thing, which is to cut money to the voluntary bodies and organisations working in our communities. Look at your core costs. Look at how you can do more for less. Look at the value for money you get from working with the voluntary sector.” (Emphasis added.)


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Tim Draimin About Tim Draimin

Tim Draimin is the Executive Director of Social Innovation Generation (SiG)

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