It’s not about the Bank

Depending on your definition, social investment is either about getting finance into underserved markets, it’s about access to finance for social enterprise or, in practice, it’s currently dominated by a handful of government investment funds.

But the debate around social investment tends to be all about the next big thing – the Big Society Bank – and the Government’s plans for it.

How about we forget the Bank for a minute and return to a few basics. What is the problem which social investment is trying to sort out? What does the government do already? Is it any good?

1. Finance for underserved markets. That’s what Community Development Finance Institutions (CDFIs) do. So what is the Government doing to support them, why and is it working?

Well, a recent national evaluation of CDFIs sponsored by the Department of Business and the Cabinet Office concluded something quite interesting, albeit rather cryptically coded. It said that the Government needs to develop (and bear with this…)

“substantial intervention rationales… only with a clear policy framework within which the sector can operate, including the range and extent of public benefit it is seeking from the sector and a recognition that the achievement of any such benefits will require investment in the sector, can [the policy] be assessed for effectiveness”.

What on earth does this mean? In other words, the Government doesn’t know what it’s doing in regard to CDFIs. And if it doesn’t know what it wants, or how much to pay for it, then God knows if it’s any good. Roughly translated.

2. What do we know about social enterprise access to finance? What is the Government policy and is it working?

Well, the evidence apparently says there’s not really a problem. A recent Cabinet Office report suggested that “many social enterprises could be as capable of accessing commercial finance as mainstream businesses, and found little evidence that social enterprises are either riskier or less well understood by finance providers than conventional small and medium-sized businesses”. It also found “no significant difference between social enterprises and mainstream businesses in the number that had been rejected by finance providers”. So no problem here then and no need for the Government to do anything – right?

3. But the Government is doing something through its multi-million pound investment funds. What do we know about them? Well, relatively unrecorded anywhere formally – but rife throughout the sector – is the huge amount of criticism levelled at the government’s principal fund manager. The Social Investment Business gets a lot of stick. Perhaps it’s deserved – who knows?

But isn’t much of this criticism misdirected? If it’s about delays in investment decisions, inefficiency, taking too long, or overselling themselves, then whether accurate or not, that would be well directed. But as most of the criticism is about how these funds distort the market, crowd out other investors and throw taxpayers’ money around through grants when they should be loans – then this critique is misdirected.

The Social Investment Business has KPIs with government, reports to government and gets its money from government. So this criticism is a bit like having a pop at a dog for chasing the stick. Shouldn’t the Government be on the receiving end?

So what was the problem, what is government doing and is it working?

Well, reflecting on the above, it seems a) there isn’t a problem; or b) we don’t really know if there is a problem and how much it costs to sort out; or c) government is already trying to help and maybe  doing it pretty badly but we don’t want to criticise them.

So anyway, let’s talk about this exciting Bank thing…

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3 Responses to It’s not about the Bank

  1. Jeff Mowatt says:

    What I was blogging about the other day in fact.
    Back in 2004 our business plan for community interest proposed local franchise operation which would commit profit to CDFIs. Projected total £100m annually which would also attract CITR.
    They needed a credit crisis to create a Big Society bank and one off investment from the deceased rather than continuous re-investment by the living.

  2. Jo says:

    The Australian government is currently in the process of setting up a social enterprise development and innovation fund, providing $20 million to be at least matched by the fund managers. We don’t have many CDFIs (count: 1!) here. What concerns me in this context is, we seem to know a fair bit about the demand side of the social investment equation, but very little about the supply side…

    • Jeff Mowatt says:

      Jo there may be more than you think. CDFIs include credit unions and microfinance banks. There would seem to be a number of the former AFAICS.

      The UK responsibility, as I’ve learned recently pass to Regional Development Authorities in 2004, around the same time I approached our local one SWRDA with our business plan. After 6 years , they still say they’ll get back to us. CDFA the association which guides them simply didn’t reply.

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