Social enterprise leans on banks as partners and increases usage of mixed financing options.
In the world of finance, traditional funding sources for organizations are evolving, with banks and self-financing showing a decrease in their dominance compared to the last survey. This shift is particularly noticeable in the sphere of social enterprises and cooperatives [1].
One of the emerging trends in this evolving landscape is the increased awareness and use of impact finance tools. In 2022, 82.5% of organizations are aware of subsidized loans, but 69.7% are actually utilising them. Other impact finance tools, such as social and social bonds, and social venture capital, are also gaining traction [2].
However, a fascinating observation is the decrease in the use of social venture capital, which dropped from 41.7% in 2020 to 18.2% in 2022. Similarly, the use of social and social bonds has decreased from 51.5% in 2020 to 30.3% in 2022 [3].
This contraction translates into pressure on the ability of social enterprises to produce change. The Consorzio Cgm, representing the world of social cooperation, has reaffirmed the role of finance in accessing credit and invited banks to maintain a gaze on the third sector that goes beyond the more traditional balance sheet criteria [4].
The challenges for banks in supporting social enterprises and cooperatives are manifold. Many commercial banks find it difficult to understand these organizations' unique business models and social impacts, leading to skepticism about loan repayment abilities [5]. Social enterprises often face regulatory burdens and internal capacity weaknesses in marketing, management, and business strategy, making it harder to attract and manage financing effectively [5].
Scaling community-grown solutions, such as savings groups, requires strategic investments and regulatory frameworks to prevent them from losing effectiveness [6]. However, opportunities for banks in partnering with social enterprises and cooperatives are plentiful.
Banks like Charity Bank (UK) and Spring Bank (USA), certified B Corps, have integrated social and environmental impact into their core missions by lending specifically to social enterprises and community organizations [1]. Programs like Bank On engage local governments and trusted community partners to overcome barriers to financial inclusion, expanding access to safe bank accounts and timely payment systems that benefit social enterprises and cooperatives [7].
Leveraging new payment technologies, such as real-time and instant payment services, improves cash flow reliability crucial for social enterprises operating on tight budgets [7]. Partnerships could include training in management, marketing, and financial literacy to strengthen social enterprises’ ability to scale and succeed commercially while delivering social impact [5].
Platforms connecting social enterprises with impact investors, facilitated by development banks such as ADB, help these organizations showcase their impact, improving their access to capital and partnerships [5].
In summary, banks face challenges in bridging knowledge, regulatory, and capacity gaps when working with social enterprises and cooperatives. However, by adopting impact finance practices, engaging community partners, harnessing innovations in payment technology, and providing training and networking opportunities, banks are positioned to play a pivotal role in enabling sustainable growth and impact of the social enterprise sector [1][2][3][5].
The current trend indicates an increasing preference for short to medium-term investments at the expense of long-term investments. Investments in the third sector are underdimensioned and in a phase of contraction, partly due to the macroeconomic scenario [8]. The third sector, represented by Giusi Biaggi, has asked banks for partnerships to stand alongside them to grow more, investing together in capacity building [9]. In the 2020-2022 triennium, 67.2% of organizations reported making investments, but this was a decrease from the previous survey (-2.8 points) [9].
References: 1. Impact Investing in Europe 2. The Future of Social Enterprise 3. Financing Social Enterprises: Challenges and Opportunities 4. Consorzio Cgm Position Paper 5. Bank On 6. Scaling Community-Based Models 7. Innovations in Payment Technology 8. Investments in the Third Sector 9. Third Sector Investments
- Despite the contraction in investments in the third sector, banks are urged to collaborate with social enterprises and cooperatives, as partners, to grow more and invest together in capacity building, due to the crucial role they play in enabling sustainable growth and impact.
- The decline in the use of social venture capital and social and social bonds by social enterprises has put them under pressure to produce change, leading the Consorzio Cgm to invite banks to maintain a focus on the third sector, considering not just traditional balance sheet criteria, but also the unique financing needs of these business entities, which often involve impact finance tools and strategies.
