The Irish Social Finance Eco-system is poised to introduce it’s first new financial product in over 20 years, following research undertaken by Rethink Ireland, Community Finance Ireland, and Dublin City University, in association with the Irish Social Enterprise Network.
A mix of non-repayable loans, low interest loans and crucially non-financial support investment readiness, the product is primarily targeting first time borrowers from the social enterprise and community space.
The new and innovative product (a first in Europe) will aim to introduce those with no security, little by way of trading record, but delivering respectable levels of social impact, to loan finance via a responsible, calculated approach.
This event aims to pump prime demand among the marketplace for hybrid loan grant supports of between €30k and €100k. Those involved in local authorities and NGOs supporting social and community enterprise, as well as early stage social enterprises, will find this information of benefit.
As importantly, the product promoters who are placing the finishing touches to what will be a pilot call for applications in 2023, are seeking feedback on the generic financial needs of social enterprise through this event which is one in a series across Ireland.
The ambition of all within the Social Economy is to encourage sustainability and reduce levels of dependency, where possible, on the uncontrollable, whatever guise it might take.
The CVSE (Community, Voluntary and Social Enterprise) sector owes a great deal to the availability of charitable support, as well as start-up and development grants from various quarters. Much of the Community & Voluntary subset will no doubt always be reliant on continued grant support to maintain the level of service provision. But what of the rest of the sector involved in growing the earned income side of their Social Enterprise?
Social Enterprise will usually need debt finance at some point, to draw down retrospective grant support, for property acquisition, development, refinance personal debt, or manage existing unsustainable borrowings where immediate demands on repayment are a real threat.
The volunteer led ethos implies to the conventional debt system that there exists at least a reduced, if not total, absence of financial vested interest in the project.
The absence of collateral of any marketable value, often requires volunteers to sign personal guarantees in order to access this debt. A community manager pledging their home as security on a bank loan has been as bad as we have seen. That the voluntary board allowed the situation to arise is a whole other matter.
Social Finance is the incubator for the community sector on the road to achieving experience in borrowing and developing a credit score, but on terms & conditions appropriate to that market. It does not request personal guarantees from volunteers (or staff!), and normally does not charge arrangement fees. Its priorities are simply:
Firstly, find a way to make finance available to a Social Enterprise
Secondly, have the finance repaid in full
And finally, derive interest income from the loan to cover its “cost to serve”, and mitigate potential losses across a portfolio
Presently in Ireland (2022), social finance up to a general limit of €500k is available to the CVSE sector absent arrangement fees and personal guarantees, yet recent survey findings would suggest that much of the sector remains unaware of the support, with over 50% financed by conventional banking instruments such as overdrafts and secured borrowings.
A survey on social finance (Sep. ‘21), commissioned by DCU and responded to by almost 200 social enterprises across Ireland, revealed a number of interesting findings. One such outcome was that half of the respondents source their finance directly from the conventional banking sector, as opposed to applying for support via indigenous social finance providers such as Community Finance Ireland and Clann Credo, which were established specifically to cater for that market, and ensure profits are recycled back into the sector.
The statistic is interesting in that it has been reflected upon differently in various quarters. Some would argue that the fact social finance now accounts for almost 50% of the sample is a significant step in the right direction. If the total amount loaned by social finance providers across the island is just somewhere north of €200m over the last 20 years, then this relatively small amount (in banking terms) has punched well above its weight.
Another mind-set would take a more pessimistic view of the finding. After 20 years of the provision of social finance in the Republic, there remains either a stark lack of awareness of the product’ existence, or, more worryingly, it means that the offering in its current structure may be incompatible with the needs of a substantial element of the market.
In either case, the present research project being undertaken by Rethink Ireland, DCU and Community Finance Ireland: “Financing Social Enterprise in Ireland – Models of Impact Investing & Readiness” aims to address both possible reasons behind this more dimly held view of the current state of play.
Through a series of customer focused product workshops, investor readiness sessions, and round table discussions with potential capital providers to the sector, moves are afoot to at least mitigate that low level of awareness, as well as making products more accessible for those at the margins when it comes to risk appetite.
Social Impact Bonds are a relatively recent innovation, circa 2007. They are financial instruments designed to use private, public, philanthropic funds or a combination of these to finance work to help solve complex social problems. It is important to note that SIBs are rather misnamed as they are not strictly speaking bonds, i.e. debt instruments. They are in fact a form of Outcomes Based Commissioning (OBC) contract where the finance needed to make the contract work comes, in principle at least, not from government or the service provider, but from third party investors (Albertson, Fox, O’Leary and Painter 2020). In practice, this has tended to not be the case and in the UK, home to approximately 50% of the world’s SIBs, this investment is often subsidised by central government (Huckfield 2020). In this sense SIB-funded provision of public services is analogous to the UK’s Private Finance Initiative (PFI) funded provision of public infrastructure.
Proponents of SIBs distinguished them from other forms of outcome-based payment by emphasising:
their alignment of social and financial returns on investment;
that service provider costs are covered by investors up-front – in theory minimising risk transfer to smaller, third sector providers; and
the potential for SIBs to bring together groups of social investors and portfolios of interventions.
However, to date, it is not clear the potential of SIBs to facilitate social innovation has been realised and there is considerable evidence that their ability to serve as a catalyst for innovation has been oversold (Fox, Olson and Armitage 2020).
At their core, Social Impact Bonds are proposed to have three key constituent elements:
a commissioner, for example a government department or public agency directly responsible for a specific public policy area), that is willing to pay initial investors a specific amount for a contracted social outcome once it has been achieved;
a service provider, for example a social enterprise or civil society organisation, that develops a social intervention, directly addressing the contracted social outcome;
a social investor that are willing to make the initial investment to provide service providers the working capital for that intervention, assuming the financial risk.
The underpinning logic is that the commissioner transfers the financial risk of failure of a SIB to the initial social investors, without reducing the overall level of social or welfare services performed (European Commission 2020). Focusing on outcomes, rather than on outputs or the cost of services alone, service providers are supposed to be incentivised to innovate and collaborate on service provisioning. Longer-term SIBs contracts provide them extra investment for service delivery, as well as the stability and time necessary to gain the trust of service beneficiaries. In addition, it is argued that the service provider is immediately provided with a large amount of funding to deliver a social service or intervention. This financial boost affords them the flexibility and means to provide their service according to what achieves the best outcome while also promoting experimentation and innovation. The social investors are meant to be paid by the commissioner if (and only if) the contracted social outcomes are achieved.
To date there is limited evidence that SIBs meet the standards of success proponents set (Huckfield 2020). A critical gap is the absence of social investors and in many cases the state assumes both the role of commissioner and social investor and many reviews have highlighted the lack of a market for such financial instruments (IGEES 2016). As a result many SIBs represent a more convoluted form of Outcomes Based Commissioning contract. In addition, the capacity of many social enterprises or civil society organisations to actively manage their involvement in such complex contractual arrangements is questionable.
On Thursday 2nd June 2022, leaders of social enterprises and support organisations, government representatives and social finance experts all met in Buswell’s Hotel, Dublin, to discuss the future of Social Finance in Ireland.
As part of the ‘Financing Social Enterprise in Ireland: Models of Impact Investing and Readiness’ EU Funded project, social finance instruments were discussed amongst the delegation. The event, co-organised by Community Finance Ireland, Dublin City University and Rethink Ireland, seeks to find new financial instruments that can assist social enterprises in the near future.
The project which commenced in January 2021 has opened a series of round table workshops and events to explore the existing social finance landscape and to explore new products that can make a meaningful difference to the social enterprise sector.
Speaking about the event, Donal Traynor, CEO of Community Finance Ireland said, ‘It is important to listen to the lived reality on the ground of social enterprises in Ireland. Getting the correct timely finance solutions to social enterprises so that we might promote sustainability and grow the wider social economy sector is crucial. Today allows expertise and experience challenge our work and offer new hope for financial instruments in the sector.’