Social finance: creating wealth for a purpose
Making charity count
Many Indians give back money to society and lakhs of NGOs benefit from this largesse; at Charioteer we believe this is sub-optimal. “Finance” means “using wealth to multiply wealth”. Social Finance should mean “using wealth to multiply wealth available for doing good.”
Charity makes the receiver dependent: the neighborhood beggar, the poor servant, that deserving NGO, once you donate, you have a “dial-a-friend” — whenever they fall short of money, you are the easy answer.
Creativity, innovation and delivering value for money are hard-work. It is so much easier to put sob-stories into that slot-machine-with-a-conscience that is you. Social Finance goes beyond “doing good” to “creating sustainable value.”.
Value-based sponsorship
This is the easiest form of “Social Finance” – corporates or individuals seeking to donate funds and time to causes that act as “soft marketing”. Examples of this would be a swim-wear company sponsoring an aqua-sorts initiative for children of fishermen, or a builder sponsoring a crèche for construction workers’ children or an HR initiative for community service by employees during office hours. The NGO gets funding because it delivers tangible or intangible benefits to the “Social Investor”.
Social Enterprise and Catalytic Capital
Often deprived sections of society can be gainfully employed, if the cost of creating special infrastructure could be subsidized. The National Association of Blind (NAB) at Madurai runs a commercially successful BPO – the office and computers have been funded by grants. For them, this has been a “hand up”, not a hand-out, making it competitive to employ disabled people.
WORTH Trust, set up by the Sundaram group in the ‘60s is an example of catalytic capital — old machines and “factory premises” were created at Katpadi to provide gainful employment to cured lepers!
First Loss Guarantee Capital
Stepping up in the level of sophistication of “Social Finance,” we move into 21st Century with “First Loss capital” capital. Suppose one were to set up a Micro-finance company in J&K. Naturally, the most likely funders would be PSU banks, and mentally I am sure they would write-off the amount the moment they disburse it. But could there be a better way to let banks be banks, by letting CSR Donors subsidize that risk?
Let us say that S-SAFE is an MFI set up in Sorpore to finance agriculture, fishing and eco-tourism. The promoters have got their own funds and are seeking loans.
Let us assume they create an SPV with two classes of debt – “First Loss” and “Commercial”. XYZ Hotels Ltd. puts its CSR Funds “First Loss” and ABC Bank provides commercial debt.
If the amounts are repaid in the normal course, both get their money back with interest. But if there are defaults, the “First Loss” class bears loss of principal and interest before the commercial bank. This makes it easier for S-SAFE to seek commercial loans.
Thus instead of a CSR Handout, XYZ Hotels has created a Social Finance vehicle which will promote discipline in S-SAFE while making commercial lenders feel SAFER — . a Win-Win-Win model.
Social Impact Bonds and Outcome Based Funding
Wikipedia say, “A Social Impact Bond, also known as a Pay for Success Bond or a Social Benefit Bond, is a contract with the public sector in which a commitment is made to pay for improved social outcomes that result in public sector savings.” It is usually a tri-partite contract when a donor agrees to finance an NGO to achieve a social result, where the financial benefit to society can be quantified. A public entity (e.g. State government, Municipality) agrees to repay the bond, if the outcome is achieved.
Developed as recently as 2010 in the UK, it is fast gathering momentum since it creates an imperative to deliver measurable and quantifiable results. India is yet to see such a bond, but it has immense potential here as Grantors seek greater efficiency.
Social Venture Capital
The Global Impact Investors Network (GIIN) states, “Impact investments are investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending upon the circumstances.”
Social Venture Capital funds try to provide business-like capital to organizations that are trying to achieve social objectives without compromising on wealth creation. In simple terms, a Social Venture Fund would invest in companies like Amul, LijjatPapad or Fab India. Such funds have sponsored many excellent Social Ventures.
In India, these funds are regulated by SEBI as “Category I (Social) Alternative Investment Funds”. These funds serve a very useful purpose in promoting the growth of organizations that are doing good but with discipline of commerce. While every fund is chasing the next Flipkart, these funds are looking for the next AMUL. They bring the discipline of equity investments to giving. Charioteer, my company, manages one such fund.
Social Audit
Before I end this article, let me touch upon the subject of Social Audit – a vital aspect of Social Finance. Today a few organizations have started developing a formal Social Audit Process, but perhaps the oldest is the Social Auditors Network (SAN) of UK. In essence, a Social Auditor provides third-party validation of the impact achieved by Social Finance. It creates credibility for funders and recipients alike and can give comfort to people handling 3rd party Social Funds. Any organization seeking Social Finance or indeed giving Social Finance, should seek a credible Social Audit.
Add value to Charity
In 21st century giving, social funding is becoming more sophisticated – Tridos Bank and Charity bank, Big Society Capital and IFMR in India are examples of how Social Finance can maximize the effect of grant money. It not only promotes eventual independence from Charity but also improves outcomes and maximizes the benefit to target-group: which is after all the core purpose of every Giver.
Our CSR Rules have created a platform to launch true Social Finance in India.
About the Author: Krishnamurthy Vijayan is the Managing Director of Charioteer I4L
