Where is the evidence that charities need an investment bank?

by Jay Kennedy, Policy Officer, Directory of Social Change

It might surprise you to know that in the midst of all the recent economic turmoil the Government is thinking of setting up another bank.  Its purpose?  To provide loans and other financial investments to charities and social enterprises.

As it has been proposed, the Social Investment Wholesale Bank would be a ‘lender to the lenders’ – it would provide capital to other ‘social lenders’ to increase the amount of financial investment going into the voluntary sector.  It would have a number of other functions, including championing the idea of social investment.

Social investment is basically about using financial capital to create positive social and environmental outcomes as well as financial return.  So, a loan could help you turn an unused space into a café that generates income for core services and also repays the loan.  So called ‘patient capital’ could provide part of the funding you need to acquire a building if you haven’t raised all the money yet.  It is ‘patient’ because it allows you to pay back the debt when you’re able to.

Investment of this type may have its place, but it simply isn’t relevant to the vast majority of charities.  Any investment that requires developing income streams that are sufficient to service debt carries risks, even if the debt is on favourable terms.  And expanding into other income-generating activities often simply doesn’t fit with a charity’s structure, mission and the work that it does. If charities do need investment to develop in different ways, there are already a number of private and charitable financial institutions that can help.

We really need the Government, and indeed many of the leaders in the voluntary sector who are promoting this idea, to take a step back and get some solid evidence before going any further.  That is what any sound investor or business would do – first ask: What is the demand?  What is the supply?  Is supply meeting demand?

The Government’s consultation on the bank cites the Third Sector Review as evidence that ‘access to appropriate funding and finance often remains the single biggest concern facing organisations’.  Yet a quick scan of the writeup of responses to the review reveals that the terms ‘social investment bank’, ‘social investment’, and ‘loans’ appear nowhere in the document.  ‘Finance’, as a form of investment, appears twice.  ‘Investment’, as in capital investment, appears three times.  By contrast, ‘funding’ appears 55 times and ‘grants’ appears 18 times.

What does this admittedly very cursory analysis of the evidence tell us?  That organisations are absolutely concerned about funding – particularly grant funding – but show very little interest in investment or finance.  Government cannot simply ignore this and pretend that the evidence says something which it doesn’t; that is a recipe for policy failure and wasting money.

Several years ago, the Commission on Unclaimed Assets recommended that a social investment bank be set up using the proceeds from dormant bank accounts.  This seems to be the basis for the Government’s proposals.  Funding from dormant accounts may still prove to be a source of at least some of the funds for the proposed bank.

DSC’s view is that any money released by the banks from dormant accounts should be distributed as grants for local organisations.  An established national funder such as the Big Lottery Fund would be an obvious choice to distribute the money widely and relatively quickly, which would be welcome at a time when many organisations are struggling because of the recession.  Or, if a longer-term impact is required, the money could be used to endow local charitable funders, so they can provide a sustainable source of grants for local organisations for decades to come.

To view DSC’s full response to the consultation, go to DSC response to consultation on Social Investment Wholesale Bank  [pdf document].