upscaling social investment 50 case studies - united...

F I F T Y C A S E S T U D I E S

Upscalingsocial investment50 case studies

Upscaling social investment: 50 case studiesCASE STUDY CO-ORDINATOR: Danyal Sattar, INAISE

EDITOR: Radhika Holmstrom

EDITORIAL ASSISTANCE AND ADDITIONAL RESEARCH: Viviane Vandemeulebroucke, Thomas Hüttich, INAISE

This collection of case studies are written by experts in the different aspectsof social finance. They cover areas of relevance to developing and upscalingsocial investment in Europe and draw on international experiences relevantto the European situation. Although most are directly European in nature,they include the key relevant experiences from North America and EasternEurope. These studies are grouped into three areas: Vision, Strategy andPolicy, and Practice.

VISION: These studies explore the vision we have of the future of socialfinance, in a context of a changing banking system.

STRATEGY AND POLICY: These studies explore strategic and policy issues forthe sector and look at issues, such as social investment in the context of achanging welfare state, or policy issues, such as disclosure regulation.

PRACTICE: These studies demonstrate the possibilities of social finance,displaying examples of current practice, showing what is possible.

ACKNOWLEDGEMENTS

The case study co-ordinator is very grateful to the EuropeanCommission Third System and Employment pilot actionprogramme for cofinancing this work. I would also like torecognise the contributions of each author of the case studyseries, who have donated considerable time and expertise tothese studies, and staff within the organisations covered whohave provided vital information to the authors – manythanks to all of you. None of this would be possible withoutthe support of the members of INAISE, the President andboard of Directors, and the co-ordinator of INAISE, VivianeVandemeulebroucke and above all, the vision and dedicationof INAISE research leader, Christophe Guene.

INAISE: These studies have been produced by INAISE, the International Association of Investors in the Social Economy. INAISE can be contacted at: [email protected] - www.inaise.orgtel: +32 2 234 5797 fax +32 2 234 5798

DISCLAIMER: Views expressed by individual authors are not necessarily policies that INAISE supports or backs,but are here to take the debate forward. INAISE is not responsible for the views expressed by individual authorsin these case studies. The selection of organisations and topics in this series does not necessarily imply thatINAISE approves, disapproves or supports of any of the organisations mentioned. While effort has been madeto ensure the accuracy of the information in these case studies situations change continuously. Readers areadvised to follow up with the organisations concerned. No information in this document should be viewed orinterpreted as an inducement to invest, an investment prospectus or as financial advice.

INAISE, april 2000

ContentsSECTION ONE: VISION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4The death of banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4A greater space for social banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7A vision of community finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

SECTION TWO: STRATEGY AND POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Can banking regulation reduce financial exclusion? Understanding the significance of CRA . . . . . . . . . . . 10Crédal: the issue of legal structures appropriate for social investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15The impact of demutualisation on building societies’ branch networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16The National Community Capital Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Eligible Measures In EU Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Ensuring the development of the social finance sector: the role of credit union trade and support organisations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Credit Unions and their role in social investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Living outside bank status - Grether Ost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Maximising and achiving rapid impact of social investment on community economic development . . . . . . 25Social Accounting and Auditing in Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26Local venture capital: how to bring equity to social businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29Social Investing in Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30The Case for Tax Credits for Social Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32The EDEN scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34Social Banking and Welfare in Europe - between market and state – where are the citizens? . . . . . . . . . . . . 36What future is there for social-economy banks? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

SECTION THREE: PRACTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42Local financing networks in France: a summary of fourteen initiatives (France) . . . . . . . . . . . . . . . . . . . . . . 42ACCION Transplanting Micro-credit from South to North (USA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49ADIE: Micro-Finance for Enterprise (France) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50Aston Reinvestment Trust (UK) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52Banca Etica (Italy) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53The Business Angels networks in France (France) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54Local social venture capital - the CIGALE movement (France) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56The Co-operative Bank’s Partnership Report (UK) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60Dalston City Business Credit Union (UK) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62Ecology Building Society (UK) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64Full Circle Fund, WEETU (UK) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65Fundusz Mikro (Poland) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67Glasgow Regeneration Fund (UK) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69GLS Community Bank (Germany) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70Industrial Common Ownership Finance Limited (UK) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71Illinois Facilities Fund (Chicago, USA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73Institute for Community Economics (ICE) - Community Land Trust and Revolving Loan Funds (USA) . . . . 74JAK Bank interest-free lending organisation (Sweden) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76Local Development and Job Creation - what can we learn from MSIF? (UK) . . . . . . . . . . . . . . . . . . . . . . . 78Local Investment Fund (UK) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79Neighborhood Lending Services - A Revolving Lending Operation for Housing Improvement (Chicago, USA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80New Horizons Saving & Loan Scheme (UK) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82Non-Profit Financial Center (Chicago, USA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83Ökobank (Germany) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85Creating a social investment vehicle: Proyecto TRUST (Spain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86RAFAD (Switzerland) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87Inclusive Partnership Strategy and Governmental Tax Benefits SOLIDE (Canada) . . . . . . . . . . . . . . . . . . . 89Time Money - How to rebuild social capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90Women’s World Banking (USA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92Working Capital: Micro-Credit Group Lending (USA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93World Savings Banks Institute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

4 • Section One

1V I S I O N

I was asked to talk about the future of banking. However, I find that I amcompelled to report that banking is already dead! The current upheaval in the financial services industry, across Europe and beyond, is as significant as the industrial revolution of the 19th century.

In the case of the UK this means a golden age ofwarm beer, cream teas and village cricket – oftenloosely associated with the sort of bank managerembodied in the Captain Mainwaring figure inthe TV series Dad’s Army. The vision is oftenaccompanied by the complaint that banks nolonger care about their customers. The truth isvery different. In the 1950s only a very small pro-portion of the population anywhere in Europehad bank accounts or access to banks. The vastmajority of those who did were solid middleclass. Captain Mainwaring did not offer accountsto the socially or financially excluded, and he sawno one before 10 o’clock, after 3 PM, or overlunchtime. Even then, he only saw the town’sleading figures, none of whom would have beenfoolish enough to ask him for unsecured credit.

The truth is that in casting off the half glassesand frock coat of the popular image, bankinghas progressed to a level of customer serviceand commercial risk taking at which CaptainMainwaring would stand aghast.

In this country we now have an industry whichholds 30 per cent of the banking assets of theEuropean Union; directly serves 94 per cent ofthe population, through 100 million accounts;conducts 30 billion transactions a year; andsupports small business to the tune of £500 forevery person in the country.

Increasingly throughout Europe and espe-cially the UK, customers will be able to usebanking services 24 hours a day, 365 days ayear; and there are more ways than ever to dothis. The UK is way ahead of most of Europe,and others may learn from the way publicdebate in the UK is obsessed with the loss ofbranches and face to face contact. The realshock story in banking over the last few yearsis not branch closure but the explosion of alter-native ways of accessing your bank.

Branches will continue to close, as they must ifwe are to recognise that many customers donot use or need them. Of course, some cus-

The Death of Bankingby Tim Sweeney,

Director General,

British Bankers’

Association

Banks with which we are all familiar will notexist in 10, maybe five, years’ time. In fact, thebanking industry to which critics often referhas been dead for some time. Bill Gates isfamous for saying that he may need bankingbut he doesn’t need bankers. He’s half right. Itis just that the banker he will be using in 10 or20 years’ time will bear little resemblance to theone you see before you today.

What, then, is the future of banking? Three littlewords, but a huge picture. It is tempting to spendtime on new technology – on cash machinesworking by voice recognition, internet bankingand the control of your finances from the com-fort of your arm chair. This is an exciting area,but what I want to do here is draw out some ofthe principles and issues which are of concern topublic policy makers and I want to start by spec-ulating what banking will look like to the cus-tomer in a decade’s time. Although there are dif-ferences in practice throughout Europe andbetween Europe and the rest of the world, at thelevel of principle the issues are precisely the sameand I will draw my examples mainly from theUK. I will then turn to specific European issues,particularly in relation to mergers.

COMPETITION AND CUSTOMER VALUE

In trying to consider banking competition, it isworth trying to define what a bank is. It is harderthan ever to draw clear dividing lines betweenthe various elements of financial services, as bothproviders and consumers become more sophis-ticated. Savings accounts, insurance, invest-ments, asset management – all this before weeven mention the three core elements of holdingpeople’s cash, helping customers make paymentsand lending money. These are the ‘retail’ or‘commercial’ banking activities that most peoplehave in mind when they think about banks.

Modern banking is handicapped by the fact it isoften bundled with cultural myths about the past.

British Bankers Association

105-108 Old Broad Street

London

EC2N 1EX

Tel. +44 20 7216 8800

Fax +44 20 7216 8811

Web: www.bba.org.uk

Vision • 5

being driven down hard, which affects shortterm profits; but competition has not yetdriven down prices uniformly in all markets.This is simply because there is only one realpre-condition for an effective competitive mar-ket place – customer demand reflected througha well informed and mobile customer base – wedo not yet have this anywhere in Europe.

Relationship banking is still deeply ingrained inthe culture of both bank and customer. We say‘my’ bank but not ‘my’ supermarket or ‘my’hardware store. This will change. New technol-ogy and a new generation of more critical cus-tomers will stretch old relationships to breakingpoint. We can see this most clearly in the UKmortgage market, where fierce competition istaking several forms. The re-mortgage marketshows huge swings in market share, a wide rangeof tailor-made products, cut-throat pricing, anda huge volume of transfer business as customersshift from one supplier to another. Some 30 percent of all mortgage applications are now trans-fers. This is mature competition in action.

This level of competition will travel across thewhole European market, carried partly by edu-cation but mainly by a swathe of aggressivenew entrants leveraging off lower cost and newtechnology and a rising tide of critical andsophisticated customers who are ready to votewith their wallets.

Banks will face extinction if they fail to evolve acompetitive response. They built their paymentsystems on large networks, which acted as a bar-rier for new competitors. These are now not justbecoming obsolete but a source of competitivedisadvantage. New entrants bear no responsi-bility for a branch network, yet can cream offthe best customers; this is where competitionmay have become distorted. In this brave newmarket, it no longer matters if you call yourselfa bank: the survivors will be the players whoapply new technologies in ways that people findmost useful, and who foresee the changes in cus-tomer need. The story of banking will be thespread of new technology and new ways of get-ting access and new competition.

So who will be the new entrants? In the UK wehave already seen 20 significant new entrantsinto the conventional banking market over thelast two years. Many are financial services insti-tutions adding banking to their list of activities.But others, particularly supermarkets, are simplybuilding on an established consumer base andexploiting synergies around the till. Others, for

tomers value face to face contact, much as theywould still prefer to have their local cornershop and the church unlocked throughout theweek. However banks cannot buck largersocial trends and at the same time remain com-petitive. In fact, many of the external pressuresplaced on banks by public commentary, andsometimes by political agendas, actually runcounter to customer demand and divert theprogress of a thriving and progressive industry.

Nevertheless, there is a danger that the ‘tyrannyof the majority’ will mean that a minority ofpeople, usually on low incomes, could feelexcluded from financial services. Even thoughthe majority is very large and compelling, socialexclusion is a threat to the whole of society.Banks are responsible corporate citizens andwant to play their part in helping governments,the rest of the private sector and the voluntarysector to solve these problems.

Banks cannot solve those problems alone.Instead, I believe that the early decades of thiscentury will see more partnerships betweenbanks and other groups to produce solutions.Technology is also providing new products andaccess channels suited to delivering bankingservices to those on the lowest incomes.

In the UK we have an increasing variety of localschemes which are effective partnerships betweenlocal community groups and banks. The localgroups provide the outreach into communitiesthat do not feel banks are for them and the bankprovides the back office administration and sup-port. These partnerships play to the strengths ofeach partner. And, because they are local, they areaimed at real needs and do not impose a singlenational solution on varying groups and differingareas. We have learnt through painful experienceand proper research that there are no easy, magicsolutions to combating the host of problems con-veniently bundled together under the heading of‘social exclusion’.

We also need to ensure that governmentsrecognise that changes in the banking sectormean that ‘traditional’ banks cannot sustain thepressure of this extra burden as well as theincreasing pressures from new competitors. Toexpect them to tackle social exclusion as well isnot sustainable.

Anyone who spends as much time withbankers as I do would be left in no doubt abouthow ferociously they compete with each other.And yet it is clear that this is not a perfect mar-ket anywhere in Europe. In the UK costs are

6 • Section One

example Virgin, are diversifying on the basis of atrusted brand name. Banking is fast becomingone of a range of services which can be attachedto any trusted brand. Why be just a bank?

The other source of new competition will comefrom cross border takeover and gigantism. Themost striking feature of the banking market is thetidal wave of mergers across the world creatingever larger organisations. The number of bigbanks merging has tripled in the past year.Among the largest mergers in US history in anyindustry, 10 occurred during 1998 and four ofthese occurred in banking. Europe is moving evenfaster – Germany, France, Austria and Spain (and,of course, Switzerland) are all seeing mergersbetween two and even three of their top 10national banks. This should not surprise us:world-wide, there are too many banks chasingcustomers and in Europe we have the dynamiceffect of a single currency and the potential for apan-European banking market. For governments,the question is whether to encourage or resist.

Companies merge to realise economies of scale,to diversify, and to create units which are moreresistant to hostile takeover. It is not yet clearwhether the current wave of bank mergers will bea good thing for shareholders or genuinely addvalue. More importantly, will be bad for compe-tition and therefore the consumer? To answerthat we need to look beyond national boundaries.Technology now enables customers to buy at adistance: look at Amazon.com, the four-year-oldinternet bookshop which is already larger thanWH Smith. In future, public policy makers willhave to judge the competitivity of mergers not interms of their own domestic market but in thebroad international market in which banks willbecome players. Wider choice and tougher com-petition are good for consumers.

European bank mergers have, so far, remainedlargely within national boundaries. But this isonly the first wave; on a world outlook, a farlarger critical mass is needed to keep a low costbase and competitive efficiency. For now, differ-ent European countries still have conflicting lawsand business cultures; but markets will converge.

GOVERNMENT

What then is the role for governments? Howcan public policy best support the publicinterest? There are two dangers in public pol-icy intervention in markets. Either fast-movingmarkets will overwhelm a policy, making itobsolete; or poorly conceived rules will hobblethe very services they are designed to support.

Any government has a natural interest inmaintaining a strong banking system, with cus-tomer safeguards. The trouble is, the bankingsector is so vital to the economy that govern-ments are constantly tempted to try to treat itlike a public utility even while they pay themost vigorous lip service to the importance ofcompetitive markets. The role of government isto facilitate, not to design: a temptation neitherthe Commission nor individual governmentswill find it easy to resist during the evolutionof the single currency.

The problem in Europe is that the single cur-rency is an artificial construct and banking likeother industries will need time to develop to itsnew dynamic. There will be conflicting drivers.At one level policy makers may want to forcethe pace further and faster than market logic oreconomics would support. Cross border pay-ment mechanisms may be an example. At theother extreme individual countries may seek toperpetuate some of the protectionism whichhas frustrated the development of the singlemarket in financial services. It will be essentialto guard against protectionism masqueradingas consumer protection. The key point is thatnew technology is obscuring current roadmaps, making any policy making hazardous.Government intervention stands to do as muchharm as good. In order to allow dynamism toflower in the banking and financial servicessector, some risks are inevitable.

The role for government is to set the broadrules, appoint a Regulator as referee, then getoff the park and let the teams compete. If theproblem is defined as ‘consumer choice’ or‘competition’, the market dynamics are alreadyin place to support these. Besides, attempts toset policy solely within national boundariesrisk doing more harm than good. The bankingof old may be dead but tomorrow’s financialservices are evolving before our eyes.

Let me end with our own market. Because theUK leads the world in developing new financialprocesses and products, we are also among thefirst to acknowledge the problems of suprana-tional regulation which, this analysis suggests,sooner or later, all the world’s governments willhave to face. The UK is highly resourceful indeveloping new financial markets; that is why athird of the world’s financial business is donethere. We are extremely well placed to be at theforefront in shaping the future of financial ser-vices in Europe and across the world.

Vision • 7

BANKING IN 2020: A long-term forecast in this area seems a very ambitious ideato me. Remember, too, that the ideas coming from a co-operative banker will beinfluenced by the co-operative culture of his bank, insofar as any co-operativespirit still remains today!

WILL BANKING IN 2020 DIFFER FROM TODAY?

On the one hand, commercial and co-operativebanks are fighting and merging to maintain aplace on the market place. On the other, thedeveloping responses to unsolved social prob-lems should, paradoxically, interest these bigmarket players. Can we bring these two areastogether?

A social answer to a social necessity only cancome from two poles: governments or associa-tive initiatives. If it is associative initiatives, willthey come from excluded people themselves orfrom various charities; are they sustainable, orwho will sustain them? This approach is notnecessarily pessimistic – on the contrary, it is ademonstration of faith in citizens’ capacity totackle the unavoidable increase of the socialgap. The challenge is to continue making newsocial initiatives and responses. One approachmight be a federation of initiatives, able to givethe excluded as good a technical answer as theother banks give their ‘ordinary’ customers.

One thing is certain: the ancient mutual andco-operative banks are now included in main-stream banking and are moving further everyday from their original values. One final chal-lenge is to find a replacement for these failinginstitutions which takes up their original role,and in so doing to re-find a new financial soli-darity on new values for the year 2020.

A greater space for

social banking by

François Capber,

Banque Populaire

du Haut-Rhin

François Capber,

Banque Populaire

du Haut-Rhin

Avenue du Président

Kennedy 55,

F - 68050 Mulhouse Cedex

Tel. +33-3 89 46 02 02

Fax 33-3 89 66 33 00

Email: [email protected]

If we look back at Europe 100 years ago, wesee the early co-operative and mutualist move-ments at the end of the 19th and at the begin-ning of the 20th centuries; high liberal capital-ism, poverty and underemployment, usury… agood foundation for the creation of new socialfinance movements. If we look back at France20 years ago, we see a general attitude whichconsidered banks public services. Perhaps weshould start our projection today by askingwhat the potential customers of tomorrow canalready expect from their banks.

Judging from the services banks offer today, itseems very probable that the services on offertomorrow will not be available to everyone.Instead, they will serve a technological elite. E-commerce and I-credit will generate a categoryof people excluded for financial, intellectual orcultural reasons. This means, too, that the gapbetween people in employment and those out-side the job market will widen further.

BANKING IN 2020. . . OR BANKS IN 2020?

People with money are going to have a lot ofchoices, from the banks they choose to the rel-ative merits of credit versus counselling, orsafety versus risk. They can select advice tai-lored to the level of risk or banking sophistica-tion they want. Above all, they can choose themost appropriate service at the best prices.People who do not have money will have noaccess to any of this. In an overbanked world,no bank will grant a low cost service or a freeservice for basic banking to those who are notin a position to demand minimal service.

8 • Section One

My vision of banking in 2020 is focused on the future of community financeinitiatives along the lines of the Aston Reinvestment Trust (ART). Will there still bea place for such institutions, whose needs will they be catering for and how willthey be affected by changes in the economic environment?

ART’s borrowers know. Personal contacts willstill continue to be essential in providing adviceand encouragement to those managing smallbusinesses, however smart computer supportsystems may become.

What about social change? There will, I amsure, continue to be individuals with worth-while projects who are unable to borrow frommainstream banks. I would expect to see agrowth in a variety of forms of micro-creditmeeting the need for relatively small loans, andmore publicly and privately financed spe-cialised start-up agencies. Nevertheless, indi-vidual borrowers will still seek the backing ofART-type institutions.

Social change will determine which small busi-nesses have the best chance of succeeding, butwill not diminish demand from that quarter.This form of change will have its greatest impactis on the third, or voluntary sector. At present,we think of work as paid employment and a jobas a full-time occupation, in spite of the growthof part-time posts. These distinctions willbecome increasingly blurred as we look ahead,and over the next 20 years I expect our defini-tion of work to change markedly. Individualsare likely to shift between paid and voluntarywork during their careers and to combine thetwo. The importance of voluntary and not-for-profit organisations in a fast-moving, unsettledworld will become more apparent than ever, andthese organisations require a degree of freedomwhich is not compatible with dependency onlocal or central government funding.

The third sector, as it grows in importance, willneed access to finance to expand its activitiesand to adapt to meet the ever-changingdemands of the communities it serves. At thesame time, the people managing these organi-sations will have to accept that borrowing anda certain degree of financial risk will enablethem to achieve far more than if they take amore restricted view of their capacities.

A vision of community by

Sir Adrian Cadbury,

chairman, Aston

Reinvestment Trust

Sir Adrian Cadbury,

chairman,

Aston Reinvestment Trust

c/o ART, The Rectory,

3 Tower Street

Birmingham B19 3PY

UK

Tel. + 44 121 359 2444

Fax + 44 121 359 2333

Email:

[email protected]

ART today serves individuals with worthwhileprojects but without the resources to progressthem; small businesses wishing to expand or tomake their future more secure; and a range ofthird sector organisations aiming to develop theiractivities. Borrowers must have a social as well aseconomic purpose; be unable to obtain fundingthrough the conventional banking system; andhave soundly based plans and projections.

Will there still be potential borrowers in thesethree categories in 2020? The answer is cer-tainly yes. Will they still be excluded frommainstream bank borrowing? I think they willand that in fact the gap between bankablemembers of the community and the rest islikely to grow rather than diminish.

We have to take account of three kinds ofchange – in markets, in technology and in soci-ety. The driving force reshaping markets isglobalisation. This will mean that mainstreambanking will increasingly become internationaland grow in scale – no place here for localbranches with some autonomy. True, this willopen up opportunities for smaller more spe-cialised private financial institutions, but theywill want to attract clients who have resources,not those who lack them.

The push from technology will be to do awaywith cash as far as is feasible. It will be possibleto carry out all transactions by transfer of bal-ances or through rechargeable cash cards. Whilethis will bring more people into the bankingnetwork, it will sharpen the divide between the‘ins’ and the ‘outs’. This increased dependenceon credit will put those who do not possess it ata significant disadvantage, and if personal judge-ments of probity and worth are largely over-taken by impersonal credit scoring systems theywill have even less chance of access to it. Thewidespread use of the Internet and of computer-driven networks will also play to the strengthsof the better-educated. However, running abusiness can be a lonely existence, as many of

Vision • 9

In my view, the need for community financeinitiatives of the ART type in every urban cen-tre will be clearly established by 2020, occupy-ing a tier above micro-finance and below con-ventional banking in the financial structure.Their particular value will be in providing alocal, personal network in a world of large-scale global institutions, primarily managed bysystems and rules. However, there are severalinitiatives which would help turn my vision forthis sector of banking into reality.

First, governments at local, national and supra-national levels must start supporting the growthof this middle, community financial tier. Thesame applies to the top tier banks, which couldprovide loan finance on acceptable terms, referpotential borrowers or make secondments. In aglobal world, there will be a strong focus on thesocial contribution of international companiesto the communities which they serve, as well ason their return to their shareholders; theirlicence to operate, so to speak, may welldepend on it. In addition, it is in the interests ofthe top tier banks to support institutions at thenext layer down, some of whose customerstoday will be theirs tomorrow.

Looking at the social scene more widely, twomain developments would help to ensure myvision of the future. The key one is the spreadof financial literacy and the encouragement ofenterprise in schools. Traditionally, studentshave been encouraged to follow established pat-terns of employment rather than go their ownway and make the most of their individual tal-ents, despite the opportunities for all kinds ofnew enterprises. Nor are they taught about theworking of the economy and about how to getaccess to finance, business advice and support.(These sources of business advice and supportwill also need strengthening in their turn.)

The second development is the move fromgrants to loans wherever possible. The problemwith grants is that too often they lead to depen-

dency and not to self-sufficiency. When a grantceases, frequently the activity for which thegrant was given ceases too. Loans need to berepaid and so they encourage forward planningand efficient management.

With this kind of background support forcommunity finance initiatives, I would expectto see them well established across the econ-omy by 2020. By then I will be 91, and nolonger chairman of ART, but I will still be amember and I will still be taking a close inter-est in its fortunes!

finance

Economic activity in large parts of Europe is struggling. Governmental actions topromote regeneration and job creation are widespread and sincere, but why, then,are there still neighbourhoods, whole regions, where governmental grants haveno lasting effect.

The ultimate form of this legislation must benegotiated appropriately, between the banks,the government and the communities whoneed better financial and economic activity.

THE COMMUNITY REINVESTMENTACT (CRA) IN AMERICA

HISTORY OF CRA

The CRA was created in 1977 as a step towardsoutlawing the practice of red lining1 poorer,largely Black or Latino communities in Amer-ican cities. The Act gave powers to the Federalbanking regulators to obstruct commercialexpansion of banks if their record of reinvest-ing in community building initiatives was notup to scratch. The meaning of ‘up to scratch’continues to be the subject of much debatewithin both the community and banking sec-tors. The commitments banks make to theCRA are assessed by the Federal Reserve, theUS equivalent to the Bank of England, andbanks are given a score, from 1 to 4 (4 is best).

The process began with “disclosure” – lenderswere required to report the extent of their homemortgage agreements on a geographical basis.The Home Mortgage Disclosure Act (HMDA)was created in 1976, before the CRA, andserved as the foundation for this banking regu-lation. Without the vital information providedby the HMDA, it would have been impossibleto identify the under-performing banks, and tosubsequently hold them to account. At the endof the 1970s in America, home ownership sym-bolised a significant social improvement formany people. The variable availability of mort-gages was recognised as being very important tothe self interest of many Americans, and couldbe used to galvanise people into action. How-ever, in spite of the information demonstratingthat banks were guilty of so-called mortgageredlining, it took 17 years for effective CRAcommitments to become translated into effec-tive community regeneration programmes. In

Can banking regulation reduce financial

Understanding the signiby

Simon Bale,

Communities Organised

for a Greater Bristol

10 • Section Two

Such is the problem of ‘soft’ financing – sub-sidised funds which struggle to be self-sustain-ing. A better approach is for small and mediumsized enterprises (SME) and community enter-prises to be treated in the same manner as themainstream economy. This requires commit-ment from mainstream financial institutionssuch as banks to contribute to the financialactivities of under served neighbourhoods andto provide appropriate financial services forfledgling community enterprises and SME.

This will not happen voluntarily. Banks areinterested in short term success whereas eco-nomic regeneration is a long term goal. Howthen to get the banks working for regenera-tion? The answer lies in legislation whichdirects banks to get involved in reinvestment.But surely that is folly; surely there is nothingbanks would fear more, and fight with greaterstrength, than a law which forces them to loanmoney to the poor and high risk individualswho suffer financial and economic exclusion?Superficially, banking regulation is not popularwith the banks. But there are examples of leg-islation which has succeeded in bringing banksback to excluded communities and which hasled to major economic renewal, improving thequality of life for many previously excludedpeople. This paper will focus on one well-doc-umented model: the Community ReinvestmentAct (CRA) which operates in the USA.

RELEVANCE TO SOCIAL BANKING

Socially responsible banking and investment isa hot topic in many parts of the EU. Socialbanking as a movement seeks to challenge thenotion that banks and other financial institu-tions should only seek the highest possiblereturn on their investments. Many banks con-tribute to social economic activity alreadythrough voluntary actions, support for projectsand secondments. Yet, the only way to ensurelong-term, robust commitment to sociallyresponsible investment is through legislation.

2S T R A T E G Y

A N D P O L I C Y

(1) i.e. exclusion

from financial services

on the basis of geography,

postal code etc.

the 14 years to 1991, a total of $8 bn was com-mitted. From 1992 to April, 1998, the total roseto almost $400 bn 2. However, commitmentfrom banks and subsequently ensuring that themoney is invested to bring about real changesare two very different issues, and much of thework of locally-focused community groups hasbeen to hold banks to account for their grandcommitments.

As this paper is being written, the US senatehas passed a bill outlining changes to the CRAwhich will neuter its influence (the so-called‘Gramm Bill’). The details can be found else-where3, but the changes will (a) release manysmaller banks from the CRA altogether (i.e.banks with less than $100 m assets), and (b)would make it more difficult for under servedcommunities to challenge CRA commitmentsfrom banks deemed to be ‘satisfactory’ orabove by the Federal Reserve, the US centralbank. These changes are being fought by manycommunity economic groups across the US,and it is a measure of the significance of theCRA that there is so much opposition to theGramm Bill from affected communities.

HOW AND WHY IT WORKS

The Community Reinvestment Act worksfrom the assumption that financial institutionsdo not willingly reinvest in the areas in whichthey are chartered. The CRA was devised andenacted in order to afford community organi-sations leverage over lenders which ignored orworked against their local communities. Thebasic premise for the CRA is: “although theyare privately capitalised, banks and savingsinstitutions are subject to an underlying char-ter obligation to serve banking needs of theirlocal communities.”

Such a premise forms the quid pro quo forallowing banks and other financial sectororganisations access to extensive governmentsupport (e.g. deposit insurance, Federal

Reserve System). It also holds to account thefederal banking supervisors who shouldalready have been encouraging the practise oflocal reinvestment.

As a measure of their commitment, banks arerated according to their effectiveness in rein-vesting in poorer, or under served neighbour-hoods, from poor to good (a four point scale).In effect, banks who score low will have moretrouble when they want to do business such asmergers or acquisitions.

The CRA model challenges this by constrain-ing the activity of banks. It is both a carrot anda stick.

WHAT ARE THE BENEFITS?

The CRA has benefited a wide range of com-munity regeneration in America. It has alsobenefited the financial service providers them-selves. This win-win situation is increasinglyapparent as banks begin to regenerate not justthe physical but also the economic features inunder served neighbourhoods. The details ofCRA profitability were investigated by GlennCanner and Wayne Passmore in 1997 (Com-munity Reinvestment Act and the Profitabilityof Mortgage-Oriented Banks). The workshowed that there was no statistically signifi-cant difference in the profitability of banks thatmade lots of mortgages in low to moderateincome neighbourhoods and low to moderateincome borrowers from those banks that madefew of these loans. In fact, they found thatbanks making lots of CRA-related loans to bea little more profitable.

Much more detail is available from the Wash-ington DC-based National Community Rein-vestment Coalition (NCRC)4 or the Centre forCommunity Change, also in Washington.

Strategy and Policy • 11

exclusion?

ficance of CRA

(2) In May, 1998,

Citigroup and Travelers

announced that their

commitments resulting

from their recent merger

would top $115 bn which

takes to total figure since

1992 over $500 bn

(3) National Community

Reinvestment Coalition,

733 15th Street, NW, Suite

540, Washington, DC

20005-2112, USA; Center

For Community Change,

1000 Wisconsin Avenue

NW, Washington DC

20007, USA

(4) http://www.ncrc.org/

Bancorp, have enabled low-income individualsto secure loans for home improvements and carpurchase which would otherwise have beendenied to them due to redlining.

FARM LOANS

As with consumer loans, farm loans are only aminor aspect of CRA commitments, eventhough many small and family farms are, ineffect, prone to redlining. Some examples ofagreements include $16 m from the NorwestBank in Iowa for new agricultural loans, 50% ofwhich was for farms of less than 500 acres and acommitment from the First Citizens Bank andTrust Company to develop programmes formeeting the credit needs of agricultural targetgroups with conventionally poor credit histories.

BUILDING COMMUNITY CAPACITY

The CRA has been employed to strengthen andrebuild the non-profit sector in many commu-nities. This has included support for creditunion development ($100,000 from the Bancode Ponce to the Union Settlement FederalCredit Union at 5% interest for two years), sup-port for community development loans andloans for community development corpora-tions. Some of the agreements have involvedgrants rather than loans ($40,000 from First Cit-izens Banks and Trust Co., over 2 years foroperating expenses for the NC Association ofCommunity Development Corporations).

BANKING SERVICES, BRANCH

AND STAFF POLICIES

Banking services, and access to credit were theunderlying issues which led to the creation ofthe CRA, and are fundamental to some keyCRA commitments negotiated by a range ofcommunity organisations. The specific agree-ments illustrate some of the key differencebetween British and American banking sys-tems. For example, the Wells Fargo Bank ofSan Francisco’s agreement to offer low-costchecking accounts (only $3.50/month com-pared with $4.50/month standard rate) islargely irrelevant in Britain where accounts arecharge-free whilst in credit. However, otheragreements are more relevant. For example,The City of Cleveland negotiated an agreementwith Society Bank which committed them tokeeping full-service branches in twenty-threeneighbourhoods for at least five years. Simi-larly, Wells Fargo agreed to maintaining branchoffices and mini-branches in low-incomeneighbourhoods “to at least the same extent as[it] serves the general population”. In conjunc-

12 • Section Two

SOCIAL PROBLEMS THE CRA HAS ADDRESSED

Housing. Single-family housing is the mostcommon form of this sort of loan, althoughsome commitments are made for multi-familyaccommodation. For example, in 1997, NCRCcommunity partners negotiated a $75 bn com-mitment from Washington Mutual. $50 bn ofthis was for single-family homes for minoritygroups. The other $25 bn was for borrowerswith less than 80% of the area median income.These loans and commitments are only effec-tive, however, if the terms and conditions areaffordable or suitable for low income or non-profit developers. For example, City of Ithaca,a community partner of the NCRC negotiateda 4% loan agreement with M and T Bank forlow-income borrowers in New York. Thisamounted to a $3.7 m commitment. Similarly,some commitments have been made with theunderstanding that lenders will be more flexi-ble in their application of underwriting stan-dards for low income or minority groups (e.g.flexibility on credit or employment history).Other housing related commitments via theCRA cover areas such as housing co-opera-tives, mortgage insurance and down payments.

BUSINESS AND ECONOMIC DEVELOPMENT

CRA commitments are becoming an increas-ingly important tool for economic regeneration,with lenders working with community partnerstargeting, for example, small business, minorityand women-owned enterprises. In 1995, the Cal-ifornia Reinvestment Committee and the Green-lining Institute (both NCRC partners) negoti-ated a commitment with the Wells Fargo Bank ofSan Francisco which agreed to devote most of its$25 bn for small business development to verysmall businesses in the form of loans of less than$50,000. Similarly, the Pittsburgh CommunityReinvestment Group worked with the UnionNational Bank which led to an agreement for$92 m to be committed to loans for small busi-nesses in specific target areas over eight years. Aswell as committing loans for small businessdevelopment in underserved and minority areas,CRA commitments have also entailed agree-ments to provide counselling and technical assis-tance for economic renewal.

CONSUMER LOANS

Whilst this is not a major focus for the CRA,some community partners have negotiatedagreements with lenders with similar commit-ments as those for home-ownership. Theseagreements, such as $6,210,000 from the US

tion with these agreements, some banks havecommitted to training staff according to thecredit needs of low-income communities.

NEEDS ASSESSMENT, MARKETING

AND OUTREACH, ACCOUNTABILITY

TO THE COMMUNITY

Needs assessment agreements are often incor-porated into commitments to ensure thatlenders are offering services and facilities whichare appropriate to a community. Some agree-ments have also involved a commitment toadvertise in low-income areas, and to designmarketing strategies appropriately (ValleyBank , in 1992, committed to provide cultur-ally-sensitive marketing to all segments of thecommunity, in this case including Spanish andLaotian residents). Marketing strategies havealso been agreed for banks to advertise throughcommunity organisations which then receivepayment for providing the service. Account-ability and liaison posts have been created tolink a bank with the community, and reviewboards such as that created by the DelawareCommunity Reinvestment Action Counciland the Wilmington savings Funds Societyhave an evaluatory and strategic role in devel-oping further CRA commitments.

WHAT THE BANKS THINK

Like any legislation, the CRA has its fair shareof critics. The Gramm Bill is one manifestationof this opposition, and all legislation needs to bescrutinised at intervals to ensure it remains rel-evant to the prevailing economic climate. How-ever, in spite of the detractors, there are alsobanks and financial service providers who haveseen the win-win benefits of greater investmentin under served neighbourhoods, and haveimproved their effectiveness at the same time asbringing renewed and sustainable prosperity tomany poor and under served neighbourhoods.

BRINGING THE CRA TO EUROPE

ARGUMENTS AGAINST

COMMUNITY REINVESTMENT

Two basic barriers are raised when consideringthe creation of a CRA for Europe.

First of all, the banking system in America islocalised and provincial in a way not experi-enced this side of the Atlantic. This is changing.More and more banks are closing and becomingpart of nationally-focused business, but on thewhole, the principle of the CRA works becausebanks have a ‘home’. In Britain, for example, it

would be very difficult to identify areas forLloydsTSB to be held to account; they are anational bank and they could argue that their‘home’ is the entire country. This would be toobig an area to administer, the argument goes.And presumably, this would be an even biggerproblem when considering EMU.

Secondly, American welfare is different toEurope. Culturally the community/social bank-ing sector is geared up to deal with the oppor-tunities provided by the CRA. There is a historyof community loan funds, of dealing with ‘bigmoney’ unlike anything ever seen in Europe.

PRE-REQUISITES FOR COMMUNITY

REINVESTMENT

Both of these barriers are real, but neither isinsurmountable.

The solution lies with the emergent social andcommunity economic units exemplified by creditunions. Britain lags behind the rest of Europe (andIreland in particular), but many of these projectsare perfectly placed to benefit from greateraccountability between banks and the communi-ties they should be serving. Community enterpriseis an increasingly effective means for regeneratingpoorer neighbourhoods and the organisations thatpromote and develop such initiatives shouldbecome ‘mediators’ in the social economy.

Banks are national or global, but this holds forAmerica also. Citigroup is global but this didnot stop it from committing $115 bn. Theimportant factor is the existence of go-betweens, the community economic units, theloan funds, the community reinvestment funds.The Delaware Valley Community Reinvest-ment Fund5, for example, began life in 1986 asa channel for CRA funds. It was then worth$10,000. In 1998 it was worth $50 m. It existssolely to administer and distribute communitydevelopment finance. Jeremy Nowak, its direc-tor, acknowledges that the DVCRF would notexist without the CRA. Europe needs similarchannels in order that reinvested funds can findtheir way to the most relevant uses.

Fundamental to all of this is the cultural shiftneeded to embrace the potential which com-munity reinvestment demonstrates. The cur-rent British Labour government has pledged £5bn to the “New Deal” programmes for eco-nomic, social and commercial renewal inBritish cities. This is equivalent to one eighthof the CRA commitments made by banksalone in the USA (adjusted for population).This is an opportunity too big to ignore.


This study was made possible with the special support of the Heinrich Böll Foundation.

(5) The Cast Iron Building,

718 Arch Street,

Suite 300 North,

Philadelphia,

PA 19106-1591, USA

Credal S.C. and ASBL. was created in the early eighties during the anti-apartheid campaign by agroup of co-operators and two religious organisations who wanted to give their savings ameaningful and responsible purpose. The choice of co-operative status and consequent structuraleconomic democracy, was clearly in line with the philosophy of the early promoters and still it.

operative status lies in the ease with which itcan raise capital. As a “variable capital”organisation it is allowed to increase its capi-tal without any official notification - which isa strong contrast to what shareholding com-panies have to comply with. More specifically,no prospectus and hence no authorisationfrom the banking commission is required.

- Dividends are not paid out of profits: cap-ital remuneration are treated as if it consistedof the remuneration of a loan. In otherwords, they are “administrative expenses”which are therefore not taxed in corporateincome tax.

- Tax privilege for co-operators: the first 125Euro of dividend income is exempt from theindividual income tax (but not corporateincome tax).

RELATIONS WITH THE BANKING COMMISSION

Co-operatives are not financial organisations assuch, therefore do not fall under the scrutiny ofthe Banking Commission. The credit businessis free of banking supervision, so long as it ispractised out of “own funds”, which co-oper-ative shares are considered to be.

A clarification on this latter aspect was given in1997 when the Banking Commission investi-gated Crédal to see whether it was illegallypractising deposit management, for which abanking licence is required. The Commissionhad found out that Crédal had more than 50 co-operators, the limit above which it con-siders the funds put in common to becomedeposits. The Banking Commission acceptedhowever that co-operator’s money would notbe seen as deposits but as own funds, provided(1) that the prospectus of the co-operative waschanged to make clear the money put in the co-operative was not deposits but shares (i.e. riskcapital), and (2) that the co-operator’s moneybe broken down into share units.

Crédal: the issue of legal structures by

Christophe

Guene,

INAISE

Crédal

place de l’Université 16

B-1348 Louvain-la-Neuve

Belgium

Tel. +32-10 48 33 50

Fax 32-10 48 33 59


14 • Section Two

Credal is a Co-operative Society (S.C.) linked toa non-profit organisation (ASBL) that targetsco-operatives and associations with a clearsocial added value (NB: Crédal is now starting amicro-finance scheme targeting unemployedindividuals, a new area for the organisation).

There are two sources of funds: Co-operative:Savings from co-operators who can be individ-uals and organisations and Non-profit associ-ations: donations from two ethical investmentschemes run by two mainstream banks. Thefund was set up in 1984 and currently manages5.5 million Euro. Its main instrument is theprovision of below market interest loans(although Crédal has recently started a socialventure capital scheme).

The costs of creating a co-operative society arelow and the procedures are simple (it needs asimple notary act to register). The minimumcapital required is an accessible 18,750 Euro.Members may be changed without having togo through the cumbersome and costly proce-dure of publication in the Official Journal; asimple publication in the Journal of Co-oper-atives is sufficient.

However, co-operatives are treated as commer-cial companies from a fiscal point of view. Thisexposes them to taxation on donations receivedand makes them ineligible for public subsidies.But this problem can be solved in Belgium bycombining the co-operative with a an organisa-tion with non-commercial status, (an approachtaken by all social finance organisations).

CERTIFIED CO-OPERATIVES

Co-operatives may obtain special certification(agréation) from the National Co-operativeCouncil, which gives them certain advantageswhich are especially useful for credit co-oper-atives:- Raising capital: the main advantage for a

financial organisation to use the certified co-

With the introduction of these changes, co-operatives are exempt from the control of theBanking Commission, though a certain obser-vation from distance remains.

As regards the credit business, the Belgian co-operative is more open than the traditionalmutual form, allowing it to serve non-membersincluding organisations (i.e. not individuals only).

ADVANTAGES

The Belgian co-operative status allows it to reach out to specific target groups

Unlike the traditional mutual status, the Bel-gian co-operative is not restricted to memberservice, but is allowed as a mutually ownedorganisation to serve third parties. This impor-tant characteristic makes it a useful tool toreach out to specific target groups, therebyenabling a real and active developmentalapproach which goes beyond any service toindividual members.

The co-operative status is a means to practice and show economic democracy

As a member organisation, through specificparticipation structures, the co-operative struc-ture imposes economic democracy (one per-son, one vote). The objective focus, rather thansavings focus, is strengthened by the fact thatreturns on shares are capped both legally andby the organisation itself (only the inflationloss is compensated at most in terms of returnpaid to investors). The absence of real returnon capital, combined with the fact that themoney is owned by co-operators creates astrong incentive for participation in practice.

DISADVANTAGES

The co-operative society is designed for mutualprofit. Therefore, a good separation of the com-mercial and social functions of the organisationis necessary to avoid conflicts of interest.

The social company – a new structurefor social investment?

The company with a social objective is a statuswhich was created recently in Belgium, withthe idea of bridging the non profit world withthe commercial one. It is a status which can becombined with any other organisational form.It imposes, among other things:

- a complete transparency regarding source anduse of funds

- no return on capital (shareholders get theircapital back at nominal value

- profits may only be transmitted to companiesof a similar nature

Organisations using this status may in princi-ple engage as non-profits in commercial activ-ities (such as bidding for public works) whilestill benefiting from the support a non-profitorganisation is entitled to. However, no regu-lation has so far been designed to define thekind and nature of support such non-profitscould receive. In theory, however, such a sys-tem offers a legal structure that could avoid thenecessity of having two different companies (aco-operative and a not-for-profit organisation)in the same group, simplifying administrationand reducing costs.


appropriate for social investment

Across Europe, mutuals are competing with private commercial banks. The received wisdomis that mutuals serve the needs of consumers better than private banks, who also have tomeet the needs of non-consumer shareholders. Mutuals have perhaps come under the mostpressure in the U.K., with the building society structure in particular under pressure. Yet arebuilding societies more proactive than banks in combating financial exclusion?

The pressure towards demutualisation hascaused the remaining building societies to re-evaluate the relevance of the mutual form ofownership. They are developing a ‘new mutu-alism’ which aims to make mutual ownershipmore meaningful and relevant to customers,and seeks to exploit the competitive advantageof mutual ownership. This has implications forthe branch network in the future.

At one extreme are the ‘commercial mutuals’,which are predominantly among the larger andmedium-sized building societies. They partic-ularly emphasise the advantages of not payingdividends to shareholders, and the need tobuild on this by minimising managementexpense ratios and costs more generally.

Several chief executives of commercial mutualsargue that customers rely much less on face toface contact these days. At the other end of thescale, ‘social mutuals’ tend to be smaller ormedium-sized institutions, which either fit intoa market niche or have a particularly stronglocal affinity.

Social mutuals place a stronger emphasis onlocal community involvement and on schemesto combat financial exclusion. They are usedby many people with smaller accounts andlarge numbers of low value transactions.

Chief executives from social mutuals argue thatthe increasing complexity of many of the finan-cial products in the marketplace means cus-tomers need more advice and assistance thanever before.

Although there is considerable speculationabout the demise of the branch, much evidenceindicates that the branch network will continueto be a significant means of delivering retailfinancial services, for at least the next decade.

The impact of demutualisation on building societies’ branch networks

by

Thomas

Hüttich,

INAISE

Building Societies Association

3 Savile Row

London

W1X 1AF

UK

Tel +44 20 7437 0665

Fax +44 20 734 6416

Web: www.bsa.org.uk

16 • Section Two

There are a number of reasons why they mightbe. The original 19th century societies pro-vided savings and home ownership facilities topeople who could not go elsewhere.

The contribution of British building societies tofinancial inclusion, by the building societies asso-ciation, published in the building societies year-book for 1999, shows that converters have closedmore branches than institutions that have chosento remain mutual building societies. Convertersclosed 10.9 per cent (282) of their branchesbetween 1995 and 1998, whereas the remainingmutual building societies closed only 7.9 per cent(227). In addition, while building societies opened242 new branches between 1995 and 1998 (8.5 percent of their 1995 base), the converters openedonly 105 (4.1 per cent of their 1995 base).

The geography of branch closures and open-ings is complex, reflecting the inherited sites ofindividual societies, the effects of mergers, anddifferences in corporate strategies. The rela-tively few branches opened by convertingorganisations between 1995 and 1998 are closertogether than those opened by building soci-eties. Converters closed over 70 branches inLondon, although no more than five in anyother city; the study also shows a clustering ofclosures in smaller southern coastal towns.Building societies closed fewer branches inthese areas but tended to close branches inmajor cities outside London. Interestingly,they also opened new branches in areas whereconverters closed.

The second stage of the study compares changesin building society branches with changes in themajor banks, over the same period. There is veryclear evidence that building societies are lesslikely than other financial institutions to closebranches in the most deprived areas. In contrast,converters are the most likely institutions tofocus their closures in these areas. Again, build-ing societies are plugging some of these gaps byopening new branches.


The National Community Capital Association is a national membership organisation thatrepresents 53 community development financial institutions (CDFIs). These CDFIs or socialfinance organisations provide financing to support economic opportunity (job creation),quality affordable housing, and community infrastructure (community facilities and essentialsocial services) in economically disadvantaged urban and rural communities across the USA.

In 1993 National Community Capital beganmaking equity grants – grants restricted to financ-ing – to help CDFIs build their financial strengthand take on additional lending risk. Many CDFIsare now able to recruit capital directly from largenational foundations and national religious insti-tutional investors because of National Commu-nity Capital’s efforts to build their financial andorganisation strength. National CommunityCapital’s advocacy efforts also resulted in theCDFI Fund — a federal programme that has pro-vided more than $135 million, mostly in the formof equity, to CDFIs since 1995.

This has opened the door to a number of otherfederal programmes and has raised the profileof CDFIs, making it easier to access capitalfrom other sources.

National Community Capital recently launcheda new effort, CDFI Investor Services, whichhelps investors evaluate CDFI investment oppor-tunities as well as financial vehicles for invest-ment. Making community investing easier shouldleverage significant new capital into CDFIs.

BUILD HUMAN CAPITAL

National Community Capital has long under-stood that human and organisational capacityshould keep pace with financial growth.CDFIs now increasingly seek skilled financialservice and other professionals.

CONCLUSIONS

At the end of 1998, National Community Capital Member CDFIs had provided morethan $1.3 billion (cumulative) in financing insome the most distressed communities in theUS. This financing has helped create more than86,000 units of housing and more than 111,000jobs for poor Americans. National Commu-nity Capital financing had helped leverage anestimated $3.9 billion in additional capital intoeconomically distressed communities.

The National CommunityCapital Model

by

Allyson Randolph,

Director,

External Affairs, NCCA

Allyson Randolph,

Director, External Affairs

National Community

Capital Association

924 Cherry Street,

Second Floor

Philadelphia,

PA19107 USA

Tel. +1 215 923 4754

Email:

[email protected]

Web:

www.communitycapital.org

National Community Capital was created by asmall group of CDFIs in 1986. Today, it pro-vides its members with financing, training, con-sulting, and advocacy. A key lesson NationalCommunity Capital has learned is the impor-tance of focusing its often limited financial andhuman resources on those organisations thatwill have some benefit to the end users – dis-tressed communities. It measures effectivenessin a number of ways. Does the organisationhave an active financing programme? Is it mak-ing loans? Are these loans being repaid? Does ithave a clearly articulated mission? Is its lendingin line with its stated mission? Is it known andrespected within the community they are serv-ing? A focused investment of capital and capac-ity-building assistance to these organisationswill yield vastly greater benefits for distressedcommunities than major investments of capitaland other resources to non-performers.

In 1998 National Community Capital distilledits extensive knowledge about the key indicatorsof CDFI success in a document ‘Best Practicesfor CDFIs: Key Principles for Performance’.

CREATE NEW CAPITAL RESOURCES

National Community Capital does this in twoways: directly, by managing a financing fundthrough which it makes low-cost, long-termloans to CDFIs on a performance basis; andindirectly, by leveraging capital into CDFIsfrom other sources.

National Community Capital launched itsCDFI financing programme in 1991 and cur-rently manages about $16 million. Largenational institutions— primarily national foun-dations and national religious organisations –make loans to National Community Capitalwhich it re-lends to CDFIs. Investors get anational distribution network for their com-munity development dollars and a nationalcommunity development presence; the securityof expert management; and a lower overallcost. The CDFIs also get access to extensivetechnical assistance as part of getting a loan.

EU funding can be given in the form of grants, loans or guarantees. All communityfunding is channelled towards precise objectives and priorities. Most funding isnot paid directly by the European Commission but via the national and regionalauthorities of the member states.

developing appropriate financing instru-ments’). The ESF focuses on the developinghuman resources (including ‘development ofnew sources of employment, in particular inthe social economy’).

The funds are used qualitatively and quantita-tively according to the Objective under whichthe region is classified. Objective 1, with about70 per cent of the structural funds allocation,promotes the development and adjustment ofregions whose per capita GDP is less than 75per cent of the Community average. Objective2 supports the economic and social conversionof areas facing structural difficulties. Objective3, which applies outside Objective 1, supportsthe adaptation and modernisation of policiesand systems of education, training andemployment.

Community initiatives are much more focusedand limited in size. The Commission conceivesthe programme, and member states have towork within that framework. They must betransnational, innovative, bottom-up inapproach and based on local partnership. Thismakes them more flexible and better suited forNGOs and social finance organisations.

An important requirement is a five per centthreshold for financing overhead costs whenusing money for a loan/guarantee/equity fundcapitalisation.

The Commission guidelines for the program-ming period 2000-2006 for the first timeexplicitly mentioned the social economy andits organisations as entitled to financial assis-tance. It will be interesting to see whether thisproduces any change.

Eligible Measures in EU by

Thomas

Hüttich,

INAISE

Web: www.europa.eu.int

18 • Section Two

Social finance organisations often depend onpublic funding during their first years, partic-ularly those with a local focus. However, pub-lic recognition of the social economy’s job cre-ating potential is only beginning. Many socialand environmental finance organisations donot fit immediately into the categories of eligi-bility for funding. Similarly, it is often unclearwhat measures (e.g. overheads, loan or guaran-tee fund capitalisation) are eligible.

Community financial assistance can be dividedinto three categories.

STRUCTURAL FUNDS

Structural operations, which are designed toincrease social and economic cohesion, usuallyform part of a multi-annual plan drawn up bythe Commission in partnership with the rele-vant national and regional authorities. The plan: - reflects priorities - sets out the measures required to achieve pri-

ority objectives - indicates the funding for each part of the var-

ious programmes.

Implementation of the programmes is super-vised by monitoring committees. Individuals,businesses and interest groups can apply tonational or regional authorities or other desig-nated organisations for funding under one ofthe various programmes. All structural fundingwill be given in the form of grants to co-finance(25 to75 per cent) national or regional aidschemes. The appropriations for the funds inthe new programming period 2000 to 2006 are195 billion EUR.

The EU’s two main structural funds are theEuropean Regional Development Fund(ERDF) and the European Social Fund (ESF).The ERDF focuses on productive and infras-tructure investment and developing endoge-nous potential (including ‘improvement ofaccess to finance and loans by creating and

SPECIFIC INTERVENTIONS ANDPILOT PROJECTS TO STIMULATERESEARCH AND DEVELOPMENT

Through the European Commission, grants aregiven to various research, demonstration anddissemination projects which meet specific cri-teria. The Commission often invites applicationsthrough calls published in the Official Journal ofthe European Communities. Grants are usuallyfor a two year period and can cover between 50and 100 per cent of the costs. The flexibility andthe pilot character of the research programmesmake them more suitable grants for grassrootsmovements than the structural funds.

THE EUROPEAN INVESTMENTBANK (EIB) AND THE EUROPEANINVESTMENT FUND (EIF)

The EIF (which is financed jointly by the Com-mission, the EIB and private financial institu-tions) and the EIB provide soft loans, guaranteesand equity through financial intermediaries.They aim to support private investment to assistin financing trans-European network projectsand to promote SMEs’ access to the financialmarkets. Loans and guarantees usually cover 50per cent of project costs. Although start-ups aretargeted, the focus is mostly on businesses witha high growth potential.

CRITICAL ISSUES

While it is probably impossible for micro-credit initiatives in northern countries to existwithout funding, public support does have itsdrawbacks. Programmes and incentives areoften poorly designed, difficult to access orhave less positive aspects. Is there really theinstitutional capacity to create or support, on asignificant scale, something like a ‘third way’or ‘third system’ banking?

The biggest problem - particularly for smallerorganisations - is the time it takes for money toarrive, especially if they have negotiated matchfunding. The time scales of the social economyand the business sector are very different.Another major problem concerns the deal flow- committed money has to be spent on a givendate and cannot be reused.

Finally, there is a strong argument for allowinginterest rates to cover operational costs: inother words, to making loans available as wellas grants. Grants tend to be short-term andunrepeatable. They can also create depen-dency and unrealistic expectations. Projects aresometimes designed to suit the requirements ofthe funders rather than the needs of the people.By contrast, the process of applying for a loan,using the money and repaying it is educationaland empowering. It promotes confidence andresponsibility.

Grants are appropriate for some uses and loansfor others. Many social economy lenders insiston loans being used for productive purposes.Some would find it more helpful if structuralfunds money could be given in the form ofguarantees.


Funding

THE INTERNATIONAL SCENE. Successful national credit union movementsthroughout the world, particularly in English speaking countries, are characterisedby a strong, single support structure that is both able to represent credit unionsnationally and provide them with the range of services and facilities they need.

NATIONAL ASSOCIATION OF CO-OPERATIVE SAVINGS AND CREDIT UNIONS - POLAND

A good example of a strong national supportstructure is to be found in Poland. Followingthe collapse of communism, a new creditunion movement was organised with the sup-port of Solidarity and a single grant of about$4.5 million from the US Agency for Interna-tional Development. Funding concentrated oncreating the National Association of Co-oper-ative Savings and Credit Unions (NACSCU).This body, owned and controlled by creditunions themselves, was able to take the lead increating appropriate development and supportfacilities. Just six years later, the Polish move-ment served over 300,000 members. This is agreater membership than has been achieved inBritain in over 25 years with a population fourtimes larger than Poland’s. Focused supportand funding resulted in a strong, self-sufficientcredit union movement, which no longerrequires any subsidy and is capable of fundingnew credit union development itself.

THE BRITISH EXPERIENCE

In Britain, support for credit unions nationallyhas been much more fragmented. Over theyears, the credit union movement has seen thecreation of several national trade associationsas well as a myriad of local credit union devel-opment agencies. Despite the strength of indi-vidual organisations, this national disunity hascontributed to a lack of focus and direction inthe credit union movement. Different associa-tions and agencies have promoted differentunderstandings about the nature and purposeof credit unions. They have operated to differ-ent personal and political agendas. Projects andinitiatives, sponsored by different bodies, haveoften duplicated one another. At worst, theyhave been competitive and contradictory.

Ensuring the development of the social

the role of credit union trade by

Paul Jones,

Liverpool John Moores

University

Paul A Jones

School of Law and

Applied Social Studies,

Liverpool John Moores

University

Josephine Butler House,

1 Myrtle Street

Liverpool, L7 4DN

England, UK

Tel. +44 151 231 3941

Fax +44 151 231 3908

20 • Section Two

For example the Irish League of CreditUnions, to which nearly all Irish credit unionsbelong, provides both political and public rep-resentation for the Irish movement as well assupport and business development services.The US Credit Union National Association,the Credit Union Central of Canada and theCredit Union Services Corporation (AustraliaLtd) provide the vast majority of individualcredit unions in their respective countries withtraining, technical advice and consultation,marketing and promotion, research and devel-opment, standards for best practice, businesssystems, back office support, group purchas-ing, insurance and central financial facilities.

Very early on in these and other successfulcredit union movements, single national creditunion support organisations became collectiveadvocates for credit unions and self-sufficientproviders of services and facilities1. All thesesupport organisations were established as co-operative enterprises owned and controlled bytheir member credit unions. Indeed, a nationalsupport structure is the logical extension of thecredit union ethos of co-operation and demo-cratic ownership. Just as individuals bandtogether in the credit union to obtain collec-tively the financial services they cannot providefor themselves, individual credit unions co-operate through national support structures toobtain the external support they require.

In addition, and perhaps more importantly,uniting in one national structure equips creditunions with a common voice both to promotethemselves to the public and to deal with gov-ernment. With strength in numbers, they areable to protect their role within the economyby obtaining appropriate national legislationand regulation2. The result is a credit unionmovement which is secure and self-sustainingwithin an active and vibrant social economy.

(1) Single national credit union support

organisations are definedas bodies representing

the vast majority of creditunions in their respective

countries. There willalways be some examples

of credit unions not members of these

organisations.(2) ‘With results from arecently released, joint

Republican-Democraticpoll showing that credit

union members now makeup 41 per cent of the US

electorate and 69 per centof the “active” half

of this number favour candidates who support

credit union issues, CUNA is touting the

78-million member-strongcredit union community as a political force on a par with the AmericanAssociation of Retired

Persons and perhaps as a pivotal factor in tight

elections.GM Corrigan,

Credit Union Times, Front Page News Stories,

found atwww.cutimes.com

Different support bodies have taken varyingmessages and demands to government, foughtover the same public subsidy and created con-fusion in the minds of politicians and regulators.In fact, recent research has indicated that thelack of one national support structure in Britainhas been one of the key factors holding back thegrowth of credit unions in the country3.

TRADE ASSOCIATIONS AND DEVELOPMENT AGENCIES IN BRITAIN

By far the largest national support organisationin Britain is the Association of British CreditUnions Ltd (ABCUL). Its 468 affiliated creditunions represent 67 per cent of the 659 creditunions registered in Britain and, betweenthem, they have 85 per cent of all British creditunion members and hold 85 per cent of thetotal assets of the movement. Like its counter-parts in Ireland, North America and Australia,ABCUL is a non-profit making co-operativetrade association, owned and controlled by itsmember credit unions, and dedicated to servingtheir needs. The members elect a board of vol-untary directors who are responsible for thedirection of the Association. Operationally, itis managed by a 16 strong staff team.

Until 1999 the second largest national tradeassociation, in terms of membership, was theNational Federation of Credit Unions Ltd. Itrepresented about 150, mostly small, commu-nity, credit unions and was entirely organisedby volunteers. As an organisation it proved notto be sustainable and was forced into voluntaryliquidation. The two other smaller nationaltrade associations are the Association of Inde-pendent Credit Unions Ltd and the ScottishLeague of Credit Unions Ltd, both of whichare organised on a voluntary basis. In addition,a number of other very small groupings ofcredit unions operate without the full recogni-tion of government.

In addition to trade associations, there are anumber of regionally based credit union devel-opment agencies. They offer, like the tradeassociations, information, support, trainingand business development services to creditunions. Some, such as those in Birmingham,Strathclyde and Wales, are substantial organi-sations with significant resources and staff.They are grass-roots independent bodies,funded mainly through local government andother grants as well as their own income gen-eration and provide immediate, practical sup-port to their local credit unions. They are notusually owned and controlled by members;most credit unions served by developmentagencies are also members of one of thenational trade associations.

THE CENTRAL SERVICES ORGANISATION

In the summer of 1998, the Government set aup a Treasury Task Force with the remit toexplore ways banks and building societiescould work more closely with credit unions toincrease their effectiveness and widen theirrange of services. The task force consisted ofsenior representatives from banks, buildingsocieties and the credit union movement – thisis unusual, as in most countries banks wouldrather restrict the scope of credit union activity.It published its findings in July 1999, recom-mending a national Central Services Organisa-tion for all British credit unions: its report said‘we were struck by the fact that, in countrieswhere the credit union movement had grownsubstantially and successfully, it has invariablydone so supported by a Central ServicesOrganisation (CSO)’.

A CSO is not an alternative trade association.It is a organisation, in some countries often asubsidiary of a trade association, equippedwith the resources and personnel to providethe necessary technical and organisationaldevelopment support that credit unions need.


finance sector:

and support organisations

(3) ‘Towards Sustainable Credit UnionDevelopment’. Report of the national researchcarried out by LiverpoolJohn Moores University,the Association of BritishCredit Unions, the EnglishCommunity EnterprisePartnership and The Co-operative Bank plc.March 1999. The document is availablefrom ABCUL, Manchester,tel 0161 832 3694.

SUPPORTING THE SOCIAL FINANCIAL SECTION – A CONCLUDING REMARK

Credit unions offer an important opportunityfor ordinary people to work together for theirmutual financial benefit. In many cases, theyare the only financial institutions able to accessand to offer low-cost financial services to lowincome groups and deprived communities.They can only achieve their full potential, andserve the millions of people who need them,with the assistance of strong, national supportorganisations. This seems to be a world-wideexperience. In Britain, the organisations withthe potential to be these strong national struc-tures are the Association of British CreditUnions Ltd and the(yet to be established) Cen-tral Services Organisation.

22 • Section Two

The task force saw a British CSO covering:- back office processing to relieve volunteers of

book-keeping and other essentially adminis-trative tasks

- assistance with business planning, financialmanagement, member financial education andmarketing

- a treasury management facility; assistancewith product development

- recycling surpluses from credit unions withan excess of savings to those with an excess ofborrowers

- back office processing for bill payments andother transactions services; support at eachdevelopment stage4.

In countries with one strong single supportstructure, the CSO is often owned and con-trolled by the credit union movement itself.For Britain, the task force recommended a sin-gle independent organisation, with the major-ity of the board from the credit union move-ment but with funding bodies (banks, buildingsocieties, local government) represented aswell. Currently, ABCUL is a key player, withbanking representatives, on a developmentgroup looking at how the CSO can be estab-lished in practice and how it can meet the needsof credit unions. The CSO is probably themost exciting development on the Britishcredit union scene at the moment. It will be amajor development, bringing not only sub-stantial funding into the movement, but alsothe expertise and assistance of other financialorganisations.

(4) idem

Credit unions have become very fashionable at the moment in the UK. This is partly because banks are currently very unpopular – bank branch closures and charges to use ATMs have between them generated a lot of general and media hostility.

active population. Nothing excludes like exclu-sion; even poor people don’t want to use apoor people’s bank. In the US, by contrast,credit unions do well because they providehigher interest and cheaper loans, and that’swhat people know them for.

The Association of British Credit Unions Ltd(ABCUL) is working with a number of localauthorities to set up ‘live or work’ credit unions.Because these cover people who do not neces-sarily live in the area but do work in businessesthere, they accrue the financial stability to lendto less financially secure people and enterprises.We are setting them up with the full infrastruc-ture they need, complete with support from localbusiness; it is taking a lot of investment, but weplan to have these credit unions self-supportingwithin two years. We are treating credit unionsas co-operative financial businesses. Attractingsavings is a crucial part of this package, which isone reason why we are ensuring the whole pre-sentation is as fully professional as possible, tobring in money from people who could go toanother financial institution.

We are continuing this trend towards greateraccessibility with the work we are doing lobby-ing central government and the Financial Ser-vices Authority. We would like, among otherthings, longer repayment periods; a higher mem-bership limit for individual credit unions; and tobe able to offer different rates of dividend on dif-ferent accounts. Ideally, this should mean we caneventually provide full current account facilities.

Credit unions demonstrate that mutuality andco-operation can work and provide a betterdeal. At the moment, only a fraction of the UKpopulation is taking advantage of that deal.Accessibility and popularity should help usattract the people who don’t want a poor peo-ple’s bank – but are doing very badly with therich people’s banks.

Shaun Spiers has been ABCUL Chief Executive since October 1999.

Credit Unions and social finance

by

Shaun Spiers,

ABCUL

ABCUL

Holyoake House,

Hanover Street, Manchester,

M60 OAS, UK

Tel: 0161 832 3694

Fax: 0161 832 3706


Web: www.abcul.org

Credit unions, by contrast, are seen as organi-sations which exist for, and do well by, poorpeople. As banks focus increasingly on high-value customers and the number of small sociallocal mutual providers reduces – not simplybuilding societies but also bodies such asfriendly societies – credit unions have movedinto that gap in the market.

However, there is a much wider role for creditunions and part of what is holding us back is thisimage of being a poor people’s bank. The fact isthat mutuality also offers hard financial advan-tages. Credit unions within the UK are financialco-operatives; members can borrow up to 2.5times the value of their savings. By law, they canoffer dividends of up to eight per cent on savings,and have a maximum interest of 12.68 per centper year, including insurance. This makes themextremely good value for relatively small loans,compared with other financial institutions. Totake just one comparison, one UK bank adver-tises loans for up to £999, with 18.7 per centinterest. This is without insurance, and onlyoffers £500 minimum, compared with the smalleramounts credit unions quite routinely lend.

Although most loans are used for small-scalepersonal credit – home improvements, holidays,paying off credit card loans and so on – thecommon bond and peer pressure mean creditunions have much lower default levels thanother forms of lending to small business. Evenwithout the additional subsidies, reduced costsand tax advantages which are also available, thefact is that credit unions can offer a better dealthan conventional banks. In the US and Aus-tralia, 25 per cent of the financially active pop-ulation belongs to a credit union, and manymembers get all financial services through them.

Membership is even higher in Ireland (48 percent of the financially active population) andsome Caribbean islands (over 50 per cent). Inthe UK, membership of credit unions is about280 thousand – 0.4 per cent of the financially


Background: Grether Ost, a limited liability company, is a self-organised, alternativeproject in Freiburg, southern Germany. It saves old factory buildings from demolition,and then creates living and working space for modest rents. Apart from economicconsiderations, environmentally sound construction is of great importance.

accept that their money will have the lowestrefunding priority if the project runs into trou-ble, and investments can only be paid back afterall other liabilities have been met; this impliesthat the investments are actually risk capital andnot deposits. However, these ‘VIP’ liabilitiesrepresent less than half of the full number.

CONCLUSION

Grether Ost’s popularity demonstrates thatdirect credit remains the most important financ-ing instrument for alternative projects and socialinitiatives. Following its “brush with the law” ithas experienced continued demand for its prod-ucts and a rising demand for information.

However, this example shows clearly the risksthat organisations face in treading the narrowline between risk capital investment anddeposit investments. Investors and organisa-tions who want to explore similar projectsshould be aware of the critical distinctionbetween the two and be sure that they tooshould add a subordination clause, stating thatthe direct credits are in effect risk capital andcannot be reclaimed in all circumstances - thisbeing one of the crucial distinctions between arisk investment and a deposit.

The current regulatory framework across theEU does not distinguish at the level of ordi-nary people between “ignorant” investors,who to the regulator need maximum protec-tion and the “informed” investor, who mightclearly know the risks associated with the kindof investment strategy they wish to pursue. Inthis environment, the utmost care needs to betaken by social investment organisations inhow they enable investors to invest in them.

Living outside bank status:

Grether Ostby

Thomas

Hüttich,

INAISE

Grether Ost

Adlerstrasse 12

79098 Freiburg

Germany

Tel. +44 761 24887

24 • Section Two

Finance is based on many low interest directcredits from supporters who lend direct to theproject. A credit contract lists the size and thelength of the credit, the interest rate and thecollateral. Although interest rates up to threeper cent are not much lower than with manycommercial savings accounts, investors aremore interested in the fact money ‘works’ forsocial causes and not for banks. Grether Ostuses the money transparently, while space forliving, working and childcare is saved fromspeculation and will be affordable for the fore-seeable future. Many investors do not claiminterest at all.

Credit lengths are usually long term, but shortterm (from three months) lending is also wel-come. If personal circumstances suddenlychange, money is usually paid back early.Grether Ost’s non-profit character and lowoverhead costs ensure that the gap betweenlenders’ and borrowers’ interest rates is minimal.The direct credit volume is planned to be dm 4million. Credits are secured by rents amountingto dm 250,000 annually; the immovable propertyworth dm 4 million; and registering investors inthe land register, which enables direct access tothe property in case of insolvency.

CRITICAL ISSUES

However, the project was in great danger afterit was declared illegal by the federal bankingsupervisory office (bfk). Although Grether Osthas no aims to be a credit institution its activi-ties were suddenly termed ‘banking’. UnderEU banking regulation non-banks are notallowed to take deposits, and any applicationfor bank status must meet minimum capitalrequirements. For about nine months, GretherOst was not allowed to accept direct creditsand was put on hold.

In January 2000 the bfk brought the case to anend. There are no hurdles left for new directcredits for Grether Ost. Individual funders


What are the ways organisations can help community economicdevelopment happen faster, and reach the ground more quickly, using the tool of social investment, without so much being siphoned off by intermediary levels?

Network credit includes:- Microcredit for microenterprises for start up

capital for micro enterprises;- Social risk capital initiatives social economy

focus;- LETS / bartering systems;- Voucher schemes, actively used in Denmark

for example, instead of DIY (do it yourself),“do it for others”;

- Credit Unions. Creating alternative bankingsystems.

The key is in the ability to mix money fromdifferent sources and funder types but to pre-sent a standard, understandable financial prod-uct to the user. However, working locally doesnot imply small scale. One example of whatlocal agencies for the social economy in themicrofinance / microcredit field can achieve ona large scale is ADIE in France. ADIE createsmany smaller microcredit operations acrossFrance at a local level, but runs at national levelto get the scale of operation. Funduz Mikro, aPolish microcredit fund, operates acrossPoland with over 35 branch outlet and 12,000deals per year. Very few microcredit bodiesoperating at a local level can do that. However,mixing the local “front office” and national“back office” can combine the advantages ofboth levels into one organisation.

CONCLUSION

These two approaches, splitting the front office(delivery) from the back office (fundraising)functions, and network credit approaches,offer ways of enabling large scale funders toengage with local economic development inrapid and effective ways.

Maximising and achieving rapid impact of social investmenton community economic development

by

Peter Ramsden,

New Economics

Foundation

There are a number of potential approachesthat can meet this need:

FRONT OFFICE - BACK OFFICE

Small social economy organisations have a realproblem with cash flow under European fund-ing programmes in particular, with the grantcheque simply not coming in on time. The con-cept of a front office - back office system is tocreate thin intermediary structures to getmoney out. The front office is the part thatdeals with the customers, the back office dealswith the fundraising. The back office could bean organisation, or a partnership, that acts as aholding body for the European funding, pass-ing it out in smaller, more handle-able amountsto bidding organisations.

This approach can also be applied to financialorganisations, and indeed is a major advantageof local social investment funds. It can be rela-tively easy to use, easy to run, and keepsbureaucracy off the backs of practitioners at alocal level.

These back office organisations need to beintelligent, subtle networked institutions, witha focus on long terms sustainability.

NETWORK CREDIT APPROACHES

These are structures that link together organi-sations and individuals in the local area, whichcan start from the grassroots up. Rather thanrequiring top down intervention to initiatethem, the challenge is in finding loose,lightweight support systems to facilitate theirgrowth and development. Network creditapproaches take the approach of plugging theholes in a local economy, so that more wealthis generated and retained in the local economy,as opposed to the approach of finding moreand more funds to put into an economy thatrapidly leaks this wealth out.

The area of social accounting and auditing developed throughout the 1990s,as companies and non-profit organisations took increasing responsibility forservices traditionally delivered by the state. This brought in new calls foraccountability in the private and voluntary sectors.

the assessment); and wider social norms and reg-ulatory information (such as equal opportunitiesdata). The indicators are therefore a mix of qual-itative and quantitative data.

VERIFICATION. It is important that a thirdparty independently verifies the process. Thisis analogous to financial accounting and audit-ing – the organisation does the accounting andan auditor checks the veracity of thoseaccounts.

DISCLOSURE. The accounts are the result of adialogue with stakeholders. They are owned bythe stakeholders and must therefore be dis-closed to them.

There are three main reasons why organisa-tions have undertaken social auditing:

VALUES. Some organisations are based on a phi-losophy of social responsibility. They recognisethe ‘social good’ that it does and can do, andexpress this through a process of social accounting.

STRATEGIES. It makes very good business senseto be explicit about a company’s social objec-tives and impact. The ethical policies of theCo-operative Bank, for instance, are central toits success as a business (see below).

PRESSURE. Organisations which are under pres-sure from external groups (such as social cam-paigners) use social accounting as a risk man-agement tool. In this way a company canattempt to get closer to its stakeholders and sobridge any gaps between perception and reality.

RELEVANCE OF SOCIALACCOUNTING AND AUDITING TO SOCIAL BANKING

Social responsibility is the reason why bankinginstitutions exist They are trying to break themould of doing business that mainstreambanks have taken. Social accounting offers away to express and account for their values.

Social Accounting and in Financial Institutions

by

Peter

Raynard

26 • Section Two

Different forms of social accounting and audit-ing began emerging at the beginning of the1990s. The most notable form was pioneeredby the New Economics Foundation and Traid-craft plc in the UK. Traidcraft is a companythat buys crafts and food products from pro-ducers in Southern countries on the basis of‘fair trade’. The company was looking for ameasurement process that took it beyondfinancial performance to the social impact onits various stakeholders.

WHAT IS SOCIAL ACCOUNTING

AND AUDITING?

Social accounting and auditing is theassessment of an organisation’s social per-formance in relation to its aims and thoseof its stakeholders. Social performancemeans its relationship with its stakehold-ers. Stakeholders are all those who affector are affected by the activities of theorganisation. A stakeholder approach isused in order to understand better the dif-ferent sets of relationships that make up anorganisation, how they inter-relate andhow they conflict.

Traidcraft produced a report based upon stake-holders’ views, which was independently veri-fied by the New Economics Foundation, anon-profit organisation that promotes sociallyresponsible approaches in the economy.

The methodology of social auditing takes fourbasic building blocks:

STAKEHOLDER DIALOGUE. Dialogue (question-naires, interviews, group meetings) is central.

INDICATORS. The indicators upon which perfor-mance is assessed are drawn from three sources:the objectives and policies of the organisation(what it says it is doing); the objectives of stake-holders (what they feel is important to include in

Strategically it also makes very good businessand commercial sense to take a holisticapproach to performance measurement. Insti-tutions which are aware of the different per-ceptions of financial institutions are be betterplaced to make the all-important trade-offs indecision-making.

Finally, the increasing pressure put upon themainstream banks (such as proposals for aCommunity Reinvestment Act in the UK),makes it particularly important to discloseabout investment in communities and theimpact of downsizing on their stakeholders.

CASE STUDIES

The Co-operative Bank (UK) (a more detailedcommentary on the Cooperative Bank report isincluded in the practice section)

The Co-operative Bank plc approach to socialaccounting and auditing has been encapsulatedin its Partnership Report. The bank is wellknown in the UK for its explicit ethical policiesand during the mid-1990s developed stake-holder policies as a basis for partnershipreporting. (The bank uses the term partnersrather than stakeholders, which reflects itsview of working in partnership with those var-ious people and organisations involved in thebusiness.)

THE CO-OPERATIVE

BANK’S PARTNERS

Shareholders; customers; staff and theirfamilies; suppliers; local communities;national and international society; and pastand future generations.

The bank sees social accounting and auditing asan expression of its values and as a way of liv-ing up to those values in a collaborative waybased on partnership.

The second Partnership Report (1998), hasbeen explicit about what the Co-operativeBank has learned and what changes it has madein response to partners’ views of its perfor-mance. The process is externally verified by anexternal company, and it is made clear as towhether it has achieved its targets. People fromother organisations may also comment on aparticular aspect of performance; for example,the Centre for Tomorrow’s Company (a lead-ing organisation in the area of social responsi-bility) comments on the extent to which valueis delivered to the various partners.

In addition, the bank takes a very strong eco-logical stance and reports on its performanceusing the methodology of the Natural Step (seebelow for details).

On the whole the Co-operative Bank’sapproach is a very important model for thelarger mainstream banks, and partly comple-ments the approach of our next case study.

VANCOUVER CITY SAVINGSCREDIT UNION (CANADA)

VanCity is the largest credit union in Canadaand has reported on its social performance fora number of years. In 1997 it produced its firstexternally verified social report.

The Chairperson explains: ‘In an age ofincreased competition and marketplace globali-sation, management tools are necessary toensure that social and environmental values arenot traded in for higher profitability. This socialreport provides VanCity with some of the infor-mation we need to track and set benchmarks forsocial performance. It also provides a barometerto measure how well VanCity is meeting itscommitment to corporate responsibility.’

The VanCity Social Report 1997 is a nicely laidout report that takes into consideration its var-ious stakeholder’s views, and like that of the Co-operative Bank, sets out its future commitments.


Auditing

OTHER EXAMPLES

An increasing number of financial institutionsare undertaking social accounting and auditing,two of which are worth mentioning.

The NatWest Bank in the UK has been one ofthe leading mainstream banks to support andbe involved in community finance. It hasrecently published its ‘Social Impact Review’,which is a review (not an audit) of variousaspects of its social performance. Although it is‘their words only’ (with a little commentaryfrom people such as environmental campaign-ers) it is an interesting first step.

Zurich Financial Services is a recently mergedgroup of companies. It has a Community Trustthat recently published its first set of socialaccounts (Allied Dunbar Staff Charity Fundand India Programme had previously carriedout social accounting processes). Although thisdoes not cover the company, it is externallyaudited and is hopefully an important steptowards the company itself being more openabout its social performance.

ADDITIONAL INFORMATION AND CONTACTS

The Institute of Social and Ethical AccountAbility (ISEA).

This is the professional body developingstandards and approaches to social account-ing and auditing. It has recently published asocial accountability standard (AA1000).Contact: ISEA, Thrale House, 44-46 Southwark Street, London SE1 1UN, UK Tel. +44 (0)20 7407 7370Fax +44 (0)20 7407 7383 Email: [email protected];Website: www.AccountAbility.org.uk

REFERENCES

Zadek, S (et al). Building Corporate Accountability. London, Earthscan 1997

Gonella, G (et al). Making Values Count. London, ACCA/NEF 1998

Pearce, J. (et al). The Social Audit Workbook. London, NEF 1996

28 • Section Two

EXAMPLE OF VANCITY’S FUTURE

COMMITMENTS TO ITS STAFF

Increase overall staff satisfaction from 76 percent to a minimum of 85 per cent by 1999 (90 per cent by 2001); complete and implementcompensation redesign (including flexible ben-efits); develop and implement a communica-tion strategy for staff, including a system toimprove employees’ access to the informationthey need to make work-related decisions;increase the percentage of staff who say theyreceive the information they need to do theirjob to a minimum of 80 per cent and those whosay they receive straightforward messagesabout what’s important to 75 per cent (by2001); develop and implement an employeetransition policy to cover technological andorganisational changes; ensure that policiesdealing with discrimination, harassment, andwrong-doing in the workplace are adequateand well-communicated to staff (by 1999).

SBN BANK: ETHICAL ACCOUNTING STATEMENT

SBN Bank is the seventh largest bank in Den-mark. Like many organisations in Scandinaviait has been carrying out ‘ethical accounting’ fora number of years.

Ethical accounting also includes a process of dia-logue with stakeholders (in SBN’s case of cus-tomers, non-customers, employees, and share-holders), but it does not involve externalverification. However, with the introduction of aninternationally recognised standard in this field(AA1000 – see below), this approach is changing.

One important element of this approach is‘dialogue circles’. At the end of the accountingprocess a series of meetings with stakeholdergroups discuss the year’s results. This offers avery important learning process, and involves agreater number of people in the decision-mak-ing and governance processes. There are even‘Hip Hoppers in dialogue circles’, who areyoung people between the ages of 14 and 18.


Equity is important for business creation. It aims to cover both long term investment(buildings, equipment, etc) and an element of rolling assets. However, although social financehas been very innovative and has increased its impact over the past years, very few socialfinance instruments provide equities to local social businesses in Europe.

- once an investment has been made, it isimpossible to use the capital invested for sev-eral years. This means local social capitalfunds finance projects. Loan and guaranteefunds have a better leverage effect.

- investment in equities has not been developedmuch in Europe. The venture capital is per-ceived as too complicated and reserved to ‘cap-italists’. It is already difficult for governmentsto convince small savers to enter the stock mar-ket; it is even more difficult to convince themto do it as a form of social investment.

The viability of a local social capital fund canonly be measured after three to five years. Dur-ing the first years the fund will have a greater orsmaller deficit, depending on how far volunteermanagement reduces the administrative cost.

HOW CAN LOCAL SOCIAL CAPITAL BE DEVELOPED?

A co-ordinated policy should include:- general recognition that equity is necessary

for small business creation - social savings funds providing the savings

needed to capitalise small businesses selectedon social criteria. These funds could be set upby associations and trades unions, possiblywith co-funding from public authorities.They will require technical skills to set up andmanage them, as well as information work

- involvement and control for individual savers,through managing the fund, deciding selec-tion criteria and monitoring the selected pro-jects

- funding and/or volunteers to cover adminis-trative costs

- professional management and evaluation - complementary instruments: guarantee funds

on equities to reduce losses on share selling,and social stock exchange markets to increasethe portfolios’ liquidity

- tax benefits for social savers.

Local venture capital: how to bring equity to social businesses

by

Yannick

Vigignol

Fédération des CIGALES

Mrs Ch. Bouchard

Mr Jacques Duguerra

61 rue Victor Hugo

F-93500 Pantin

Tel. +33-1 49 91 90 91

Fax+33-1 49 91 90 91


Social local venture capital has a positive socialimpact – job creation, social inclusion, localdevelopment, and so on – but it is not easy todevelop.

To understand why social local venture capitalis an exception among social finance instru-ments, we need to compare it with loans, guar-antees, and interest-free loans. There are severalnotable differences:

- people who invest in a business own any addedvalue, financial or social, the business creates;and if it closes down, they lose their invest-ment. This is very different from credit orguarantee schemes, where the financial institu-tion is more a service provider than a partner.

- shareholders follow the business on a longterm basis. There is no speculation in invest-ing in a micro-enterprise; it is almost impos-sible to sell shares in the first three years ofactivity. A social capital institution monitorsits portfolio with criteria that are morefocused on the project’s long term viability

- savers in local social funds have more controlover their savings and become more involvedin what happens to them. This local partici-pation promotes economic democracy.

- the remuneration of a local social capital fundis usually not paid by the entrepreneur itfinances. As a shareholder the social capitalfund can receive a bonus – if there are someprofits and there is general agreement to do so– but this very rarely happens in the first fewyears. In some cases, such as participativeloans, the social capital fund receives an inter-est, but it is a low rate and most of the time itis linked to any profits. Generally the onlyfinancial revenue the fund acquires is by sellingits shares at a higher price, and this depends onthe market rather than the entrepreneur.

- by bringing equity, a fund has also propertyrights in the business. This means publicauthorities cannot create such funds as itwould amount to a kind of nationalisation

There are a number of social investors currently active in Ireland – some have been created within the public sector, others have their origins in the community and voluntary sector and one is an initiative of the country’s roman catholic religious orders.

At the regional level the western developmentcommission investment fund is an example ofsocial investing that has developed in the pastfew years in direct response to the pattern ofunemployment, emigration and depopulation.The commission’s investment fund receivesmonies from national government and the EUand invests through loans and shares in com-munity and private enterprises located in 17counties in the west of Ireland.

VOLUNTARY SECTOR SOCIAL INVESTORS

The first voluntary initiative of the 1990s wasfirst step. This voluntary organisation providesno interest loans and mentoring to start up pri-vate sector enterprises. It is a vehicle throughwhich mainstream financial institutions candeal with ‘non-bankable’ enterprises: the finan-cial institution makes available a fund that firststep in turn lends on. The organisation was alsosuccessful in obtaining specific taxation legis-lation that enables businesses to deduct contri-butions to first step. The small enterprise seedfund was established in 1995 to attract invest-ment into the small business sector – particu-larly to early stage companies. The fund raisesmonies through annual public offerings and todate has invested in about 20 enterprises. Asomewhat similar fund, the Irish businessinnovation centres seed capital fund, was estab-lished in 1999 with an initial capital sum ofir£1.5 million. The initial capital was con-tributed equally by private sector supportersand enterprise Ireland.

COMMUNITY-BASED SOCIAL INVESTORS

A number of the local partnership companiesmentioned above have established very smallmicro-finance funds with finance from gov-ernment, larger social investors and main-stream banks. The Tallaght Trust is a localmicro-finance fund that was created in a large,marginalised, urban satellite of Dublin to sup-port enterprise development in that locality

Social Investing in Irelandby

John

Everett

Irish Social Finance Centre

10 Grattan Crescent

Inchicore, Dublin 8

Ireland

tel: +353 1 453 1861

fax: +353 1 453 1862

30 • Section Two

Most of the social investing that has occurredto date has been directed toward three objec-tives – enterprise development in general,community development in general and micro-finance in marginalised situations. It is worthnoting that the enterprises and projects inwhich they invest almost always rely on a sig-nificant element of grant aid as well as socialinvestment.

Enterprise Ireland is the national governmentagency with the overall remit to support busi-ness development in Ireland and it does sothrough a mix of grant aid and venture capital.The department of tourism is an importantsource of grant aid to community enterprisesand projects, particularly in rural areas. Threeinternational funds – the international fund forIreland, the Ireland fund and the Europeanunion’s peace and reconciliation fund – are alsoimportant sources of grant aid for private andcommunity projects and enterprises. At thelocal level every county maintains an enterpriseboard that provides grants to new enterprises.

GROWTH AND DEVELOPMENT

GOVERNMENT-BASED SOCIAL INVESTORS

Two statutory agencies in particular – enter-prise Ireland and udaras na gaelteachta – havebeen involved in enterprise support for overtwo decades. Often the investment providedby these agencies is twinned with grant supportthat they have also provided and is in turnleveraged as part of an overall finance packagethat includes components from smaller socialinvestors and mainstream financial institu-tions. Enterprise Ireland operates a number ofdesignated venture capital funds in conjunctionwith the European union and local private andvoluntary sector partners. Udaras na gael-teachta provides both grant aid and venturecapital to enterprises in areas where Irish isspoken as the first language.

RELIGIOUS COMMUNITY

The credo fund was set up in 1996 to enablereligious orders to allocate a portion of theirinvestment funds to socially responsible invest-ing. The fund has invested in various commu-nity development projects such as cultural,enterprise and heritage centres, local propertydevelopment companies and community busi-nesses. It has also provided micro-finance toindividual enterprises in the private sector andsocial economy.

CRITICAL ISSUES

Irish social investors have experienced varyingsuccess in engaging and forming partnershiparrangements with mainstream financial insti-tutions. While first step has enjoyed close sup-port from the bank of Ireland in particular,other social investors interact with commercialbanks much more haphazardly. One of theissues facing these investors is the need for aco-ordinated and integrated strategy for engag-ing mainstream financial institutions.

Projects seeking social finance and smallersocial investors attempting to leverage theirmodest funds find it difficult to co-ordinateseveral finance sources effectively. They needan agreed procedure for working with fundingconsortia.

Most experienced social investment practition-ers will agree that the finance provided tomicro-enterprises is only effective if it is sup-plemented with financial and administrativemanagement support. While this is availablefrom numerous sources, it tends to be timelimited, relatively low level and contract basedrather than senior expertise delivered on astakeholder basis.

Ireland’s financial and investment legislation andregulation takes no account of socially respon-sible investing. As a consequence smaller socialinvestors incur disproportionate costs in order

to comply with relevant regulation. In somecases, such as the credo fund, social investorshave had to change their structure fundamen-tally in order to avoid regulatory restrictions.

In an effort to address the issues describedabove and promote the development of socialinvesting in Ireland a number of practitionershave recently established the Irish social invest-ment forum. Hopefully this new organisationwill become a vehicle through which several ofthe issues described above can be addressed.


Governments often encourage particular types of investing and saving through the tax regime.In 1999, the UK government announced plans to encourage investment in science research for enterprises, through a tax credit. In 2000, the UK Social Investment Forum (UKSIF) is campaigning for tax relief for investment in social lending, Community Finance Tax Credit.

The Dutch model offers a tax exemption forprivate investors on the interest or dividendthey receive from the green investment funds.The funds are regulated by the Dutch CentralBank and have to invest at least 70 per cent inrecognised green projects. The objective is tomake low interest loans available to the greensector. Green funds pay out net dividend orinterest. The investors pay no tax on thisincome and, consequently, accept a relativelylow return on their investment. This results ina supply of low cost funds for the green fundswhich forms the basis for providing greenloans at favourable interest rates.

The scheme is considered a great success by theDutch Government. It fulfils its objective byreducing the financial burden for green pro-jects while attracting a large public to the fieldof green investment.

The US operates several tax credit models tar-geted at enterprise support in deprived com-munities. The Low Income Housing TaxCredit was introduced with the Tax ReformAct of 1986. This tax credit was based on theprinciple that the most efficient way to makeuse of public funds was to promote privateinvestment rather than give direct cash outlays.The tax credit is cited as the main stimulus forfunding 80,000 to 100,000 units annually andmore than $1.8 billion a year in related wages.

More recently the Community DevelopmentCorporations Tax Credit was targeted at 20Community Development Corporationsacross the USA. Each corporation was eligibleto receive up to $2 million in private sectorinvestments encouraged by the favourable taxregime. The credit has now raised $20 million.

A new tax credit is now being proposed inPresident Clinton’s budget proposal for 2001:the New Markets Tax Credit. Such a tax creditwould offer a 25 per cent tax credit of theamount invested over five years in communitydevelopment organisations.

The Case for Tax Credits for by Laura Noble,

UK Social

Investment

Forum

UK Social Investment Forum

Holywell Centre

1 Phipp Street

London

UK

Tel +44 20 77 494 880

Fax +44 20 77 494 881


Web: www.uksif.org

32 • Section Two

The campaign was taken to the UK Parliamentat the start of the year. Tony Colman MP, chairof the All-Party Parliamentary Group onSocially Responsible Investment, presented aPrivate Bill, entitled the Community FinanceTax Credit Bill. The bill, although it had verylittle chance of becoming law, did give anopportunity to present the case to the Govern-ment and other Members of Parliament.

The proposed legislation would stimulate theCommunity Finance Initiatives (CFIs) the UKGovernment is keen to support. CFIs seek tomatch a businesslike or private sector approachto lending with public sector or not for profitmotivation. They usually provide an additionalsource of finance, many as a lender of lastresort, seeking to fill financing gaps that reflecteconomic and social disadvantage.

Tony Colman took up the case for tax relief forCFIs after it was raised in a report published bythe Government’s finance department, the Trea-sury. The report, ‘Enterprise and Social Exclu-sion’, recommended that the Treasury andInland Revenue should examine tax relief forCFIs. It also resulted in a £30 million supportprogramme for enterprise in deprived commu-nities, which will include a £12 million challengefund for CFIs. However as Mr Colman pointedout in his speech to Parliament, this does notlever in the potentially huge resource of privateinvestors. He told MPs ‘We currently offer taxrelief to those who invest in enterprise for per-sonal profit and we offer tax efficient giving tocharitable causes but as yet we give no tax reliefto the investors for social purposes.’

In preparing the case for tax relief in the UK forsocial investors, UKSIF has drawn on the expe-rience of other countries. Netherlands, forexample has a very successful tax credit schemefor green funds. Since its launch in January 1995,six banks have introduced green funds whichhave a combined fund volume 1 billion Euros.

The tax credit would apply to equity and otherforms of patient capital, and is designed toencourage $15 billion in private sector invest-ment for business growth in low and moderateincome rural and urban communities.

On the other side of the Atlantic the Irish Gov-ernment has written a special clause into itsfinance bill. This clause gives tax relief onmoney donated by corporate businesses toFirst Step, an organisation which helps peoplemove into self-employment from benefits. Ithas levered in significant funding from theBank of Ireland to the project.

Back in the UK, UKSIF believes a tax creditwould be a very efficient model for levering inprivate finance to community lending, and thatpeople are prepared to lend or invest muchgreater volumes than they are able to give. Forexample investors in the Sheffield EmploymentBond lent up to 10 times more than they wouldhave felt able to give. NatWest Bank’s marketresearch for its own community bond alsofound that customers who would considerinvesting in a community bond rose from 18per cent to 31 per cent with the introduction oftax relief.

The model which UKSIF is presenting to thegovernment would offer a 25 per cent tax reliefon the sum invested in a CFI. The moneywould be granted to the CFI which would befree either to retain the money or to distributesome back to the investor.

We believe that the tax credit offers the UKGovernment the opportunity to act as a cata-lyst to the development of social investing inthe UK. Over the coming year UKSIF willcontinue to press for a tax system which recog-nises the potential of private investing in com-munity finance.


Social Investors

Since it was established in 1977, the French system of aid for unemployed people wanting to create or take over businesses has undergone several reforms.One of the most recent is the ‘Encouragement au Développement d’Entreprises Nouvelles’ (EDEN).

buy-outs; financial institutions (credit institu-tions with a social vocation) or national insti-tutions (banks with a mutual structure); orgroups of different types of organisations.

In practice, organisations have joined togetherto tender: members of the main French localfinancing networks as well as credit institu-tions, for section 1, and specialist firms pro-viding management assistance services (cham-bers of commerce, consultancy firms) forsection 2. These different groupings have led tovarious complications which have considerablyslowed down the scheme. Organisations andnetworks that are generally in competition andnot used to taking a common position are hav-ing to work together. This has made existingconflicts worse, although it has also helpedimprove some co-operation.

Although the EDEN initiative represents sig-nificant progress and very innovative terms andconditions the scheme does have several incon-sistencies. For one thing, it pursues contradic-tory objectives. The state delegates the man-agement of the repayable loan; but thenetworks only wanted responsibility for decid-ing whether to grant loans. The tender proce-dure was designed to comply with rules regard-ing public expenditure; at the same timequalitative criteria ran contrary to the very con-cept of invitations to tender according to therelevant French law. This also produced com-petition rather than co-operation, and incon-sistency between different public authorities.

Consequently, the procedure has been long andcomplicated. At 31 December 1999, norepayable loan out of the 400 million francslending total projected for 1999 had effectivelybeen paid out to a new business. Certain callsfor tenders had still not been published in Jan-uary 2000. However, new businesses were stillable to file applications from the start of theyear, which means that there is already a sig-nificant backlog of applications waiting to beprocessed in certain areas. The scheme has also

The EDEN scheme by

Charlotte

Engrand

EFICEA

EFICEA

Mr Erwan Bothorel

& Mr Cyrille Rollinde

7 rue Domrémy

F- 75013 Paris

France

Tel +33 1 53 94 78 70

Fax +33 1 53 94 78 71


Web: www.globenet.org/eficea

34 • Section Two

This helps young people and people on incomesupport get access to bank loans throughrepayable loans, which provide ‘leverage’ forother financing, and also offers managementassistance during the first years of the com-pany’s activity.

Loans range from 40,000 francs for a one-per-son enterprise, up to 500,000 for a managementbuy-out to rescue a company in difficulty.They can be for up to five years, with a maxi-mum grace period of 18 months, and must bematched by at least half the same sum fromanother source.

Management assistance is supplied by organi-sations that specialise in providing advice onsetting up and developing businesses. Mostbusinesses receive 35 hours in total, but thiscan vary. Some management buy-outs receive50 hours over a period of three years.

Moreover, the state ensures that the mostimpoverished new business creators are paid aminimum amount during the start-up phase;new business creators, or those taking overexisting businesses, who receive income sup-port or a widow’s pension, maintain the fullamount of their benefits during the first sixmonths of their business venture. In fact, thestate has a highly innovative role in thisscheme. In some areas, responsibility for grant-ing and managing loans as well as managementassistance has been delegated to private organ-isations recognised for their financial expertiseand advice services for new businesses, as longas these meet national criteria. This pilotscheme is implemented in accordance with thepublic procurement system of calls for tenders,which has previously been reserved for privateenterprises.

Contracts have separate sections for loans andassistance. Eligible organisations include associations set up to provide aid for newenterprises or to back management buy-outs;consultancy firms specialising in providingadvice on enterprise creation or management

been delayed because of misunderstandings atdifferent levels.

Moreover, no provision has been made toinform new businesses and co-ordinatebetween contracted organisations; paymentfor section 1 is too low; and the degree of nec-essary financial acumen has been underesti-mated. As a result of these difficulties, the pilotwill now be maintained in its current form upto 2002.

Several groups have already started to givethought to proposals to submit to the publicauthorities with a view to remedying theshortcomings in the current system. In partic-ular, they suggest replacing the tenders proce-dure with a list of approved organisations.These would be responsible for decidingwhether to grant the repayable loans, but allloans would be administered by the state.

In order to ensure co-ordination between sec-tion 1 and section 2, organisations whose ten-der is accepted for section 1 could indicatewhich organisation selected for section 2 theywould prefer. They also suggest extending therepayment period, and introducing a premiumof 20,000 francs on all new businesses createdby people receiving income support.

Given the difficulties experienced and the con-troversy aroused by the implementation of theEDEN scheme, it is very likely that the dis-cussions will become more intense in the com-ing months, in particular over monitoringrepayments and support for new businesses.Certain amendments will have to be made inorder to enable this initiative, which is uniquein Europe, to function smoothly.


A few years ago, Christian Aid ran the slogan “give a man a fish and you feed him for a day. Give him a fishing rod and you feed him for life.” Such should bethe sentiment behind social banking and welfare in any developed state. But this is not the case.

nothing without positive, confident people touse them and benefit from them. Indeed, con-fidence should be the key purpose of regener-ation in our cities. This is the root of success-ful welfare, and social banking has a major roleto play in challenging and tackling exclusion.

British cities are full of people who havebecome resigned to a life of inactivity andexclusion. These are people who either nevervote, or no longer vote because the world ofpolitics has no meaning for them.

This paper is being written in the shadow ofimpending European elections, at which onlyabout one third of the electorate of GreatBritain will bother to express any interest in theevent. Resignation and apathy are the symptoms,but the problem goes deeper. Since the beginningof the eighties Great Britain has experienced agreat variety of government initiatives aimed atthe under served neighbourhoods of inner cityand outer estates. Yet, after almost twenty years,these neighbourhoods remain at the bottom ofthe heap. This is due in large part to the failure ofthese initiatives to address the root problem ofpersonal confidence and recognition.

The ‘welfare’ provided by City Challenge, Sin-gle Regeneration Budgets, URBAN, Objective‘this’ or Objective ‘that’, through to the cur-rent New Deal for Communities can never cre-ate sustainable regeneration because it does notlink people with the creation of their ownwealth. The usual handouts from all manner ofgovernments, Left, Right or whatever, fail tohit the target because they are unable to createtruly sustainable economic activity.

SOCIAL BANKING IS ONE SOLUTION

There is a need for greater integration of ‘main-stream’ economic and financial activity with therapidly emerging community economics of manypoorer neighbourhoods. These include creditunions, local economic trading schemes (LETS)

Social Banking and Welfare in Europe

between market and state: by

Simon

Bale

36 • Section Two

More and more, across the western world, gov-ernmental initiatives are destined to fail simplybecause they do not provide the tools. Thehandouts do not regenerate. They do not cre-ate confidence. They simply maintain a socialstructure, one in which the poor receive thegrant and the rich make the money.

Some efforts to challenge this situation have beenattempted in some regions, but on the whole,they have been doomed to mediocrity. Why isthis? What do governmental initiatives lack?

I believe that this is a cultural and historical prob-lem, one which needs to be challenged. I hopethat this paper will stimulate such a challenge. Itis written from a British perspective – a countrywhich has experienced its fair share of welfareand social regeneration programmes in the pastcentury. Some have been effective, others havesunk without trace. But one thing remains: theneed for social and economic regeneration. Afterthe 1983 General Election, Britain’s Prime Min-ister, Margaret Thatcher famously declared “Let’ssort out the inner cities”. That was sixteen yearsand many initiatives ago. The ‘inner cities’ are stillwith us. Politicians come and go. Exclusion andpoverty remain.

They remain because the underlying cause ofsocial exclusion has been ignored. People needto be connected with their financial and eco-nomic potential if they are to participate intheir own regeneration, and this must be initi-ated by governmental intervention as well asby the activity of the financial service sector1.

ACCESS TO SOCIAL BANKING:WHAT IS EXCLUSION AND WHATIS WELFARE?

Arguably the single most important factor ineconomic regeneration is the confidence ofthose affected. New buildings, new roads,improved health-care, fewer dangers and dis-tractions for young people all help to create anew and hopeful environment, but they are as

and the wide variety of alternative economic sys-tems which have been developed around theworld. I will not discuss them in detail here, butrather point the reader to some key texts whichshould be essential further reading1. Instead, Iwant to lay out why I believe that all of thesealternative systems can never fully regenerate orcreate welfare or true economic activity on theirown. They need to be part of a system whichaddresses the needs of excluded communities, butwhich also permits the inclusion of those com-munities into the wider, global arena. People needto become financial citizens. Social banking rep-resents a broadening of both the ‘community’ sec-tor to include, at its root, the commercial sector inorder that both may benefit. In Britain, and pos-sibly in the wider EU, social banking is in itsinfancy. In the United States, with the creation ofthe Community Reinvestment Act (CRA) andother similar approaches to social banking haveled to a closer relationship between under servedneighbourhoods and the mainstream financialinstitutions which have previously ignored them.The CRA assists the creation of credit unions,supports low interest loans to community initia-tives, and creates relationships between poorerareas and bigger commercial enterprise. It is cen-tral to the creation of financial citizens – individ-uals who, through a relationship with mainstreamfinancial services are able to play a role in localeconomic regeneration, thereby creating welfare.

The remainder of this paper describes oneapproach to thinking about the link betweensocial banking and welfare, an approach whichimplicitly links government, banks andexcluded communities.

FINANCIAL CITIZENSHIP – A WIDER RESPONSIBILITY

Currently in Britain, credit unions are still anovelty. They are becoming less so, but eventhe biggest ones cannot yet be described as bigbusiness. In Ireland and in other Europeannations credit unions have begun to influence

the way people think about community eco-nomics, but there is still some way to go beforethey are accepted in all situations. They are notyet perceived in anyway like ‘real’ banks.

Banks and other financial institutions have a pri-mary responsibility to their customers – bothborrowers and lenders. To this extent they areordinary commercial enterprises and suppliers ofservices. Customers choose to use them and theyhave a right to expect a certain quality of service(including good advice) in return. The mis-sellingof pensions in Great Britain in the early 1990s,for example, was an abuse of this expectation.

But banks in particular are not only commercialenterprises. They occupy a special position in thefinancial system and the tight financial couplingof one bank to another makes them collectivelyvulnerable to ‘systemic risk’. In considering riskbanks therefore have a responsibility not merelyfor the internal cost of potential failure to theircustomers and employees but in a wider sensefor the external cost to the economy.

Their special ‘systemic’ position also gives banksand other institutions a responsibility for the con-sequences of ‘market failure’ within our own soci-ety. We believe that financial exclusion should beviewed from this perspective. It is much more thana consequence of poverty among certain individ-uals. It is a real failure of the market to providewhole communities with the basic equipment ofmodern life. Basic financial services are becomingas necessary as water and electricity. This may bean exaggeration but it indicates their special role.

CHOICE AND EXCLUSION

Most suppliers of goods and services are happyto provide for anyone who chooses to buyfrom them. Pubs sometimes chuck out unde-sirables but most shops and manufacturers arenot so choosy. In this situation customers arefree to choose between competing suppliersand somebody will usually supply a Mini foranyone who can’t afford a Rolls Royce.


where are the citizens?

(1) Richard Douthwaite,

Short Circuit,

Resurgence Books (1997);

David Korten, When

Corporations Rule the

World, Earthscan (1996);

Peter Lang, LETS

Work – Rebuilding the

local economy, Grover

Books (1994), Credit

Union Home page:

http://www.cu.org/

There are many, many

more CU sites on the web.

Search from Netscape

using ‘credit union’.

At the highest level, lack of investment in cer-tain communities is a key contributor to theirdownward spiral. It is also the area in which wehave the clearest demonstration that a solutionis possible. The American model of commu-nity reinvestment cannot necessarily be grafteddirectly onto our financial system but it hasbeen successful in regenerating economic activ-ity and it demonstrates that given the rightframework the banks can win too.

THE ROLE OF EXCLUDED COMMUNITIES

The notion of financial citizenship is notmerely an expression of the impact of exclu-sion; it is also an indication of the solution.Organised and economically knowledgeablecommunities are necessary to understand anddevelop financial participation within excludedneighbourhoods. Without communityinvolvement and debate, reinvestment andfinancial inclusion cannot take hold.

Regulation or legislation on its own will notsolve this problem. No amount of compulsionon banks and insurance companies to acceptnon-profitable customers will ever lead to gen-uine inclusion and sustainable welfare. Newsolutions have to be created, but the real failureof the market in this area lays a responsibilityon the financial service regulators such as theFinancial Services Authority in Britain, and onthe institutions they regulate.

True financial citizenship must involve thebanks and their regulator but it can only besustained by active participation of individualsand the commitment of communities.

CONCLUSION

For people who are excluded from the eco-nomic life of the community, active citizenshipis not just the goal; it is the road back to par-ticipation and inclusion. The solutions will behybrids, they need to reflect and incorporatethe specific and diverse needs of geographicallyvaried neighbourhoods. Welfare and socialbanking are implicitly linked through theinter-relationship between banks and commu-nities. Public administration must acknowl-edge this linkage in order that it can work tobring together the seemingly disparate worldsof commerce and community.

Special thanks to the Heinrich Böll Foundationfor their support for this specific paper.

38 • Section Two

The difference with banks and insurance com-panies is that some customers are likely to beunprofitable. These institutions increase theirprofits not by maximising their customer basebut by optimising it, picking off the most prof-itable customers and rejecting the rest. Exclu-sion is therefore not merely a matter of povertyor cultural resistance or lack of education; it isa positive mechanism of rejection. As theOffice of Fair Trading points out: “It is oftenclaimed that those who fail to take up even themost basic of financial services have done so outof choice. My scepticism of such claims has beenconfirmed by the analysis and research in thisreport. The take-up of bank current accounts,household insurance and short-term credit isinconsistent with the exercise of any meaning-ful choice.” (John S Bridgeman, Director Gen-eral of Fair Trading)2.

COMMERCIAL MECHANISMS AND CITIZENSHIP

The reversal of the normal market mechanismmeans not merely that potential customers can-not afford the products on offer but that they areeffectively excluded from the marketplace. Forthis reason we need to abandon the commercialmodel of customers and suppliers as a way oftalking about this situation. The issue is not cus-tomer rights but participation which is why weshould talk about ‘Financial Citizenship’.

Financial exclusion is one of the tap roots ofsocial exclusion and just another dimension ofthe trap that individuals and communities haveto organise their way out of. Greater economicactivity and participation as financial citizens inthe economic life of the community, the countryand the wider EU is an important dimension ofthe solution and it brings potential benefits toeveryone - including the banks. Financial citi-zenship is the road to sustainable welfare.

LAYERS OF EXCLUSION

Financial exclusion has many faces and it impactsindividuals, families and whole communities.

The withdrawal of bank branches and cashmachines from urban and rural communities.Ironically these are often the very communitiesthat depend most on the cash economy. Shopsin these communities can only survive if theyare close to a source of cash (the analogy witha village well is very clear) and the devastatingknock-on effect is that whole ranks of localshops close down when a branch is closed.

(2) Vulnerable consumers

and financial services,

The Office of Fair

Trading, 1999.


The French co-operative and mutual-benefit sector is in good health. Its banks regularly increase their market share, to the detriment of their counterparts in the commercial sector. However, the sector is under threat.

Obviously, market constraints do exist.Whether they are real or imaginary is of littleimportance; the commercial banks and therefore(although to a lesser extent because there is noshareholder pressure) the banks of the co-oper-ative and mutual-benefit sector are expected toconform to the “rule” which demands a returnon capital of around 15 per cent.

Keynes described stockmarket behaviour assymptomatic of a ‘casino economy’ – invest-ments are not based on objective facts, but onthe competitors’ anticipated behaviour. Theactual health of the company in question isimmaterial – if one person sells the others doto, for fear of being landed with a lot of value-less shares. Saying that prices are going to dropis enough to make them do so. Competition inthe commercial banking world is based on thelogic of this self-fulfilling prophecy. Obviouslythis reasoning only works as long as it disre-gards objective realities.

Will this unbridled pursuit of profit in order tosatisfy the shareholders take over in the social-economy banks? Have co-operative banksescaped this imperative of rates of return oncapital? Will the return on equity rate alsobecome the be-all and end-all for the co-oper-ative banker? The answer to this questiondepends on two things: first, the usefulness ofthese banks; second, their tenacity in holdingto their values whatever the obstacles.

The co-operative and mutualist ethos calls fora financial sacrifice from the member, becauseinterest cannot rise above a certain level. Thisethos is based on specific values; the labourmovement of the 19th century was a reactionto triumphant economic liberalism. Faced withthis increasing commercialisation and individ-ualism, workers’ associations emphasisedhumanist, mutualist, co-operative values basedon equality and fraternity. It should be bornein mind that they do not exclude profit, pro-vided that profit is not the sole motivation.

What future is there for social-economy banks?

by David Vallat,

Centre Walras ,

CNRS, Université

Lumière

David Vallat

Centre Walras (CNRS,

Université Lumière Lyon 2)

Avenue Berthelot 14

F - 69007 Lyon

France

Tel. +33 4 72 72 64 07

& 4 72 72 65 50

Fax +33 4 72 72 65 55

Email: Jean-Michel.Servet

@univ-lyon2.fr

In France the commercial banks are callingupon the government to reduce, or even abol-ish, the particular characteristics of the sectorresponsible for what they consider unfaircompetition. Quite independently, financialorganisations in the social-economy sector arechanging those characteristics anyway. Theexample of the British building societies is sig-nificant. These co-operative credit companies,the result of a 200-year-old movement provid-ing property ownership for the most disadvan-taged, are one after the other falling into linewith a global shift towards standardised bank-ing. The consequences are still unclear, butbranch closures in unprofitable (particularlyrural) areas suggest that certain fringe groupsamong the clientele will find access to creditincreasingly difficult. The World SavingsBanks Institute has observed a similar privati-sation movement; its prime mission of helpingvery low income groups is under threat fromthe new declared insistence on profitability. Inan environment where the rule is becoming‘amalgamate or die’, who is going to take overthe social role of facilitating access to credit forthose who do not comply with the acceptedselection criteria?

Poverty and insecurity can be handled in twoways. One is participative assistance, where theindividual in need takes part in a process whichleads to better integration (by becoming a prop-erty owner, by being enabled to consume, bygetting access to credit in order to set up a busi-ness, etc); this is in line with the beliefs of theco-operative bank, where the beneficiary is alsoa member of the association. The declared col-lective project is that of an association centredon the individual. The alternative, the philan-thropist approach, is more traditionally ‘chari-table’: the beneficiary is in a position of depen-dence – a dependence which is all the moreserious as it means the organisation answers toits shareholders rather than to society.

To simplify, let us consider the social economyas having two main aims:

- at the minimalist level: as an alternative toeconomic liberalism. This means introducinga third sector between the market and thestate. The social economy, in this case, is anattempt to put the economic dimension into aproper perspective within the social dimen-sion: the survival of the community takespreference over the pursuit of profit

- at the maximalist level: this is the franklypolitical level. The final goal is to revolu-tionise society by putting forward an alterna-tive to economic liberalism. This is a field dearto the utopian socialists of the 19th century(from Owen to Proudhon and includingCabet, Fourier, etc).

No matter what the approach, the aim isalways to moderate market forces. The verytendency to liberalisation in the banking sectordemonstrates that this is necessary. The com-mercial banks’ multiplicity of lucrative finan-cial products may cause the co-operativebanks’ customers to become more demandingand become obsessed with profits. Mutualistvalues are facing a crisis overall; the two gen-erations of staff of the social-economy bankingsector have very different attitudes to its orig-inal values. The generation which grew up inthe 30 years of post-war progress do not seethem in the same way as those who have expe-rienced only the recession and the growth ofeconomic liberalism. In more general terms,these values must be constantly revived tocounter the smooth line of talk of market apol-ogists, a line which often gets front-page cov-erage with the media. In the end what betterway to defend these humanist values than byshowing that the banks of the social economystill have a distinct role?

So what role does the social economy in gen-eral, and its banks in particular, wish to play?Must they be content to exploit as best theycan the legacy which gives them an advantagein reaching a very particular clientele? Mustthey also grapple with the problems of socialexclusion? Whichever they choose, people stillneed credit. It is enough to think of all thosewho, generally because of a lack of security, donot have access to loans from commercialbanks. A loan is never neutral. It must involveliability on the part of the lending organisation.It should genuinely assist the borrower, andnot put them too far in debt. Commerciallenders take little account of the borrower’s

future; a loan given in accordance with the val-ues of the social economy must, as far as pos-sible, be a means of access to a better situation.

Business start-ups in France are a good exam-ple1. Around 80 per cent2 of the businesses setup have no employees. They involve very littlecapital (50 per cent of the entrepreneurs investedless than 50,000 French francs) and most (80 percent) belong to the trade and services sector.Only 22 per cent of businesses obtained a bankloan, and only eight per cent of those with aninitial capital base of less than 25,000 francs. Theunemployed people who constitute at least halfof the entrepreneurs have very small funds avail-able to invest, while little account is taken of thefinancing needs of all categories taken together:50 per cent say that they need capital.

This group still requires finance. This begs thequestion of what constitutes profitable credit.It is an important question because if the banksof the co-operative and mutual-benefit sectorfully satisfied this need, the solidarity-financebodies, from the Association pour le droit àl’initiative économique (ADIE) to the Nou-velle économie fraternelle (NEF), would haveno place in France. A profitable credit contractfor a bank represents an operation in which thecosts incurred are lower than the expectedprofits. It therefore means minimising costsand maximising potential profits. A sizeablepart of the banks’ costs are connected withobtaining information about the customer, inorder to reduce their risks: selection, follow-upand, in the final instance, sanctions. The prob-lem is that none of these methods is suitable forthe category of unemployed persons who setup businesses. They cannot be selected on thebasis of solvency (using techniques such ascredit scoring.). Monitoring and legal remediesare equally unsatisfactory. The small amountsborrowed generate little interest; the projectshave a very modest cash-flow; and they con-sume very few other bank products.

On the one hand there is a need for social-typecredit, which is not only risky but also involvescosts. On the other, the general trend istowards financial profitability. One sensibleoption might be liberalisation, but this wouldturn away from the humanist principles of thesocial economy and reject many innovativeprojects. Reality imposes constraints; but wecan reform rather than submit to them.

One solution could be new ways to financebusinesses created by unemployed people,which are giving those entrepreneurs employ-

40 • Section Two

(1) Particularly because

many people who fail

to get stable,

salaried employment

turn to setting up

a business.

(2) The figures given

come from an INSEE

survey ‘Information system

about new businesses’

(SINE 1994) quoted

in Evaluation des aides

à la création d’entreprise

of the French

Planning Office

(Committee presided

over by Bertrand Larrera

de Morel), Paris:

La documentation

française, 1996, 162.


The success of social credit is a source of worryto the commercial banks, which explains theirconstant push for liberalisation. This is whyDirectorate General XV of the EuropeanCommission, which is responsible for regulat-ing banking, considers that the banking systemshould be standardised to conform with a sin-gle status; any status other than that of a bankshould be no more than transitory. One devel-opment in this direction is the directive impos-ing a minimum of EUR 5 million level of cap-ital for any bank, which could eliminate manysocial finance initiatives altogether. It is there-fore up to people in civil society to put pres-sure on the state if they wish to preserve theco-operative and mutual-benefit banks and, ingeneral, finance organisationworking at theheart of the social economy.

Working on society in order to change itrequires a political framework for banking reg-ulation. What should the state do to reduce theharmful effects of extending the liberalisationof the banking sector? Apart from giving socialbanks legal protection, there are two courses ofaction. On the one hand, with reference toFrench banking law, Article 11 of the Law of1984 can provide some interesting ideas.

This article stipulates that the ruling forbiddingcredit operations to all non-bank organisationsdoes not apply to non-profit-making bodieswhich ‘for reasons of a social order grant loansfrom their own resources at preferential con-ditions to certain of their members’. Thisexception should therefore be extended toEuropean level.

There is also the possibility of a legal obliga-tion, along the lines of the US CommunityReinvestment Act, to invest a certain fractionof savings in the area where they were col-lected. This measure would have the enormousadvantage for savers of greater transparencyconcerning their investments and might allowthem to be more demanding about how theirsavings are used; they could, for instance,direct them towards environmental and com-munity projects.

In the end the counter-argument to economicliberalism is always the same: a continual insis-tence on the social aspect. The founding fathersof the credit co-operatives were not mistaken:credit used properly creates a social bond.

ment. Social banks would be facilitating socialinclusion; the business is just one means to thisend. The objective is the return to employ-ment, whether this is eventually self-employ-ment or not.

With this kind of potentially insecure invest-ment, both parties must build up a good rela-tionship. This is essential for confidence on bothsides (it is not enough to say, as one well-knownFrench bank does ‘your bank is accountable toyou’) and mutual understanding of the con-straints on each; and the bank makes its invest-ment long-term. This is fully part of the ethos ofthe co-operative banks; the relationship is notbased on security, which would denote a purelycommercial relationship and a lack of confi-dence, but on mutual understanding.

This ideal strategy is not without its costs. Asimilar approach is to develop partnerships,probably with community finance initiatives3.In these partnerships potential projects are usu-ally screened and directed towards sources offunding. In this way the costs are sharedbetween the different bodies. Projects are exam-ined in detail, not only at the accounting level,but also by market study and observation in thefield. A relationship builds as the meetingsprogress, and this is what actually creates thegreatest confidence. Businesses are also sup-ported after start-up, for at least a year. Com-pliance with the credit contract is not normallybased on the threat of legal proceedings, but onthe mutual relationship and on group pressure.

By being more ambitious, social banks can makereal social change. Credit was a weapon in thehands of the labour movement in the 19th cen-tury. It made it possible to create consumer andproduction co-operatives which could competewith the shops and factories of the bourgeoisie.Issuing loans is creating currency, making it cir-culate, creating exchange - in a word, wealth.

The members of the Local Exchange TradingSystems in the English-speaking world and thelocal exchange system in France4 knew whatthey were about. By creating a local currencythey enriched their social relations. Many localcurrencies have existed and still exist, which ful-fil similar functions5. Along the same lines, buton a different scale, 85 million or so credit unionmembers world-wide show the impact of finan-cial tools used on a community basis. Theselocal initiatives, whether planned on a commu-nity and/or associative basis, involve civil soci-ety in an area which has been the reserve of thecommercial banks – credit.

(3) David Vallat, D, (1998),

‘La finance solidaire: un

champ d’application varié’,

Rapport moral sur l’argent

dans le Monde, Paris:

association d’économie

financière / Caisse des

dépôts et consignations.

More generally, the reports

Exclusions et liens

financiers (of which the

1999 edition was

published by Economica)

consider the problem

of the struggle against

social exclusion through

financing, seen as a

tool for development.

(4) Servet, J-M,

ed., 1999,

Une économie

sans argent: les SEL,

Le Seuil.

(5) Ibidem

This article sets out to describe the financial organisations that fall within the scope of the socialeconomy in France, that is to say organisations satisfying a need that is not covered adequatelyby the market. The diversity of these organisations that exist throughout France ensures anincreasingly wide range of solutions designed to meet the needs of new business creators.

LOANS

ASSOCIATION POUR LE DROIT

À L’INITIATIVE ECONOMIQUE, “ADIE”

“ADIE”, a non-profit association, supportsinitiatives of the underprivileged, unemployedpeople or people on income support, who wantto create an enterprise but are excluded fromthe traditional banking system. It grants loansfor very small-scale projects. These loans areless than or equal to 30,000 francs with aninterest rate of 6%. “ADIE” also providesmanagement assistance to these enterprisesduring their first years of activity.

If its funds are provided chiefly by the publicauthorities (European Union, the French State,Regions), it also develops partnerships withlocal banks which provide loans, while“ADIE” guarantees such loans and providesmanagement assistance to the enterprise.

“ADIE” has a network of offices in fourteenFrench regions which manage one or more localsub-offices. Some of them have set up local part-nerships with organisations that specialise inproviding advisory services to new business cre-ators (Management Boutiques), as well asorganisations that guarantee bank loans (“FondsFrance Active”, described below). In particular,such partnerships enabled them to tender jointlyin response to the call for tenders launched bythe French Ministry of Employment for themanagement of a public system of financial aidand assistance for job seekers wanting to createnew businesses: “EDEN” (Encouragement à laCréation d’Entreprises Nouvelles).

Local financing networks in France:by Erwan Bothorel,

Cyrille Rollinde,

Charlotte Engrand

EFICEA

EFICEA

Mr Erwan Bothorel


7 rue Domrémy

F- 75013 Paris

France

Tel. +33 1 53 94 78 70

Fax +33 1 53 94 78 71


Web: www.globenet.org/eficea

42 • Section Three

The different schemes offered to thoseexcluded from the traditional banking sector(unemployed people and people on incomesupport) are largely financed by the State andthe local authority bodies, which have come tounderstand that enterprise creation is an incon-trovertible way of absorbing people intoemployment.

A new and significant system of public aid topromote enterprise creation entered into forceat the start of this year. The scheme, known as“EDEN” (Encouragement à la Création d’En-treprises Nouvelles) integrates financial backingby way of a repayable loan and a system ofmanagement assistance for new business cre-ators to help them run their business once it hasbeen established. The innovative aspect of thisscheme is that it entrusts the responsibility fordeciding and managing the aid to private organ-isations that specialise in provide backing forenterprise creation. This system reinforces theactions and resources of these organisations.However, generally speaking, these networks,which struggle to find the necessary resourcesto operate and provide assistance to new busi-ness creators, continue to operate on the basisof diversified resources, provided by privateindividuals, the public and private sectors.

3P R A C T I C E

FRANCE INITIATIVE RÉSEAU: “FIR”

France Initiative Réseau is a federation of non-profit associations: Local Initiative Platforms(“PFIL”). These organisations provide financ-ing by way of interest-free, unsecured personalloans. The average amount of these loans is50,000 francs, but can be as high as 250,000francs. The territorial funds responsible forgranting these loans on trust are funded by bothprivate and public organisations; the public con-tribution must, however, not exceed 60% of thetotal amount lent. Each platform is responsiblefor raising its own funds in its territory, frombusinesses, chambers of commerce, territorialauthorities (district, departmental and regionalauthorities) and certain categories of privateindividuals. The operating costs are generallycovered by public funding (local authorities,Caisse des Dépôts, European Social Fund). Eachplatform has a system whereby new businesscreators receive management assistance, for-malised by way of a sponsorship agreement.

The role of France Initiative Réseau is not toprovide financial backing to the PFIL but toprovide technical support and to establish rela-tions between new PFIL and older platforms.It also negotiates framework agreements, inparticular with the DATAR, the Caisse desDépôts et Consignations and the EuropeanSocial Fund. Last year it was able to increasethe number of platforms from 136 to 188; thetarget is to cover the whole of the French ter-ritory by 2004.

RÉSEAU ENTREPRENDRE

The associations of Réseau Entreprendre alsogrant loans on trust. However, they financelarger-scale projects since the amount of theloans varies, from 100,000 to 300,000 francs. Tosupplement the loan on trust, the new businesscreators must put up funds themselves and alsohave a bank loan. The loan on trust, however,gives borrowers considerable leverage since thebank loan represents on average two to threetimes the loan on trust.

The aim of Réseau Entreprendre is to promotethe creation of new businesses by relying aboveall on company chiefs who have the necessaryknow-how. Unlike “ADIE” and to a certainextent the “PFIL” which focus on persons thatdo not have access to the banking system andwant to set up their own business, RéseauEntreprendre backs projects to create busi-nesses that should be capable of developinginto an SME. The objective is that the busi-nesses should be capable of providing directlyor indirectly employment for ten or so peoplewithin three years.

The network comprises 14 regional associa-tions that cover in part or whole the followingregions: Aquitaine, Ile-de-France, Midi-Pyrénées, Nord-Pas-de-Calais, Basse-Nor-mandie, Haute-Normandie, Pays-de-la-Loire,Provence-Alpes-Côte-d’Azur, Rhône-Alpes.

As the schemes described above make loanswithout having the status of a financial institu-tion and therefore cannot take deposits fromthe public, they have a special dispensationfrom the French banking law (article 11 of thebanking law of 1984), which allows them onlyto grant loans for “social purposes” and byusing their own resources. This status limitsconsiderably their scope of action.

Practice • 43

a summary of 14 initiatives (France)

The NEF grants short, medium and long-termloans with an interest rate of 5.5% to 7.5% forloans of 50,000 to 1 million francs (200,000francs on average) and for periods rangingfrom several months to fifteen years. The guar-antees required are relatively restrictive, sincenew business creators must find people (friendsand family) to guarantee 120% of the loanamount on a joint and several basis.

It also provides management assistance to newbusiness creators. This is partly financed by anassociation (the NEF association) which relieson private donations and public subsidies, pluslocal unpaid volunteers.

The Caisse Solidaire du Nord-Pas-de-Calaiswas set up after the “NEF” (1997). It is a uniqueexample in France of an investment companywith an exclusively social vocation. It is onlyactive in the Pas-de-Calais region. Like the“NEF” investment company it has adopted anopen-end cooperative structure (capital of 15.15million francs). Its shareholders are split intothree colleges: financial institutions (BFCC,Caisse des Dépôts), institutional investors (theRegional Council), representatives of civil soci-ety (venture capital companies, such as, forexample, “Autonomie et Solidarité” and“RTVL”). In addition, 15 associations haveinvested 1,000 francs as partners in the structureand own 51% of the voting rights.

The Caisse Solidaire lends at a rate of 8%, foramounts ranging from 30,000 to 150,000 francs.Like the NEF, the Caisse Solidaire requires ajoint and several guarantee to be provided, butfor 30% of the amount lent. The remaining riskis covered by local guarantee funds (50% of therisk) and by the “Caisse” itself (20% of the risk).It does not itself provide any management assis-tance, but relies on its different partners to pro-vide such assistance (“ADIE”, “Cigale” clubs,Management Boutiques).


INITIATIVES BY PRIVATE INDIVIDUALS

Initiatives such as local savings clubs for womenentrepreneurs, the Clubs Locaux d’Epargnepour les Femmes qui Entreprennent (“CLEFE”)belonging to the network to promote solidarityinitiatives, the Réseau d’Accompagnement desCréateurs et Initiatives pour une NouvelleEpargne de Solidarité (“RACINES”), provideloans to new business creators.

The solidarity-employment funds that are cur-rently being reactivated and are funded bydonations from private individuals providebacking by way of loans to businesses that cre-ate jobs.

AMBITIOUS LENDING STRUCTURES:FINANCIAL INSTITUTIONS WITH A ”SOCIAL” VOCATION

Some rare initiatives have been tried to cir-cumvent this constraint while operating withinthe banking law. But the rigidity of rules gov-erning structures carrying out banking trans-actions explains the relatively limited numberof institutions combining a banking businesswith “social” lending.

The “NEF” (Nouvelle Economie Fraternelle)which was set up in 1989, is owned by 3,500members. Its objective is ambitious: to redefinethe traditional banking relationship by, on theone hand, encouraging savers to invest theirmoney in a responsible way and, on the otherhand, by backing projects that respect a cul-tural, social or ecological ethic. It thus aims topromote the creation of businesses having aclear social approach or vocation neglected bytraditional banking networks. Forty-five per-cent of the projects financed have receivedfunding on account of their social nature orbecause they are designed to favour integra-tion. Its activities cover the whole of France.

In Bordeaux, the Caisse Sociale de Développe-ment Local, covers the city of Bordeaux as wellas an urban community comprising 25 dis-tricts. It relies upon savings that are dedicatedto social solidarity, via a deposit account called“savings-employment” which is guaranteed bythe municipal credit of Bordeaux. It has pooled5 million francs raised from the CréditCoopératif, the Caisse des dépôts et Consigna-tions as well as from local deposits. If its objec-tives and its form are very similar to those ofthe solidarity funds, it does not however havethe status of an investment company.

GUARANTEES: TERRITORIALGUARANTEE FUNDS

Guarantees can provide a way of avoiding orsupplementing micro-loans by facilitatingaccess to traditional bank loans.

THE FONDS FRANCE ACTIVE

(“FFA”) NETWORK

Created in 1988, the Fonds France Active, sup-ported by the Caisse des Dépôts et Consigna-tions, focus on the same type of borrowers asthe “ADIE” and the “PFIL” (60% of the peo-ple receiving assistance were long-term unem-ployed people before they set up their ownbusiness). The territorial funds help prepare, inrespect of a specific geographical area, enter-prise creation dossiers and applications forbank loans. They also arrange guarantees.

France Active guarantees 65% of the bank loanfor enterprises in a start-up phase or that haveexisted for less than three years. In the case ofbusiness expansion projects, it covers 50% ofthe loan and up to 80% for certain micro-enterprises. The maximum period of the guar-antee is 5 years and the maximum amount is200,000 francs, irrespective of the duration andamount of the bank loan. France Active canalso act as a joint guarantor or provide addi-tional guarantee cover, with another local ornational guarantee fund (“FGIF”, “SOFARIS”,

“SOCAMA”). The borrower then receivesmanagement assistance during the life of theloan. The France Active guarantees can bemanaged by the same organisations as the“PFIL” and “ADIE” loans. Certain new busi-ness creators who do not have access to thebanking system have been financed by a loanon trust and a bank loan guaranteed by FranceActive at the same time, thereby enabling themto multiply their chances of success.

In 11 years of existence, France Active and itsnetwork have facilitated the granting of 130million francs in bank loans destined to helpabsorb job seekers into employment and havecontributed to the creation or consolidation ofalmost 20,000 jobs.

GUARANTEE FUNDS MANAGED BY THE

INSTITUT DE DÉVELOPPEMENT

ECONOMIQUE ET SOCIAL (“IDES”)

These funds are intended for a more targetedsection of the public:

The Guarantee Fund to support enterprise cre-ation, management buy-outs or developmentprojects for women entrepreneurs, the Fonds deGarantie pour la création, la reprise ou ledéveloppement d’entreprises à l’initiative desfemmes (“FGIF”), was established by an agree-ment signed in 1989 between the State, the Min-istry responsible for the advancement ofwomen’s rights and “IDES”. The “FGIF” dif-fers from the “FFA”, in that it is not linked tolocal structures, but operates on a national basis.

The Guarantee Fund which is destined to promoteeconomic integration, the Fonds de Garantie pourl’Insertion par l’Economique (“FGIE”,) operatesin a similar way to the “FGIF”, but focuses onproviding aid within the framework of absorptioninto employment schemes.

Guarantees are available for a maximumamount of 150,000 francs, but cannot exceed60% of the loan. The maximum period of theguarantees ranges between 2 and 7 years.

Practice • 45

LOCAL VENTURE CAPITAL COMPANIES

There are also public liability companies, evensometimes cooperatives, that acquire a participat-ing interest in the capital to back new businesses.

In the first quarter of 1998, “Eficea” carriedout on behalf of the DATAR a survey on“small” local venture capital. The surveyrevealed that some 52 structures had con-tributed venture capital for start-up situationsfor amounts of less than one million francs(participating interests in the capital and cur-rent account loans by partners). In 1997, thesestructures financed less than 200 new businesscreation projects.

Their scope of action is in general very limitedgeographically (“Filières” in Brittany,“Autonomie” et “Solidarité” in the North,“Femu Qui” in France, “Herrikoa” in theBasque region) and thematically (alternativeprojects for Garrigues).

BUSINESS ANGELS NETWORKS

This network is based on a close working rela-tionship between new business creators andinvestors. The Business Angels clubs bringtogether private individuals that want to investin start-ups for higher amounts than the“CIGALE” clubs (between 200,000 and500,000 francs approximately). Althoughinvestment decisions are based on an elementof business profitability, criteria of geographi-cal proximity are also integrated.

The introduction of individual investors willingto contribute capital, their know-how andmanagement assistance to new business creatorswho are looking for a financial partner, is afairly recent phenomenon in France. Alongsidenational networks that specialise in high-poten-tial projects (new technologies, biotechnology),there are some non-specialised networks ofassociation that are better suited to provide aidfor more risky, medium-sized projects


PARTICIPATING INTERESTS IN THE CAPITAL

PRIVATE INDIVIDUALS WITH PARTICIPATING INTERESTS

Although new businesses creators are chieflyinterested in loans or guarantees, certain struc-tures are designed to promote the creation ofbusinesses and to facilitate access to equity cap-ital for setting up a business.

The “CIGALE” clubs are set up on a jointbasis and group together twenty or so privateindividuals who contribute to a common poolthat is used to take a participating interest incompanies that respect ethical, ecological orspecial values. Investments are motivated byprojects (alternative) and/or persons (solidar-ity). The underlying principle involves localinitiatives, whether in terms of the funds raisedor the financing operation.

The “CIGALE” clubs acquire a participatinginterest in the capital of a private or public lim-ited company (sometimes cooperatives) beingset up or in the process of reconstituting itscapital. The funds invested cannot exceed 33%of the company’s capital. The average invest-ment of a “CIGALE” club is around 20,000francs but several clubs can invest largeramounts. Even if the participating interestremains limited, it can provide considerableleverage for businesses which, otherwise,would not have had access to a bank loan.

A “CIGALE” can benefit from a FranceActive guarantee in respect of 50% of the fundsinvested. In exchange, it undertakes to monitorand report on the management of the business.

Practice • 47

(for example the “INVEST’ESSOR” networkin the Hauts de Seine).

In principle there is no specifically targetedtype of project. But projects are expected tohave rapid growth prospects to enableinvestors to recover their investment over themedium-term (three to five years) However,the risk/profitability analysis is less conven-tional than in traditional venture capital com-panies. The amounts invested range from100,000 to 500,000 francs.

THE LOVE MONEY MOVEMENT

The “Love Money” federation in favour ofemployment is intended to help mobilise localfunds to finance new businesses, or enterprisesthat are expanding or experiencing difficultieswith a view to floating these small to medium-sized companies on the OTC market at a laterstage. It helps these companies to raise fundsby way of public issues or privately. There arecurrently 11 associations, including 7 in theParisian region, the others being in Poitiers(86), Fontenay-le-Comte (85), Montpellier (34)and Beaune (21).

THE “EFICEA” INFORMATION CENTRE

The “Eficea” information centre introducespeople wanting to create or take over the run-ning of a business to associations, organisationsor structures that can offer them financingsolutions adapted to their needs. These struc-tures, described in part above, are incorporatedin a data base that contains 460 such organisa-tions. In 1999, the centre helped some 2,500potential new business creators in this way.Interested parties are first of all referred toguarantee organisations (“FFA”, “FGIF”,“Entreprendre Ensemble”, etc.).

Nevertheless, an important number of peopleare referred to organisations that lend fundswith or without interest(“FIR”, “NEF” and“ADIE” principally) despite the restrictive cri-teria that they apply when selecting new busi-ness projects. As regards venture capital, theyare principally referred to the Love Money net-work for the creation of jobs and the“CIGALE” clubs rather than venture capitalcompanies or networks of individual investors,which remain restricted to certain types of pro-jects (start-ups, innovative projects, ethicalprojects).

ACCION International is one of the oldest practitioner bodies of micro-finance. Founded in 1961 as a private non-profit organisation, ACCION today supports an international networkof micro-finance partner organisations in 14 Latin American countries and six US cities.

To be eligible for a loan, businesses need eitherto have been trading for at least a year or tohave gone into business from similar employ-ment; one in four ACCION borrowers comesfrom the second category and has been tradingfor less than a year. ACCION has to date tar-geted minority ethnic businesses and 87 percent of borrowers are either Hispanic Ameri-can or African American.

ACCION (USA) has developed experimentallyand works through a partner network of localnon-profit institutions. With both below marketrate capital and guarantee funds from ACCIONInternational, the local US partners negotiatelines of credit and loans from commercial banksand foundations. They also raise operatinggrants from corporations, banks, foundationsand individuals. ACCION has received addi-tional capital under the US Community Devel-opment Financial Institutions Act.

A survey in 1997 of the impact of micro-loanson 849 of ACCION’s US borrowers revealedthat, after the first two loans over 17 months,the entrepreneur’s average take home incomehad increased by 38 per cent or by an averageof $455 per month. For those borrowers on thelowest income, the rise was even greater - 54per cent or an average of $515 per month.

ACCION (USA):Transplanting Micro-credit from South

by

Pat Conaty,

Common Futures

ACCION

U.S. Division Headquarters

ACCION International

6987 North Oracle Road

Tucson,

AZ 85704 USA

Tel (520) 742-3500

Fax (520) 297-5160


Web: www.accion.org/


Its first micro-credit programme was estab-lished in Recife, Brazil in 1973, and its US net-work operations began in New York City in1991. The table below highlights the financialturnover of ACCION’s Latin American andUS operations in 1997 to 1998.

ACCION’s USA operations have three principal objectives:

IMPACT: to create jobs, enhance householdincome and increase the assets of the micro-businesses of low income people

SCALE: to extend the benefits of affordablemicro-finance to a widening number of micro-enterprises in order to revitalise disadvantagedcommunities

SUSTAINABILITY: to develop a micro-lendingmodel sufficiently efficient and robust to coverits costs through fees and increased income.

ACCION’s borrowers in the USA are pre-cisely the so-called ‘lifestyle’ and retail busi-nesses that the UK Small Firms Loan Guaran-tee Scheme excludes – 39 per cent work fromhome, 30 per cent from a shop and 23 per centfrom the street or a market stall. Forty per centare women, many of whom need to work fromhome because of childcare costs.

ACCION INTERNATIONAL NETWORK – STATISTICS FOR 1997 - 1998

LATIN AMERICA US

AMOUNT DISPERSED $503.3 MILLION $14.8 MILLION

ACTIVE LOAN PORTFOLIO £226 MILLION $3.7 MILLION

NUMBER OF LOANS 621,721 5110

AVERAGE LOAN SIZE $809 $2,739

PERCENTAGE OF WOMEN 61% 40%

ACCION partners lend to individuals and topeer groups. References are taken up with pre-vious employers, landlords and other creditors.Individuals are asked to post whatever physicalcollateral they can, and require a co-signer;groups provide joint and several guarantees oneach others’ loans and are not normally askedfor other collateral. Interest rates are eight to10 percentage points above bank base rates andsimilar to that on credit cards (i.e. 16 to 29 percent APR). ACCION considers these costsnecessary to cover the service provided and forACCION partners to achieve self-sufficiencyin due course.

Late payments are strictly defined – after oneday overdue – and the loan officers are diligentin chasing clients for arrears; fees for collectioncharges are added and legal action is instigated,if necessary, after an account is 60 days or moreoverdue.

CRITICAL ISSUES

ACCION partners have not had difficultyattracting loan capital from US banks atfavourable rates. The US Community Reinvest-ment Act has helped this. ACCION can attracttoday loans from many American banks at halfthe bank base rate (i.e. three to four per cent).

Pay is now partly performance related andbonuses can add 10 to 20 per cent to staffsalaries. Lending staff are recruited more onthe basis of previous business rather thanbanking experience and ACCION seeks staffwith a similar background to that of its bor-rowers.

However, while in Latin America nine out of19 ACCION network institutions are sustain-able (allowing them to access and pay for com-mercial funds) and 16 out of 19 cover all theiroperational (but not capital) costs from feesand income generated, the most cost-effectiveof ACCION’s six US partners (i.e. ACCION

Chicago) has so far been able to cover only 58per cent of its non-financial operational costs.As Michael Chu, President and Chief Execu-tive of ACCION International, says, ‘We’restill far away from reaching the standardswe’ve attained in Latin America. But it’sexactly the same as Latin America 15 years ago.What it will require is a lot of creativity, so wecan deliver credit of a much lower cost struc-ture than at present.’

Chu is determined that most of ACCION’soperations in the USA will achieve sustainabil-ity over the next five years. Its latest strategysets out ambitious plans for scaling up over fiveyears to reach 6,500 clients with a loan book of$20 million. For this, costs will also have to bereduced, especially by centralising and standar-dising the US operations – probably into onenational non-profit company. At present, ittakes ACCION 14 hours to set up, process andservice a typical loan (similar to the time scaleof a commercial bank). Chu estimates centrali-sation and standardisation can reduce thesetransaction costs to five hours within five years.

CONCLUSION

Even though ACCION US is the leadingmicro-credit service provider in the UnitedStates, it is still small. This suggests that micro-credit initiatives should only be establishedwith adequate innovation time, resources, plan-ning and experimental pilots. To some extent,ACCION started operations in the USAbecause of wide recognition of its achievementsin Latin America and political pressure to dothe same in the USA, where ACCION Inter-national has its headquarters. Partly as a result,at that time it failed to develop an innovativeand well thought-out strategy.

Practice • 49

to North

ADIE (Association pour le droit à l’initiative économique) was inspired by theGrameen Bank in Bangladesh and is one of the largest and most successfulmicro-lending organisations in the European Union. It was established in 1988 to make micro-loans available to disadvantaged people.

A recent study by IFF in Hamburg (August1999) shows:

ADIE STATISTICS 1998

NUMBER OF CUMULATIVE LOANS 5,422

AVERAGE LOAN AMOUNT FF 22,000

AVERAGE LOAN TERM 20 MONTHS

CURRENT BORROWERS 3,300

LOANS ADVANCED (1998) FF 28 MILLION

LOANS OUTSTANDING FF 44 MILLION

CUMULATIVE DEBT WRITE-OFFS 3%

DELINQUENCY RATE 6%

BORROWER BUSINESS SURVIVAL

RATE (AFTER TWO YEARS) 75%

LOANS PER LENDING OFFICER (AVERAGE) 59

CRITICAL ISSUES

Like the Grameen Bank, ADIE targets its lend-ing on France’s most disadvantaged groups. In1997, 44 per cent of its clients were on welfareand 27 per cent were long term unemployedhouseholds. It solicits applications and runssupport programmes for the most marginalgroups, including the young unemployed, ex-prisoners, ethnic minorities and womenentrepreneurs in rural areas.

Referrals to ADIE vary from region to region.Many referrals come from the French Cham-bers of Commerce and enterprise agencies, butregular media stories on ADIE’s work also gen-erate client interest. All loans are at 6.5 per centper year, plus an initial three per cent fee. Themaximum loan and loan term are FF30,000 andtwo years respectively. ADIE has made indi-vidual loans to date, but is currently developinga group loan product and delivery system.

ADIE: Micro-Finance by

Pat Conaty,

Common

Futures

Mr Emmanuel Landais

14 rue Delambre

F - 750014 Paris

Tel. 33/1/42185787

Fax 33/1/43201950


Web: www.adie.org


Lending in France is restricted to organisationswith banking status, so ADIE has received spe-cial authorisation to make loans from equityraised from donors. However, by the early1990s demand from the self-employed andmicro-enterprises was far outstripping thedonor funds it could raise annually.

In 1994, ADIE formed a partnership with themajor French banks, whereby ADIE assessesthe borrower’s creditworthiness but the bankissues the loan and pays ADIE a set up fee ofthree per cent; ADIE uses its equity to give a70 per cent guarantee to the bank. As a result,by 1998 only one in four loans were sourcedfrom ADIE’s own funds and 75 per cent weremade by 25 banking partners across France.

Today ADIE has 14 branches, serving mostregions of France, and plans a nation-wide ser-vice by 2001. Lending decisions are made atbranch level. In 1999, ADIE had 85 staff as wellas 300 volunteers, who include a good numberof retired bank managers, accountants andbusiness people, and provide business adviceand mentoring. Volunteers are also involved incredit committee lending decisions at eachregional branch.

Lending volume has increased from 700 in1995 to 851 loans in 1996, 1279 in 1997 and1,629 in 1998, Staff numbers have also risenfrom 35 to 85. Loan volume forecast for 1999 is2,400, rising to 6,000 in 2001. To service thisrising volume, each loan officer has to managea case load of 70 to 80 active borrowers andinterview 300 prospective borrowers a year, ofwhich about 40 are approved for loans. A busybranch office approves five to 10 loans a week.

Successful loan applicants receive a regularmonthly contact, usually through a visit fromtheir loan officer. Over the two year period ofmost loans, each borrower benefits from anaverage of 15 hours support through contactwith their loan officer, volunteer mentor orother ADIE service.

ADIE’s head office in Paris monitors loans.Each borrower needs five individuals to guar-antee 50 per cent of the loan. These guaranteecommunities create a moral pressure and inpractice work well to reduce debt.

Because ADIE cannot source its own capitaland relies on its bank partners to make 75 percent of its loans, it cannot make much moneyfrom its lending operations to pay for the cost.It is also unable to charge a much higher ratefor its loans because of the French restrictionsagainst usury and corresponding ceilings onlending rates (currently up to about 11 percent). ADIE cannot therefore become self-financing but it has been increasingly success-ful in attracting grant aid from the EuropeanUnion, the French government and localauthorities. In total, ADIE secures fundingfrom some 250 public, private and charitableorganisations.

CONCLUSION

ADIE has proved itself increasingly able toexpand its micro-lending programme, createjobs and widen its socially beneficial impact,despite the legal constraints and practical barri-ers to raising its own capital. The partnershipwith the banks has been mutually beneficialsince these guarantee mechanism and loanappraisal systems provide a creative way to offermicro-loans to the poorest entrepreneurs inFrance.

This achievement benefits the banking sector interms of public relations, but also provides newbusiness customers, many of which havebecome very successful since ADIE’s initialpartnership with the banks in 1994.

ADIE now faces major challenges ahead toextend its service and coverage to all regions ofFrance and to develop an effective group lend-ing system to help reduce loan costs.

Practice • 51

for Enterprise (France)

Aston Reinvestment Trust (ART) is a local social investment fund which promotes economicand social regeneration in Birmingham by lending to small businesses and voluntary sectororganisations that cannot access other finance. ART aims to build up self-sustaining fundswith money raised from socially concerned investors, working also in partnership with thepublic sector, and lends these funds at commercial but affordable rates.

running costs through the interest rate onloans, arrangement fees and consultancy. Capi-tal has been raised from a wide range of sources,including individual investors throughout theUK, mainstream banks, local and national busi-nesses, borrowers themselves and trust funds.ART now has a strong base from which to focuson raising money locally.

CRITICAL ISSUES

There is an inherent tension between makingsmall loans and covering costs; small loanscarry relatively high costs and tend to be fairlyhigh risk.

ART has found marked differences betweenlending in the profit and not-for-profit sector,stemming both from a lack of business supportfor third sector organisations and from the ini-tial reluctance in the third sector to move fromgrants to loans.

Whereas finance for small firms may be work-ing capital, voluntary sector organisations lookto ART either to finance the purchase of anasset, such as property or equipment, or forbridging finance while awaiting a grant orother payment.

One key challenge is explaining to potentialinvestors who are unfamiliar with social invest-ment the difference between a donation and aninvestment. The ART model is based on a beliefthat viable propositions can repay loans at marketrate. ART is based on the assumption that localmoney is more likely to encourage successfulloan repayment, because people feel morestrongly about money invested from the locality.

Aston Reinvestment Trust (UK)

by

Lesley Harding,

Forum for

the Future

Aston Reinvestment Trust

The Rectory

3 Tower Street

Birmingham

B19 3UY

England UK

Tel +44 121 359 2444

Fax +44 121 359 2333


Web: http://www.reinvest.co.uk


ART operates Birmingham-wide but focuseson the main areas of deprivation and on keygroups: viable businesses and enterprises whichprovide social or economic benefits to localpeople; voluntary organisations and charities;affordable housing projects; and energy savingloans to businesses and the voluntary sector.

ART is a mutual society which means that itsmembers, both borrowers and investors, own it.To date ART has mainly focused on lending tosmall businesses and voluntary sector organi-sations. Most applicants are referred fromother agencies; ART always aims to workwithin the existing network of agencies pro-moting regeneration in Birmingham, and withclose support from the Enterprise Agency.ART will then discuss the project with themand ask for a business plan.

ART maintains a close relationship with itsborrowers throughout the repayment period.If a borrower is having difficulties repaying aloan, ART will work closely with them andrestructure the loan if necessary. It is clearly inthe interests of the fund that loans are repaid,even if late, and it is also important for thewider regeneration of the area that people whotake out a loan are not left worse off. PatConaty, development manager at ART, pointsout that the key is to assess the appropriateamount of debt.

The first year target (1997-1998) for fund-rais-ing of £500,000 was exceeded by over 25 percent (£630,000). By April 2000, ART has £1.3million in funds available for lending. 47 loanshave been agreed totalling £709,000, of those£668,000 have been drawn down. The focus ison access to loans rather than cheaper loans.ART will only lend to organisations with aviable proposition that have been turned downby the mainstream banks.

ART aims to become financially self-sufficientin the medium term, when it has raised funds of£3.5 million. This will enable ART to cover its

Practice • 53

Banca Etica is the first alternative bank in Italy. It was constituted (as a bank) inMay 1998 and started banking activities in February 1999. Today, its main bankingproducts are ethical certificates of deposit and ethical bonds. In future, saversshould be able to determine their own level of interest rate.

the social utility they produce. In addition tostandard economic analysis, Banca Etica auditshealth, welfare and environmental impacts andhas created an innovative assessment tool, theVARI model (Values-Requisites Indicators), toinvestigate values that have not been examinedso far by the existing banking system.

CRITICAL ISSUES

The project had to raise 13 billion lire, (6 mil-lion Euros) in equity, the minimum level to setup a bank in Italy.

It took three years to get a banking licence, andmaking arrangements with other banks has notbeen simple. Four banks and the Italian PostOffice have now signed agreements with BancaEtica to sell its products.

The main difficulty in raising the necessarycapital has been finding appropriate remuner-ation for potential investors.

The world of social enterprises and associa-tions was not well known by Banca d’Italia(the Italian Central Bank) or in general, by thetraditional banking system. Banca d’Italia’srequirements included a demonstration of thenecessary technical and social criteria.

The Cooperativa Verso la Banca Etica carriedout studies for Banca d’Italia about the scopeand the development potential of this sector inorder to justify not only the social value of theproject but also the economical opportunitiesof this growing market.

Banca d’Italia has also required the Co-opera-tive Verso la Banca Etica to become BancaPopolare Etica – the first such case in Italy – sothat shareholders could move their capital stockshares from the Co-operative to the Bank.

Banca Etica (Italy)by

Francesco Biccatto,

Fondazione Choros

Banca Popolare Etica

Piazzeta Forzatè 2/3

I-35137 Padova

Italy

Tel. +39 049 8771111

Fax + 39 049 664922


Banca Etica finances social and environmentalenterprises in the non-for-profit sector. Thepolicy is oriented towards a mixed welfaresociety where the public sector collaborateswith the third sector.

Banca Etica is mainly directed towards non-profit enterprises, and towards collaborationbetween the public and third sectors. Its workwith local authorities is particularly interesting,as it aims to promote citizens’ and social organ-isations’ full participation in decision making.Presently, six Regions and 190 Municipalitiesare shareholders of Banca Etica and haveunderwritten about 800,000 Euros of its capi-tal stock, creating a strategic partnership to bedeveloped through:

STOCK CAPITAL FOR SOCIAL ENTERPRISES

Under-capitalisation is a structural problemamong social enterprises, especially if theyinvolve disadvantaged people in their produc-tion process, and lack of stock capital causesmajor difficulties with accessing credit. Localauthorities, Banca Etica and other stakeholdersare providing the capital for a new capitalisationco-operative with the local authorities (andRegions) as the main shareholder. Banca Eticawill carry out a campaign to collect stock capi-tal and donations - similar to the three-yearcampaign it carried out to collect its own capi-tal – among a strong network of social co-oper-atives, families, volunteer associations, tradeunions, churches and individuals. Banca Eticawill also assist the capitalised social co-opera-tives with assessing their financial needs, helpimplement business plans and complementcapital with short and medium term credit.

MUNICIPAL BONDS

Municipal bonds are a new financial tool inItaly. Banca Etica will help local authoritieschoose projects of common interest. Its maingoal is to provide credit to economically reli-able enterprises that demonstrate attention to

Equity capital enables enterprises to make long-term plans. However, the market is not always able to provide it. Venture capital was developed with a view to fill this gap.

As the market and the specialist organisationswhich usually provide backing for new businesscreations do not cater for them, local networksof ‘Business Angels’ aim to fill that gap, by:

- mobilising local funds and organising localfora, through which potential new businesscreators can meet potential investors

- facilitating financing for projects supportingnew businesses.

BUSINESS ANGELS

Business Angels are private individuals withfinancial resources and a solid knowledge ofcompany management, who invest directly andpersonally in small and medium-sized enter-prises, most often during the start-up phase. Ingeneral they are interested in local companiesand which involve a business sector withwhich they are familiar.

It has been estimated that in the UK, BusinessAngels invest approximately 500,000 francs perproject (one or two investors). In France, theamounts local networks provide less andnational networks contribute considerablyhigher amounts.

The Business Angels are rarely sleeping part-ners. They often provide small and medium-sized enterprises with an important number ofbusiness contacts, as well their experience.They are often former heads of companies whohave sold their business and want to help newbusinesses, while at the same time obtaining areturn on their investment. Close personal co-operation between investors and entrepreneuris essential.

This type of participating interest means a veryreactive role and a high degree of risk for theinvestor, which traditional finance providers,notably venture capital companies, are unwill-ing to provide.

The Business Angels net by

Cyrille Rollinde

EFICEA

EFICEA

Mr Erwan Bothorel


7 rue Domrémy

F- 75013 Paris

France

Tel. +33 1 53 94 78 70

Fax +33 1 53 94 78 71


Web:

www.globenet.org/eficea


Venture capital first emerged in the UnitedStates. A basic form was first used in France in1955, with the creation of regional develop-ment agencies, but it was only really developedduring the 1980s, through venture capitalmutual funds known as Fonds Communs dePlacements à Risque (FCPR). These funds aredescribed by the European Venture CapitalAssociation as ‘financial intermediaries invest-ing capital in companies or specific projectswith strong potential’. In general, financing iscombined with active participation in runningthe company, in sharp contrast to the conceptof sleeping partners.

Venture capital can play a fairly wide-rangingrole, involving start-ups as well as developmentoperations and business buy-outs or transfers.A study of the activity of venture capitalorganisations over the last few years reveals aworrying trend: from 1985 to 1997, the per-centage of start-up ventures decreased from 22per cent to seven per cent. At the same time,the average investment increased from 1 mil-lion francs in 1990 to 1.6 million in 1995.

A study carried out by Eficea (Epargne,Financement, Information pour les Créateursd’Entreprise et d’Activité) in 1997 suggests thatthis analysis must be treated with a certaindegree of circumspection, and that, in fact, inFrance a relatively large number of local capi-tal risk companies continue to participate innew businesses.

Nevertheless, the cost associated with theexpertise and management involved meansthat most investors seeking a high return arenot interested in investments of less than onemillion francs. This means small projectsinvolving investments of around or under100,000 francs have to seek other sources offinance. Their needs range from supplementaryfinancing, to loans and guarantees.

BUSINESS ANGELS NETWORKS IN FRANCE

Business Angels networks provide a forumthrough which interested investors andentrepreneurs seeking venture capital funds canmeet. The networks simply organise meetingsbetween the parties; they advance no otherfunds. This encourages some small French ven-ture capital projects, which have problems rais-ing local funds, to focus on establishing con-tacts between new business creators andinvestors.

EXAMPLES IN OTHER COUNTRIESCONFIRMING THE POTENTIALOF THE BUSINESS ANGELS

In Britain, 43 local networks, bringing togetherbetween 50 and 300 investors, match supplyand demand for private capital. In Europe, arecent study shows that it is possible to raisebetween 10 and 20 billion euros annually inthis way. In the United States, 250,000 businessangels invest every year between 10 and 20 bil-lion dollars in more than thirty thousandenterprises (source: André Januay, Guide del’initiative économique, 1998).

SOME FRENCH EXPERIENCES

French Business Angels are organised aroundnational or local networks. The latter play animportant role in increasing awareness amongindividual investors, who can then find pro-jects requiring greater investment in thenational networks. Alongside the nationalbusiness networks focusing on high potentialprojects with a strong technological content,several non-profit making local networks,which are ready to consider far more diversi-fied activities, are starting to emerge.

All the networks must take care to ensure thatthey are not considered to be raising fundsfrom the public, as this would require a new setof formalities.

Practice • 55

works in France (France)

The CIGALE movement emerged in 1983, the result of work by a group who wanted choiceover the way their savings were managed and allocated. At a time when financial marketswere enjoying unbridled growth, they were concerned that savings should be used to supportnew enterprises. They also wanted to call into question the principles of the market economy.

THE CIGALE CLUB NETWORK

The CIGALE movement now boasts 110 clubswhich, in 1999, raised approximately 1.7 mil-lion francs of savings, investing 1,044,643francs by way of equity capital in 44 enter-prises and creating more than 115 jobs.

THE MOVEMENT AT LOCAL LEVEL

A CIGALE club is:- legally: an agreement concluded between per-

sons (the contract sets out the rights and obli-gations of each member)

- fiscally: an investment club.

This status creates a certain number of con-straints for members:- the number of investors cannot be fewer than

five or more than 20- payments must be made monthly via a bank

(a bank account is obligatory) and representan average of between 50 and 300 francs amonth

- the club lasts for five years, with the possibil-ity of a further five years (10 years maximum)

- the purpose of the club is restricted to estab-lishing and managing an investment portfolio.This means backing provided to businessesmust take the form of a participating interestin the capital or a current account loan to thepartners (loans are prohibited) of public orprivate limited liability companies or co-oper-atives (collective enterprises); this excludes awide range of small businesses, and activitiesinvolving associations.

Moreover, the clubs subscribe to a charterwhich lays down a certain number of invest-ment criteria. The enterprises backed must becollective enterprises and have a social, culturalor environmental purpose.

Local social venture capital: the CIby

Yannick

Vigignol


Mrs Ch. Bouchard

Mr Jacques Duguerra

61 rue Victor Hugo

F - 93500 PANTIN

Tel. +33-1 49 91 90 91

Fax+33-1 49 91 90 91

Email:

[email protected]


CIGALE clubs were set up with several objectives:- to raise capital from local savers- to ensure transparent and democratic savings

management - to invest the funds as venture capital- to ensure local development by creating

employment.

Today, the CIGALE clubs’ importance inenterprise creation is recognised in France andabroad. But it is also a movement which needsto be constantly reassessed.

BUSINESS CREATION IN FRANCE

- According to the official figures, the numberof new enterprises created in France everyyear has continually declined over the last 10years. There were 183,822 created in 1994 butonly 166,190 in 1998, which corresponds to adrop of 9.5 per cent.

- Public funding for business creation has beenreduced, and management of this funding hasbeen delegated to organisations working inthe field.

- The vast majority (97 per cent) of the enter-prises created in France are TPE1, and banksare more interested in bigger businesses withstrong development potential.

- Equity capital is the most difficult form offinancing for a business to raise because it hasthe greatest risk. Financial backing for newbusinesses primarily takes the form of loans orguarantees and rarely involves equity capital.

It is against that background that the CIGALEclubs have tried to show the importance of alocal structure, which is close to these smallbusinesses and also gives savers greater controlover how their money is used.

(1) “Très petites

entreprises”:

fewer than

five salaried

employees.

Generally, during the first year, members paymoney into the club without investing. Thisbuilds up adequate initial capital (the averageinvestment per project is between 20,000 and25,000 francs) to fund their investments.

During the next four years, the CIGALE clubscontinue to build up funds which they investand monitor the enterprises in which they haveinvested. They operate in partnership withlocal business creation organisations.

At the end of the five years (or 10 years ifrenewed), the CIGALE becomes a so-called‘management’ club; it ceases investment activ-ity, but manages its portfolio of participatinginterests until they have been liquidated.

THE MOVEMENT AT REGIONAL LEVEL

When several clubs cover the same area, theycan to create a regional CIGALE association,known as a ‘territorial association’. Such asso-ciations ensure stability and co-ordinationbetween different local clubs.

They involve:- the necessary logistics to support the clubs

involved (meetings between clubs, co-opera-tion, training)

- creating clubs in their region - a representations to local enterprise creation

organisations - publicising clubs’ activities - identifying new projects that could be of

interest to the clubs and putting projects incontact with clubs

- ensuring that local activities are consistentwith overall guidelines.

At the present time there are three such associ-ations (Nord, Ile de France, Ille et Vilaine) anda new one is being established in Burgundy.They require at least five club members to jus-tify pooling resources. Two have also taken ona salaried employee.

THE MOVEMENT AT NATIONAL LEVEL

A national federation to supplement the activ-ities of the territorial associations was set up in1985. It represents the clubs: it is managed bya board of directors and an executive commit-tee elected by the general meeting and isresponsible for implementing the guidelinesestablished by the general meeting. It has twosalaried employees.

The federation has a twofold role:- it provides the services of a regional associa-

tion to clubs which do not have one - it ensures that the movement adopts a consis-

tent approach at national level:• it gives a wide range of clubs with different

origins a shared identity • it enables CIGALE clubs to be established

in regions not covered an regional associa-tion and provides support for specialCIGALE clubs, such as clubs within com-panies or universities

• it facilitates the exchange of experiences andgood practice

• it represents the movement to national andEuropean partners

• it increases public awareness of enterprisecreation using local savings responsibly.

THE DEVELOPMENT OF THE CIGALE MOVEMENT

CIGALE clubs are nowadays established inthe majority of French regions; only fourregions do not have one. There have alwaysbeen more than 60 active clubs2. However several distinct periods stand out in the move-ment’s history:

From 1983 to 1987: very strong growth in thenumber of CIGALE clubs. In 1986, 100 clubswere established.

Practice • 57

GALE movement (France)

(2) Excluding

CIGALE

‘management’ clubs.

It is clear, therefore, that even though clubs’financial and structural resources do not alwaysmeet their needs, the CIGALE movement hasdemonstrated its resilience. However, eventhough the movement has achieved widespreadrecognition, both in France and abroad, it hasnot developed to the extent of networks such as‘ADIE’ and ‘France Initiative’.

PROBLEMS WITH DEVELOPMENT

There are three main reasons why the move-ment has had difficulty in developing:

THE FINANCIAL WEAKNESSES

OF THE NATIONAL FEDERATION

As the movement’s history shows, the varia-tions in the number of CIGALE clubs has beenclosely linked to the national federation’s bud-get. During periods of financial problems, thefederation has had difficulties co-ordinating theexisting network and setting up new clubs.

The federation’s only income is membership fees(eight per cent of its 1998 operating budget) andsubsidies linked to projects; subsidies can nolonger be used to finance operating costs. As aresult it has been obliged to set its objectivesaccording to funders’ priorities, even if these dif-fer from the aims established at the start of theyear and are not understood by the CIGALEclubs at local level. However, it would be diffi-cult to increase the membership fees (110 francsper CIGALE club member), when membersalready contribute to their clubs. The solutionwould be recognition as “public utility institu-tions” which would enable them to receive sub-sidies for operating purposes.

NATIONAL VERSUS LOCAL ACTIVITY

National publicity and information, targeted atpublic authorities, requires time, humanresources and money. At local level clubs aremore interested in practical management, butnational level activity is also an important wayto establish new clubs.


From 1986 to 1992: declining numbers, partlybecause the federation suspended its develop-ment work while it had serious financialproblems and also because the first clubs werecoming to the end of five years. During thisperiod, the number of clubs fluctuated con-siderably, which was also linked to the feder-ation’s financial problems.

From 1992 to the present: the federation hassucceeded in putting its financial situation ona healthier footing and has the necessaryresources to operate with a stable number ofvolunteers and salaried employees. The num-ber of CIGALE clubs has increased regularly;there are now 110 active clubs and the num-ber of new clubs being set up exceeds thenumber of clubs finishing their term.

The number of people won over to this eco-nomic viewpoint has grown in line with theincreased number of clubs, even if the eco-nomic and political context has not alwaysbeen favourable. The CIGALE clubs now haveapproximately 1,500 members. In addition,members of the clubs that are now ‘managing’their investments do not always withdrawfrom the sector, but continue their work inorganisations that operate in partnership withclubs. The movement has thus succeeded inmobilising people of very different back-grounds and enhancing their awareness of thesocial economy, at a period when people do notalways have the opportunity to influence eco-nomic development.

Some 385 enterprises received different types ofbacking from CIGALE clubs during the period1983 to1999 (participating interests, currentaccount loans to the partners or cash advances),thereby creating more than 100 jobs annually –a total of approximately 1,600 jobs. Clubs havealso provided management assistance for thesecompanies, which has increased their survivalrate after five years to 75 per cent3.

(3) 50 per cent,

according to the

French national

enterprise creation

agency.

This is a central problem – the movement con-stantly needs to set up new clubs, and the moreit establishes the more it needs to establish. Forexample, 27 CIGALE clubs were set up in1999 (approximately 250 new members) whichwill cease their investment activities in 5 years.That means even more clubs will be needed tooffset clubs that can no longer invest.

The services are therefore provided to clubswhich are still being established and do not haveany members. After that stage, members do notneed them. Clubs therefore have good reasonfor asking what they get for their membershipfee; national work has very little relevance tothem. Clubs with a very local identity have dif-ficulty in relating to wider initiatives involving,for example, investment to promote solidarityor enterprise creation, even though these initia-tives should eventually benefit everyone.

THE CONSTRAINTS ON FISCAL STATUS

The status of an investment club imposes someconstraints on the movement. Only 44 per centof the clubs invested in 1999, because they haddifficulty finding projects that corresponded tothe CIGALE criteria. As indicated above,investment clubs can only invest in public orprivate limited companies, or co-operatives,which often require an investment clubs cannotafford. In addition, the individual enterpriseswhich represent a large part of the new busi-nesses created (80 per cent) are excluded.CIGALE clubs in isolated rural areas, whichare often not part of a regional associationwhich can help them find suitable projects,cannot finance projects involving TPE typeenterprises in rural areas. Finally, associationsare also excluded from receiving financingfrom the clubs, as they have no capital.

There are therefore a certain number of activi-ties that the CIGALE clubs cannot back, eventhough there is considerable demand. Someclubs are forced to make loans, which they arenot empowered to do (limited to institutions

approved by the French Bankers Association)and which they do not really want to do, asthey prefer to provide equity capital ratherthan interest bearing loans.

Tax benefits are a way of reducing risk thatsupplements other methods of financing whichrely on guarantees and share liquidity. Clubscurrently receive the same tax benefits as tradi-tional investment clubs, which do not have apublic utility role and are solely interested infinancial return. Investing in enterprises thatcannot rely upon the traditional banking sys-tem is more risky. One way of enhancing theflow of savings into the social economy wouldbe to improve this tax incentive.

Since 1998 the federation has been holding dis-cussions with the Ministry of Finance with aview to resolving these difficulties and devel-oping initiatives to direct savings into socialinvestment schemes.

CONCLUSION

The movement has expanded since 1994.Increasing the number of clubs will enablelarger investments, which is the only way tomake a serious impact in the area of enterprisecreation. But this can only happen if local,regional and national activity are co-ordi-nated, which requires financial, legal and fiscalresources. The role of voluntary workers inbusiness must be recognised and appropriatelysubsidised by the public authorities. This is akey challenge facing not only the CIGALEclubs, but all organisations that play a role inenterprise creation.

Practice • 59

In 1997, as it celebrated its 125th anniversary, The Co-operative Bank announcedthe introduction of its new ‘Partnership Approach’ - which sought to define a newmodel for managing a successful business in the 1990s, and beyond.

Bank’s Report not only measures socialresponsibility and ecological sustainability, butalso the degree to which the business deliversvalue to all of those partners on whom it isdependant. So, whilst a traditional ‘socialaudit’ will assess whether a detergent is made inan ethical and ecological manner, it will notnecessarily measure whether it actually doesthe job of cleaning, or whether it is price com-petitive. The Co-operative Banks PartnershipApproach recognises that if the organisationwishes to be around for another 125 years, thenit will need to continue delivering value tothose parties on whom its is dependant.

It is the Bank’s intention that the PartnershipReport be viewed as an open and honest assess-ment of the Bank’s performance. To this end,external verification was secured from a num-ber of independent experts. The Centre forTomorrow’s Company assess the degree ofinclusivity, Business in the Community assesscorporate community initiatives and “ethicsetc” act as overall auditor (bringing in envi-ronmental experts from the University of Sun-derland as appropriate).

Richard Evans, from ethics etc..., who acted asan independent external auditor for the Part-nership Report, states in the report that: “Onthe basis of the audit I am satisfied that thePartnership Report for 1997 gives an accurateand balanced view of the Bank’s relationshipswith its Partners during this period”. In areview of the Bank’s ecological performanceethics etc., also concluded that the Bank’s“determination and commitment to minimisingits depletion of global resources and contribut-ing to sustainability deliberately sets a highstandard for other businesses to follow”.

SEEKING FEEDBACK

It is considered vital that the bank receives thor-ough feed-back on its Report from all Partners.To this end, the Report has been made widely

The Co-operative Bank’s the nearest thing yet in the UK to a true

by

Paul Monaghan,

Cooperative Bank

Paul Monaghan,

Partnership

Development

Manager,

Tel. +44 (0)161 829 5460

Web:

www.co-operativebank.co.uk


Clearly reflecting traditional co-operative val-ues, the Approach is based on a commitment toserving the interests not just of shareholders (aswith a p.l.c.) or customers (as with a mutual),but of everyone involved in making a contri-bution to the business success - the banks sevenPartner groups.

The Co-operative Bank’s Partners are definedas: staff & their families, suppliers, the localcommunity, national and international society,customers, shareholders, and past & futuregenerations of co-operators. In developing the‘Partnership Approach’, the bank consultedwidely with all partners from an early stage.For example, in May 1997 all 1.2 million cus-tomers were sent a Report detailing the Part-nership Approach and a feedback form. Morethan 100,000 (12%) completed and returnedthe questionnaire. A tremendous figure, whenone considers that the average response rate toa direct mail campaign is between 1% and 2%.Of the respondents, 97% agreed that “com-mercial organisations have a purpose beyondprofit”, and that the bank “had a responsibilityto all its partners, and not just shareholders”.

In the first instance, this requires a regularaudit of the degree to which the bank deliversvalue to each Partner - where ‘value’ is definedby the Partner. Secondly, in line with the bank’sethical and ecological commitments, it requiresthat an assessment is made as to whether suchvalue is delivered in a socially-responsible andecologically-sustainable manner.

The results of such an audit were published -warts and all - in the Bank’s first PartnershipReport, in April 1998.

THE PARTNERSHIP REPORT

The Co-operative Bank consider that their first‘Partnership Report’ is the UK’s nearest thingyet to a true corporate sustainability report.This contention is based on the fact that the

available and a commitment made that all feed-back will be summarised in the following year’sReport. Highlights include the following.

Jonathon Porritt, the UK’s leading environ-mentalist, has commented that “As people con-tinue to wrestle with what sustainable devel-opment really means, The Co-operative Bank’sPartnership Report gives an innovative and sig-nificant insight into that reality.” PaulHawken, one of the leading environmentalistsin the US has commented “The report issuperb... Really amazing in its completenessand scope. A pleasure to read too.” In a recentreview of environmental reports from all overthe world, Tomorrow Magazine, one of theworld’s leading Business and EnvironmentJournals, acclaimed in January 1999 that theBanks Report was the world’s most significantcorporate publication (in terms of sustainabil-ity) during 1998.

In February of the same year, Michael Meacher,the UK Environment Minister, presented theBank with a special one-off commendationfrom the UK Environmental Reporting Awardsfor the best Social / Stakeholder Report. And inMarch, the bank received a special commenda-tion from the European Environmental Report-ing Awards for Stakeholder Reporting. InAugust 1999, the Bank will produce its secondPartnership Report, allowing partners to review,year on year, progress on the issues that mattermost to them. This will be the first time a com-pany in the UK has produced a social audit intwo consecutive years that has been exhaus-tively externally verified.

Informed media comment has been largelypositive. The Independent newspaper reportedthat “The Co-operative Bank is setting newstandards in social responsibility and ecologi-cal sustainability in a move that will challengecompanies that have sought to bolster theirreputation by stressing their commitment tothe wider community.”

The Guardian newspaper has commended theBank for its “publish and be damned approach...which other leading companies would do wellto follow suit.” An independent study of all ofthe media coverage realised by the Report pro-duced by PR Week found that the five key mes-sages to come across were all positive.

Practice • 61

Partnership Report: Sustainability Report? (UK)

The Dalston City Business Credit Union (DCBCU) started life as an informal savings group in 1995 and achieved registration in March 1996. Local traders wanted banking facilities that took into account seasonal earning patterns, were accessible and had speedy decision-making procedures. However, the lack of other business credit unions in the UKmade it hard to learn from other experience.

DCBCU aims to achieve financial self-suffi-ciency, and plans recruit new members exter-nally, particularly from the many local markettraders. Members have also been active in set-ting up a local community credit union.

CRITICAL ISSUES

DCBCU is currently undergoing considerablechange, as the main funder no longer exists.

There are, however, a number of key lessons todate:- patience: the initial setting up period took

much longer and was much more problematicthan anticipated. Registration as a FriendlySociety in particular took a long time anddemoralised some of the organisers

- learning from others: the strong credit unionnetwork has been invaluable

- time constraints: ownership and managementby members has both benefits and problems.Small business owners tend to be very busy,particularly if they have no other paid staff

- sources of funding: DCBCU received almostall of its start-up funding from one source,which has now ceased. It might have bene-fited from earlier planning for the end of thegrant period

- financial viability: to be viable, a businesscredit union needs to keep down runningcosts that are passed on to members. Thisnecessitates low cost or voluntary co-ordina-tion and members with sufficient time andenthusiasm to put into it; or sharing runningcosts with other credit unions

- additional services: business credit unionshave different needs from community creditunion, including business developmentadvice. The pool of skills and experiencewithin a business credit union could providea considerable help for this; and by comingtogether businesses may also be able toincrease their bargaining power

Dalston City Business by

Lesley Harding,

Forum for

the Future

Dalston City Business

Credit Union Ltd

18 Ashwin Street

London E8 3DL

Tel. +44 20 7923 3783

Fax +44 20 7249 1347


DCBCU is a not-for-profit organisation whichprovides a savings and loans facility for localbusinesses. As a credit union it can only lend toindividuals, so individual business owners joinand access loans for business or personal use.Membership is restricted to individuals oper-ating a business within the Dalston area. It hasa board of directors as well as two committees;the credit committee considers all loan appli-cations and the supervisory committee isresponsible for DCBCU’s internal auditing.All board and committee members are mem-bers of DCBCU.

DCBCU also provides:- stability: fixed interest rates on loans are unaf-

fected by changes in national rates - security: it pays loan protection and free life

insurance cover - ownership: the members control it themselves

and know who they are lending to, and whothey are borrowing from. In addition, intereston loan repayments is ploughed back

- local trading between members - advice on accessing external markets.

Overhead costs were met by statutory start-upfunding plus an additional £10,000 from theEuropean Social Fund. New members pay a £5membership fee and make an initial deposit of£10. They must save at least £10 per month.

Members can take out a loan after six monthsof continuous saving. Initial loans are availableat up to 1.5 times the individual’s level of sav-ings. This ratio increases over time – subject tothe individual’s repayment record – up to 2.5times the individual’s savings and a maximumof £10,000. Loans are generally repaid over aone to two year period and members areencouraged to continue depositing savingswhile they repay. The rate of interest is fixed at12.68 per cent APR which is equivalent to oneper cent a month.

- forward planning: the people initiallyinvolved in setting up DCBCU had a visionfor what they wanted to achieve, but nodevelopment strategy.

CONCLUSION

DCBCU is one of only a handful of businesscredit unions in the UK to date. Structurally, itdiffers from a community credit union primar-ily in the nature of its common bond, whichensures all members have a business interest.This structure is relatively straightforwardand replicable, and could potentially provide amechanism for providing savings and loanfacilities in areas where small businesses mayotherwise struggle to access credit. It mightalso help to provide a degree of financial sta-bility amongst the small business sector, whichtends to be strongly affected by fluctuations inthe wider economy.

A number of practical points will need to beconsidered if what is a good idea in theory is towork in practice in a particular location.DCBCU still faces a challenge in consolidatingand strengthening its position as one of the firstbusiness credit unions in the UK.

Practice • 63

Credit Union (UK)

The Ecology Building Society grew out of the green movement of the late 1970s, whichemphasised simple living and self-sufficiency. Environmentalists who wanted to buy andrenovate older properties were finding it extremely difficult to get loans, and were oftenpushed into taking on high cost bridging loans; using expensive contractors; and carrying out unnecessary works at the lender’s request.

CRITICAL ISSUES

The society has developed expertise in lendingin restricted markets, so it lends to people whomight not otherwise get loans, such as peopleworking in agriculture or forestry. By lendingagainst the value of derelict properties, it hasmade it possible for these properties to bereused. However, sceptical regulatory author-ities have had to be reassured that this type oflending makes sense and does not implyunnecessary extra capital requirements; it helpsthat the society can point to its extremely lowrate of arrears, which means it currently carriesno provisions against loss.

A further problem is the valuation process,which does not easily accommodate uncon-ventional properties. The society has a constantproblem finding valuers who understand itsproperties and assess demand; in fact it is cre-ating a new market.

CONCLUSION

The Ecology Building Society does not want topursue growth for its own sake, but it is still rel-atively small. It can only process a limited num-ber of properties at a time, and the size of its cap-ital base limits the size of the loans it can make.Without acquisitions, the society must eithergrow to increase its capital and therefore its lend-ing capacity, or seek external sources of capital.

Although the society plans to retain its focuson individual action, growth will enable it toincrease its funding of collective ventures,through community groups and sociallyminded businesses. It expects to take a moredirect role in initiating projects with environ-mental and social benefit.

Ecology Building Society (UK)

by

Paul Ellis,

Chief Executive

Ecology Building Society

Mr Paul C. Ellis

15 Station Road

Cross Hills, Keighley

West Yorkshire

BD20 7EN, UK

Tel. +44 1535 635 933

Fax +44 1535 636 166



The Ecology Building Society was formed in1981 with just £5,000 capital to pursue an eco-logical approach to lending favouring renova-tion over new-build; environmentally con-scious new homes over regimented, flimsilybuilt suburban homes; rescuing derelict landover using greenfield sites; and creating benefitto the wider community.

Since its foundation, the society has experi-enced growth in assets that has outstripped therest of the building society movement. In the1980s annual growth rates of 30 to 40 per centwere not uncommon, and it remained thefastest growing society in the UK during the1990s. The society has made no acquisitions;the entire business has been built on fundsdeposited by the membership. From the initial£5,000, assets have grown to £29 million, with18 per cent growth in 1999.

This growth demonstrates the need for thistype of service. Small is appropriate, because ofthe nature of the risk; the lender must under-stand the nature of a building or project thatwould be rejected by conventional assessmentsystems, and carefully assess the borrower’scapacity to undertake the work. Such consid-erations do not fit well with computerisedcredit-scoring systems.

Building societies have many limitations, notleast the requirement to make 75 per cent of alllending on residential property. However, theEcology Building Society has always empha-sised the type of individual action which theUK building society movement, with its basisin mutual self-help and co-operation, hasexemplified. The society is unusual amongstsmall building societies in having borrowingmembers and savers in all parts of the UK.

Practice • 65

The Full Circle Fund (FCF), inspired by the Grameen Bank model, offers free training,support and access to loans to women entrepreneurs through a group lendingmodel. It operates in three areas of Norfolk. It has taken around two years to startup and has just started making loans.

guarantees (because of the collective responsi-bility built into the model) and all assessed andapproved by their lending circle. The develop-ment stage of the project has three phases, dur-ing which participants:

- Attend a six-week training course for onemorning per week to develop their businessideas, carry out market research, and gainconfidence as entrepreneurs.

- Attend a five-week training course for twodays per week providing specific training inbusiness skills, and draw up a business plan.

- Form borrowing circles of four to six womenwho establish their own group rules. Groupsassess each loan application and worktogether to ensure that repayment. After thetraining period, monthly centre meetings goover procedural matters, such as checkingrepayment accounts. Additional training isalso available.

During training and for the first year of self-employment, FCF helps borrowers with child-care and transport costs.

Initial loans are small, normally £500 or below,but borrowers can graduate to loans of up to£2,000. Repayments are made from a groupbank account. Group members share liabilityfor all loans to the group, so they cannot accessfurther loans until all members are up to datewith repayments; they are expected to have astrategy to deal with defaults, although they donot repay the loan of a member who defaults.A serious default may lead to a loan beingrescheduled or written off, but legal proceed-ings will only take place if there is evidence offraud or negligence.

Full Circle Fund (WEETU, UK)

by

Lesley Harding,

Forum for the Future

Erika Watson

Full Circle

WEETU, Sackville Place

44-48 Magdalen Street

Norwich, NR3 1JU

UK

Tel. +44 1603 767367

Fax +44 1603 666693


FCF is founded on the assumption that financialviability is unlikely to be compatible witheffective poverty alleviation of the target group.It is therefore determined to resist the pressureto diversify into more profitable, larger loans.

Women’s Employment, Enterprise and TrainingUnit (WEETU) is the parent organisation run-ning the FCF. It was set up in 1987 in responseto the marginalisation of women in the econ-omy of the Norwich area, and noted a steadystream of women interested in self-employmentwho found it difficult to access suitable supportand advice. Some reported feeling patronisedand that their ideas were not taken seriously; 70per cent had had no access to initial finance,training or support; many felt isolated. WEETUconcluded that a suitable scheme to help newentrepreneurs should combine access to financewith training and support.

FCF is a not-for-profit entity, which offerssupport including credit, business training,help with child care and transport costs. It doesnot seek to replace other forms of financialsupport for small businesses, but to provide aspringboard from which borrowers can accessloans from mainstream financial institutions.

FCF has gained statutory, charitable and pri-vate funding. This covers two full-time projectworkers plus bought in specialist training. Inaddition, a separate loan guarantee fund of£20,000 is required as a back-up.

Loans themselves are made via a stream ofcredit from the Charities Aid Foundationwhich is lent to FCF and then lent out at aslightly higher rate of interest to the individualgroups. Loans will be made at 1.5 per cent overbase rates. By the end of December 1999almost 150 women had participated trainingcourses; 37 women had formed eight lendingcircles; and 11 had then taken out the first loansto help them to start up their own businesses.All loans were made without credit checks or

CONCLUSION

It remains to be seen to what extent a model,largely untested outside the developing worldand the US, can successfully be adapted to theUK. WEETU recommends a minimum threeyear pilot stage in order to draw useful results.This implies a minimum £80,000 per year pro-ject funding, in addition to the loan fund andguarantee fund, to fund development workersand training as well as overheads. A new schemeshould be highly sensitive to the local contextand must start small, only seeking to scale upwhen the model has been thoroughly tested.

WEETU believes the group model is crucial inencouraging people to work co-operatively.The loan binds people together, and is backedup by the mutual support which can be invalu-able in starting up a small business. The fundalso has community development goals, seek-ing to contribute to the wider regeneration ofthe area through creating local wealth and pro-moting self-employment as a route to financialself-sufficiency. It also provides scope forwomen to act as positive role models both fortheir community and their children.

The results of the pilot stage will obviouslyinfluence decisions on what happens next, butthe Director is very keen that scaling up theproject should be handled carefully. WEETUargues that self sufficiency should be under-stood in terms of successful outcomes for par-ticipants rather than covering costs.


CRITICAL ISSUES

WEETU does not have any plans to achieveself-sufficiency, which would require biggerloans, many more loans, or much higher inter-est rates – subverting the original aims of thefund, and hampering the provision of highquality training. There may be long-termpotential for financial self-sufficiency if thetraining can be separated from the loan fund.

US research finds that rapid scaling up is acommon cause of problems among peer-lend-ing funds, because they lose sight of local con-text and dilute their effectiveness. A furtherissue currently under debate is whether tointroduce compulsory savings. FCF alreadyhas a built in group emergency fund but manyprogrammes have a compulsory savings ele-ment which has screened out those who werenot serious about the scheme and encouragedfinancial literacy.

WEETU is lobbying for a ‘welfare waiver’ sowomen can continue to receive benefits duringthe first two years of self-employment. In partsof the US entrepreneurs are allowed two yearsto build up their business while still receivingbenefits.

Setting up a new scheme requires patience andtenacity. In particular, people tend to be suspi-cious of anything which involves ‘credit’. Ittook WEETU two years to reach the stage ofrecruiting the first entrepreneurs, but interest isgrowing and WEETU’s second intake is likelyto be oversubscribed.

Fundusz Mikro (FM) was established in 1994 under the auspices of the PolishAmerican Enterprise Fund. It is a limited liability company registered under Polishlaw, and a wholly-owned subsidiary of a US not-for-profit company set up in 1990to stimulate the development of private enterprise in post-communist countries.

NO. OF NO. OF ANNUALBORROWERS GUARANTORS INTEREST RATE

1 AT LEAST 3 37%

2 AT LEAST 2 35%

3 AT LEAST 1 33%

4 NONE REQUIRED 29%

All group members are jointly liable for loanrepayments, so if one member defaults the oth-ers are responsible for repayment and nobodycan access further loans until full repayment.Groups of at least four borrowers account for80 per cent of FM’s loans. The average loan sizeis $1,600 up to a maximum of $8,500. The aver-age loan term is nine months, with a maximumof 12 months. Loans are made for working cap-ital or investment purposes but not for con-sumption. Working capital loans tend to be paidback within six months and investment loanswithin 10 months. Loan terms are deliberatelyshort to provide an incentive for repayment sothat further loans can then be accessed. Bor-rowers also build up a good credit history whichcan help them access mainstream finance.

By the end of March 1998 FM made cumulativedisbursements totalling $20.8 million with $8.8million of loans outstanding. The delinquencyrate was 2.2 per cent for repayments up to 180days late, and 1.2 per cent for later repayments.By November 1998 FM was covering 86 percent of operational costs from lending opera-tions. Additional revenue (such as interest oncash balances) provides net profit.

Having developed a successful loan product forvery small businesses, FM is now exploringnew products and directions. These include anongoing service which can approach (but notmatch) that provided by the mainstream banks,to help clients graduate smoothly to the banks;and a loan product for the poorest businessstart-ups.

Fundusz Mikro (Poland)by

Lesley Harding,

Forum For the Future

Fundusz Mikro

Ul. Zurawia 22,

00-515 Warszawa

Poland

Tel. + 48 22 629 00 92

Fax + 48 22 628 88 11


Practice • 67

The philosophy of FM´s approach was basedon the conviction that micro-finance is neededin the North as well as the South.

FM is a very flat organisation with 10 seniormanagers, seven of which are heads of regionaloffices; 11 back office staff; and 51 field offi-cers. Each local office has on average two loanofficers who approve around 20 new loans permonth and serve a portfolio of some 100 clientsat any one time.

FM is developing over phases with the long-term aim of becoming a self-sufficient financialinstitution offering a range of loans, savings,other financial services and non-financial ser-vices to Polish micro-entrepreneurs. It drawson a range of other models, probably mostclosely the BancoSol in Bolivia.

From February 1995 to February 1996, FMsimultaneously undertook nine pilot loan pro-grammes, testing different lending methodolo-gies, location sizes, field officer seniority levels,client genders and distribution mechanisms. Itdecided to work from a city location, offeringa range of individual and group loans. Loansare distributed using junior level staffemployed directly by FM.

FM advertises its loan products through arange of media, including both formal andinformal channels. Applicants complete a sim-ple form but do not need a business plan. Dur-ing the assessment period loan officers workclosely with applicants to assess business via-bility and to establish the correct loan amountand terms.

During the pilot stage FM discovered thatgroup loans were probably the only way toreach the scale of operation necessary to breakeven within five to six years, and built in incen-tives for this through interest rates and thenumber of external guarantors required.

In the South, high transaction costs are dealtwith by highly streamlined procedures, vasteconomies of scale and charging substantiallyhigher interest rates than bank rates. Stream-lining and economies of scale are equally pos-sible in the North.

FM has so far not found a strategy for refi-nancing ‘grown up enterprises’. The step-lending methodology (based on ‘group collat-eral’) has natural limitations for largerinvestments because of the increasing risk forthe co-guarantors or co-borrowers.

CONCLUSION

FM demonstrates how a micro-credit opera-tion can keep unit costs to a minimum, gener-ate high volume (over 15,000 loans in the firstfour years) and still keep loan loss rates low(i.e. well under two per cent). It has providedincentives for group loans with lower interestrates (seven to nine per cent below individualloans) and implemented an ambitious growthand business plan. However, large scale micro-finance must still take account of local diver-sity. To some extent there will be a tensionbetween meeting needs and achieving financialviability. Other organisations seeking to adaptthe model need to decide their target, and toassess potential viability accordingly.

Upfront finance was invaluable for running thepilots, establishing a viable financial institution,and ensuring a lasting, stable organisation.


New microfinance organisations usually haveto choose between minimising costs and max-imising revenue. FM aimed to combine the bestof both approaches – i.e. the speed to sustain-ability of the cost-minimisation model with theoutreach and impact of the revenue-maximisa-tion model – and decided to design the full-scale institution upfront, to hire the futuresenior managers immediately and, after an ini-tial year, to open as many branches as possible.Although this involved financial exposurethrough short term operating deficits, over afive year period it was a much cheaper, shorterand surer way to sustainability.

CRITICAL ISSUES

Micro-finance has its limits. At the upper end,loans are so great that borrowers cannot raisethe money to repay if their businesses collapse;peer group guarantees are only better thanphysical collateral if they provide an effectiveback-up repayment source. At the lower end,every business, however tiny, should generatenet cashflow surpluses. When interest-bearingdebt is used as a substitute for seed equity, itinevitably puts a huge burden on fragile,uncertain cashflows. Some public sector andvoluntary sector programmes incur largedefaults because they do not observe this rule.FM will lend to any micro-enterprise with atleast three months’ net cashflow surplus - thisdoes not preclude anyone with a serious ideafrom starting and returning in three months,and does effectively screen out businesses thatpeople are only prepared to try with someoneelse’s money.

The Glasgow Regeneration Fund (GRF) was set up by a public and private sector partnership toprovide financial support to business start-ups and existing businesses located in the eightRegeneration Areas in Glasgow. It is the first loan fund managed by Developing Strathclyde Ltd(DSL) and also receives grants from the European Union European Regional Development Fund.

From the total fund of £3 million (receivedfrom organisations and companies in the pub-lic, private and third sectors) GRF has invested£1,918,741 to end of March 1999; 82 per cent ofthis money is invested in loans, nine per cent ingrants and nine per cent in equity. During thisperiod annual operational costs were £175,000and the total fund invested in loans was£395,100.

CRITICAL ISSUES

There is evidence that GRF is currently run-ning down by some £200,000 per year; balanc-ing total loan capital disbursed plus the opera-tional cost plus write-offs against income frominterest rates and loan collection. Althoughwell managed, the Fund consciously chose tooperate in areas and markets considered mostdifficult. The fund will not be able to survivewithout further grants and funds from thepublic or private sector.

Co-operation with the banking sector is estab-lished through financial support and in-kindsupport, including seconded fund managers.The banks’ incentive is that this way they canlearn about the economic ‘enterprise network’in Glasgow and Scotland and the needs of‘micro’ clients; build up a good network ofenterprise contacts; and develop their futureclient base more effectively.

DSL has just launched a new social enterprisefund, targeted at Glasgow’s social economyorganisations, who may need only very smallloan amounts but can show an ability to repaythe loan.

It will be available for not-for-profit organisa-tions (new and existing) which provide somebenefit to the local community.

Glasgow Regeneration Fund (UK)

by

Thomas Hüttich,

INAISE

David Brown,

Chief Executive

Developing Strathclyde Ltd /

Glasgow Regeneration Fund

30 George Square

Glasgow G2 1BB

Tel +44 141 221 545


Practice • 69

GRF aims to stimulate enterprise in sociallydisadvantaged areas of Glasgow. The eight tar-get Regeneration Areas have been officiallyrecognised as disadvantaged; they contain 44per cent of Glasgow’s resident population andover 60 per cent of the city’s long term unem-ployed, and a range of other physical and socialdifficulties.

GRF’s remit is to provide access to businesscapital on a commercial basis with the mini-mum of eligibility criteria, particularly to indi-viduals with little or no security, whilst takingan ‘informed’ view of their business proposi-tion’s long term viability. DSL funds businessstart-up and development through loans,equity or bank guarantees. Repayment is flex-ible and may include capital repayment ‘holi-days’ and staged repayments. Loans are typi-cally small scale, between £1,000 and £20,000.

GRF is not a conventional local finance vehi-cle, in that (a) it represents a partnership organ-isation with contributions from the private andpublic sectors which was matched by fundingfrom the European Regional DevelopmentFund and (b) GRF is a funder of last resort butwill on occasion take the approach of gap fun-der finance. Although not a commercial organ-isation (interest rates are low compared to bankcharges), DSL/GRF is a professionally run andindependent organisation, and has successfullyachieved quite rigorous lending outputs.

GRF made its first loan in January 1994; sincethen over £2million has been invested in 240small businesses from across the RegenerationAreas. About 50 per cent have been new busi-nesses; the others were looking to expand orwere at risk of closing down. By 1999, GRFloans were responsible for over 1500 new jobsand safeguarded 410 jobs at risk; and 82 per centof the businesses assisted by GRF continue totrade for more than one year following funding.

Founded in 1974 by anthroposophic oriented founders, the GLS Gemeinschaftsbank (‘communitybank’) is probably one of the most unusual credit institutions in Germany. With two sisterinstitutes - the non-profit credit guarantee co-operative (GKG, founded in 1966) and the non-profit trust (GTS, an association of about 240 charitable companies, founded in the late1950s) – the co-operative bank today has over 17,000 members and customers.

net yields more or less below market conditions.Conditions depend upon the interest rate spec-ifications and the levels of interest saversrenounce, as well as the level of the annually cal-culated ‘reallocation’ paid by borrowers. Thebank calculates this reallocation in order not tomake a profit but to obtain a balanced result.The system of ‘cost reallocation’ makes banks’operations transparent, and smaller interestcharges benefit applicants directly.

Other more focused offers include the greenaccount, Rudolf Steiner school savings account,local savings products, renewable energy, agri-cultural savings accounts, overseas develop-ment, and cultural finance savings bonds. GLSalso offers consultancy in fundraising, restruc-turing assets into donations and gifts, and legal,tax, economic and inheritance affairs.

CRITICAL ISSUES

Some borrowers find obtaining credit too complicated and time-consuming and preferconventional banks, despite the more favourableGLS conditions.

Large failures on credits are not common. Thescope for credits, however, is limited by the stillrelatively small amount of own capital. Theexpansion of the volume of loans depends on thegrowth of the co-operative capital. GLS coversmore than 10,000 investors in Germany.

Many investors are deterred by the fact theywill not profit from usual market conditions.The term, ‘anthroposophic bank’ may put offsome people, even though many projects areunconnected.

Tax exemptions for investments in renewableenergies (already implemented in the Nether-lands) and social projects would certainlyattract more investors.

GLS CommunityBank (Germany)

by

Thomas Hüttich,

INAISE

GLS-Gemeinschaftsbank eG

Oskar-Hoffmann-Str. 25

D-44789 Bochum

Tel. +49 234 3079 30

Fax +49 234 3079 33


Web: http://www.

gemeinschaftsbank.de

Credits are not assigned according to the prin-ciple of maximising profit, but according tosocial and environmental impact – for instance,Rudolf Steiner schools and biodynamic agri-culture. Projects pursuing a general or com-munity interests with the GLS credit pay nointerest. Instead, the applicants bear the creditcosts of ‘their’ bank. Two thirds of the GLScredits are assigned on this basis.

The GLS community bank in Bochum is oneof the oldest ‘alternative banks’ in Germany,created in 1974, 14 years before the better-known Ökobank. With a total balance sheet ofDM 289 millions (1998) - similar to theÖkobank - the GLS bank has branches inHamburg, Stuttgart and Munich. It is a fullyrecognised German bank.

GLS represents ‘community for borrowingand giving’. The majority of projects financedare concerned with education (Rudolf Steinerschools), agriculture (ecological agriculture)and renewable energies (wind and water powerfunds). Most savers are socially and ecologi-cally committed individuals with few institu-tional investors (with the exception of anthro-posophic organisations). Criteria are strict.Financial security is ensured - if material col-lateral is missing - by personal endorsements(usually no more than DM 5,000 per person).The interest rate charged to borrowers directlyreflects the operational costs of the bank, andworks out at between 2 percent and 4.5 percentover the last 20 years. Furthermore the GLSbank does not need to generate profits and hassignificantly fewer credit failures than average.

GLS collects money with classical banking toolsand holding funds, and passesed it on in theform of credits. Deposits are protected as nor-mal. The risk capital is developed only by theholding funds and the GKG Beteiligungs-AG,which has recently become part of the GLSgroup and equips enterprises with own capitalfunds. The investors are usually satisfied with


ICOF was formed in 1973 to meet the demand for finance from worker co-operatives in the UK. The problem at the time was that the worker co-operative in its modern form was a very new form of business structure and conventionalsources were reluctant to provide finance.

investment vehicle was formed in the shape ofa public limited company. ICOF PLC began in1987 as a subsidiary of ICOF Limited, with thespecific purpose of raising capital by publicshare issue. Preference shares were offered,redeemable after 10 years, and £550,000 werepurchased. This was a pioneering approach toethical investment, and it also spread share-holders’ money across a wide portfolio ofloans to reduce risk to the investor. Investorswere invited to waive dividends, which couldthen be used as a guarantee against bad debts.

By 1989 ICOF’s cumulative lending had passed£1.5 million, with net assets reaching £1.2 mil-lion. For some time, it had been receivingincreasing numbers of loan applications frombusinesses which were not technically workerco-operatives, although they were democraticin nature and possessed explicit social objec-tives. These community businesses or socialenterprises were often trading arms of churchesor charities serving the needs of a local, sociallyexcluded community, with a locally electedmanagement board and a commitment toempowering those who worked for the organ-isation. In other words, like worker co-opera-tives, they could not uproot themselves andstart trading again in a different part of thecountry. In 1994, therefore, ICOF CommunityCapital was launched to extend the lendingremit to such organisations. Community Cap-ital was a new UK investment society, offeringindividuals and organisations withdrawablemembership shares. It raised £450,000 and hasbecome ICOF’s most popular fund.

In 1997, the PLC fund launched another shareissue, partly to encourage the original investorsto re-invest rather than redeem their shares,and partly to raise new lending funds. ThePLC fund is now worth over £1 million. ICOFis presently in the middle of another share issuefor the Community Capital fund wheredemand for loan finance is so high that it is indanger of outstripping supply.

Industrial Common Ownership Finance Limited (UK)

by

Andrew Hibbert,

ICOF

115 Hamstead Road

Birmingham B20 2BT

England UK

tel 00 44 121 523 6886

fax 00 44 121 554 7117

Email:

[email protected]

Site: www.icof.co.uk

Practice • 71

A worker co-operative is defined as a businesswhich is owned and controlled by its workerson the basis of one member one vote. Usuallyeach member has a £1 share. Banks wereuneasy with this structure because they fearedthat the business would be inefficient; thatworkers would be tempted to pay themselvesmore than the business could afford; andbecause co-operatives did not want membersgiving personal guarantees as security on anyloans the bank might make. Such guaranteeswere, and are, perceived by co-operative mem-bers to be divisive because some members maywell have significantly more to lose than oth-ers. In the initial period ICOF’s source of cap-ital was in the form of donations and deposits.However, in 1976, £250,000 of central govern-ment money was released under the terms ofthe Industrial Common Ownership Act.

The initial funding of £250,000 from centralgovernment enabled over 120 loans totalling£725,000 to be made between 1976 and 1984,before loan and revenue losses made furtherlending impossible. Throughout the 1980sICOF expanded, because it was entrusted bymany local authorities to administer co-opera-tive loan funds in their areas. This was a time ofrapidly rising unemployment in the UK andlocal authorities, particularly Labour controlledauthorities, were keen to generate jobs and topromote worker ownership. Local funds werestarted in areas including the West Midlands,West Glamorgan, London, Manchester, Yorkand Northampton. Over the years, these fundshave proved a cost effective way of regeneratinglocal economies. Most still exist today and con-tinue to be used by ICOF to make loans.

By 1987, however, it was clear that a newnational fund was needed as local funds weretoo isolated and the initial government fundingwas becoming stretched. Moreover, the Bank-ing Act of 1987 made it no longer possible forICOF to accept deposits from individuals andsuccessful co-operatives. Accordingly, a new

SHORTAGE OF CAPITAL

ICOF is now raising investment funds from thegeneral public for the fourth time. Today, it is incompetition with other forms of ethical invest-ment. It becomes harder each time to raise lend-ing capital and there is a strong possibility thatthe Community Capital fund will be con-strained by a shortage of capital. In terms of thetotal amount lent, the last two years have bothbeen records. In 1999 ICOF lent £680,000.

EQUITY

ICOF has always been a loan fund: that is, itprovides loan capital. Many in the social econ-omy feel that loan finance is too expensive fornew start ventures and that a form of non-vot-ing equity is needed. This would be repaid onlywhen the business did well. However mostsmall firms in the conventional private sector donot have access to equity – indeed, the majorityin the UK use the most expensive and unstruc-tured form of borrowing, the overdraft. ICOFbelieves the need for equity finance is unprovenand that loans remain a superior option to over-drafts, being more structured and less expensive.However, ICOF will continue to support thedevelopment of all new financial mechanismsfor providing finance for the social economy.

CONCLUSION

The present government in the UK is sympa-thetic to organisations such as ICOF, and maywell make more money available to lend to thesocial economy. However, ICOF believes that asfar as possible, such organisations should be inde-pendent. It has therefore embarked on a pro-gramme of ensuring other sources of revenue,since it is cannot presently meet its costs fromlending activity. It has mainly done through thisthrough a Back-Office Service of loan adminis-tration for other community finance initiatives.


CRITICAL ISSUES

There are a number of problems with theapproach which ICOF has adopted, both forICOF itself and for borrowers.

SECURITY

The original problems which ICOF was set upto address – namely the reluctance of banks toprovide loan finance for businesses which haveexplicit social objectives or a different organi-sational structure from the norm – remain.ICOF continues to have a policy of not askingmembers of businesses for personal guarantees.This enables those who have no assets to bor-row. It also prevents arguments over whethersome members are being asked to sacrifice morethan others in the event of default.

INTEREST

In the early years of ICOF, most of the moneyobtained as lending capital was ‘free’, in that itwas provided by central and local governmentwhich did not expect to receive it back. Thismeant that interest rates were potentially lowerto the borrower. However, the launch of thePLC and Community Capital funds commit-ted ICOF not only to repaying the capitalinvested, but also to paying dividends andinterest where possible. ICOF also introducedvariable rate loans. The recent general trend tolower interest rates has meant that ICOFreceives less back from the borrower and fromthe money it holds on deposit. It has thereforebecome more difficult to cover costs and it isdifficult sometimes to lend at as low an interestrate as ICOF would like. This can occasionallymake an ICOF loan uncompetitive.

LOSSES

During the 1980s there was considerable pressure,particularly from the local authorities which hadgifted money, to make loans in order to createjobs. This led to higher risk loans, causing cumu-lative losses to rise in 1986 to 30 per cent. This wasnot a sustainable policy. In order to meet costs,especially in the light of declining interest rates(see above), and also the need to repay investors,ICOF has had to reduce losses dramatically. Inthe last two financial years thorough monitoringand appraisal have reduced losses to 3.5 per centand 4.2 per cent. However, this does mean thatICOF is making fewer loans to new start busi-nesses, which are inherently risky.

The Illinois Facilities Fund (IFF), based in Chicago, was set up to fill a specific and identifiablecredit gap: real estate loans to non-profit making organisations serving low incomecommunities. In the mid 1980s, these institutions were under considerable pressure fromgovernment funders and other donor bodies to grow, but were unable to obtain capital fromtraditional financial institutions.

IFF’s own equity fund is over $12 million. Thisfund has been built up from grant donations.In addition, IFF manages a similar size pooledloan facility, which is available to it from majorbanks in Chicago and Illinois as a whole. Bypackaging these loan funds at, say eight percent, with its own zero per cent funds, it cancreate a four to five per cent spread between itscost of capital and its loan rate to borrowers.Under the pressure of the Community Rein-vestment Act, IFF can sometimes obtain fundsfrom the banks at below the base market rate.

IFF lends to non-profit organisations acrossthe state of Illinois, but most lending is in theGreater Chicago area. From 1990 to 1995:- loans had resulted in 550 new full-time jobs

and 900 part-time jobs – an average of 290jobs per year plus 294 additional constructionindustry jobs over the period

- loans had saved borrowers £2 million in inter-est charges and lending fees

- lending had leveraged an additional $34 mil-lion in community reinvestment funds

- loans were used to develop a total of 503,000square feet of new or modernised facilityspace for low income communities.

CONCLUSION

The financial benefits speak for themselves andIFF has had few problems with loan default.The market for further work by IFF is grow-ing; the market for facility finance in Illinoisalone stands at an estimated $269 million and31 per cent of non-profits in Illinois now haveplans to undertake major capital projects toacquire new facilities or to renovate existingones. IFF has worked effectively to open upand service this growing market. As one of thepioneers of such financing techniques, itdemonstrates the scope for developing similarEuropean social financing techniques.

Illinois Facilities Fund(Chicago, USA)

by

Pat Conaty,

Common Futures

The Illinois Facilities Fund

300 W. Adams, Suite 431

Chicago, IL 60606

Tel. +1 312 629 0060

Fax +1 312 629 0065


Practice • 73

Most were also renting from landlords whowere not interested in renovating the propertythemselves. IFF was created specifically to helpthese organisations access modern and user-friendly service facilities at an affordable cost.Today IFF defines its mission in terms of help-ing non-profits own and control their assets.

IFF began lending in 1985. In its first twoyears, in order to stimulate the market, lendingcharges were kept remarkably low at three percent. Since 1988, lending has been at a morerealistic level in order to cover administrativecosts, pay for wholesale funds to on-lend andcover the risk of bad debt and loan delin-quency. Lending rates since 1988 have there-fore ranged from five to 10 per cent.

IFF specialises in property finance, includinginvestment for acquisition, maintenance, reno-vation and new build construction. The aver-age loan size is $200,000 - $250,000 and theinterest rate is typically in the region of 7.5 percent, which is about two per cent below theaverage business borrowing rate.

IFF has approved almost 200 loans andinvested in the region of $30 million.

CRITICAL ISSUES

Characteristically, non-profit office and servicefacilities suffer from poor physical condition,no or low maintenance input, poor design qual-ity, limited cash available to repair property.

To widen awareness of this debilitating situa-tion and to develop strategies for tackling itmore systematically, IFF runs regular designand planning workshops which have also devel-oped the market for facility financing. Main-stream banks have now entered the field, but asbank loans are typically up to 70 per cent ofloan to value, IFF frequently fills the gap tocomplete the deal and lower the overall cost tothe borrower.

The Institute of Community Economics (ICE) was established in New England in the mid-1960s. In 1967 it developed the CommunityDevelopment Loan Fund (CLT) 1967 to help black tenant farmers in theSouth during the Civil Rights Movement to acquire land co-operatively.

For legal purposes, a CLT is a non-profit, tax-exempt company. For housing purposes, itresembles a cross between a housing associationand a limited equity housing co-operative. It isa company characterised uniquely by dual own-ership – the trust owns the land in perpetuityand the residents own the housing and itsimprovements, typically on a 99-year lease. Theresidents can also transfer the land lease to theirheirs and the resale formula adopted by eachCLT allows housing mobility (some compensa-tion for investment in housing improvementsand a small return on market appreciation).

Most US CLTs are either involved in develop-ing affordable rented housing (frequently on aco-operative basis) or on extending and devel-oping affordable home ownership. Once estab-lished, CLTs develop housing co-operativemanagement or homeowner training and assis-tance programmes and some have developedhome repair advice and lending services. Oncethey acquire land, CLTs rarely sell it, but mosthave powers to sell or swap it.

A CLT’s Board of Directors is elected by itsmembers. Annual membership is covered by asmall yearly subscription, which is part of thelease agreement for the residents or co-opera-tors and there is a separate fee for non-lease-holders who are part of the common bond.

The practical objectives of ICE and the Amer-ican CLT movement vary according to housingmarkets. In neighbourhoods where propertycosts are rising, the objective is to protect andpreserve affordable home ownership. In otherneighbourhoods where the market is either flator falling, typically because landowners areabandoning property, it is to extend either co-operative housing or owner-occupation to ten-ants via a mutual mechanism.

ICE developed both the CLT model and theCommunity Development Loan Fund Model(a revolving loan fund mechanism) to revitaliselocal economies.

Institute for Community Community Land Trust and Revolving

by Pat Conaty,

Common Futures

The Institute of Community

Economics (ICE)

57 School Street

Springfield, MA 01105-1311

Tel. (413) 746-8660

Fax (413) 746-8862

As the CLT movement in the USA has grownslowly but steadily, the emphasis has movedfrom agricultural land to urban land and is nowfocused on affordable housing projects. How-ever, CLTs can also be used for mixed use suchas work space, play space and the environmen-tal preservation of natural habitats (known asan Environmental Land Trust) and historicbuildings.

The concept of a middle path, or ‘Third Way’between private freehold and feudal leasehold(i.e. a new type of commonhold or land steward-ship for lasting community benefit) through amodern day ‘commons’ in land use and manage-ment has not been considered in Europe for cen-turies now. Although the debate is still marginalin North America, the CLT movement has begunto show the practical financing and managementpossibilities. Starting from only a little over 500units of housing in 1988 under CLT manage-ment, today there are over 5000 units. Growthcould escalate in America if government policywere to shift and, given the demise of effectiveaffordable housing subsidies in the US, this mightwell occur over the next decade.

The US Department of Housing and UrbanDevelopment (HUD) supports ICE’s workproviding technical assistance to communitybased initiatives and community based, afford-able housing bodies (i.e. Community Devel-opment Corporations or CDCs) to developCLTs. CLTs have the potential to meet anenormous range of purposes and affordablehousing requirements including:- permanently affordable housing to rent (27

per cent) - single family homeownership (26 per cent) - co-operative housing to rent (16 per cent) - shared ownership (12 per cent) - purchase of derelict property for redevelop-

ment (10 per cent) - home ownership (flats) (6 per cent) - co-operative buyouts of mobile home parks

(2 per cent).


Economics (ICE) Loan Funds (USA)

Practice • 75

CONCLUSION

Like other community development work, aCLT requires local organisation and publiceducation to help local people acquire theproperties they are renting; purchase and ren-ovate derelict property; or even pool theirhousing assets to acquire improvement finance.

These lessons have been taken up by a smallnumber of bodies in Scotland and England. Forexample, an attempt to establish a CLT is under-way in Birmingham, and a few have been set upin the Hebridean islands of Scotland. The Birm-ingham initiative is supported by the CityCouncil, housing co-operatives and housingassociations, local home improvement agenciesand the Aston Reinvestment Trust to help lowincome inner city homeowners access capital toimprove old property in serious disrepair.

If the UK initiatives are successful in adaptingthe CLT to address British rural and urban hous-ing needs, this will be a good model for othermember states within the European Union.

The ICE Revolving Loan Fund (RLF) is todaycapitalised at $12 million (from an original $1million 0 per cent investment from the FordFoundation); 85 per cent of its capital base hasbeen raised from some 500 individualinvestors.

The ICE RLF gives new CLTs a track record asborrowers so they can attract support fromother community loan funds as well as con-ventional financial institutions. The margin onICE loans is three to four per cent and loansrange from six to eight per cent secured.Although slow payment/delinquency rate iscurrently seven per cent, historic bad debtwrite off rate has been consistently under oneper cent.

CRITICAL ISSUES

In many areas, CLTs have acted as a participa-tive planning tool for co-operative land man-agement and local regeneration. They haveplayed a particularly effective role in commu-nity economic development in the African-American communities of Boston and Wash-ington DC. In the 1990s local authorities haveovercome their original mistrust of CLTs;partnerships have begun and CLTs are increas-ingly benefiting from gifted local governmentland and other operating subsidies and prop-erty refurbishment grants.

In some areas the CDC develops the housingand the CLT acts as an ongoing communityinvolvement body for planning, maintenance,and community regeneration. Each CLT, like alocal community finance organisation, definesits own common bond area, which may rangefrom an urban neighbourhood to a small city.CLTs are exempt from corporation tax but paylocal land taxes.

Apart from a few strict Islamic countries, interest-free lending is anathema tomodern banking and lending practice. The JAK Bank in Sweden is highly unusual. Since 1968 it has developed an ingenious and modern system of interest freelending that works out at a fraction of the total credit cost of comparable,compound interest products from conventional financial institutions.

savings have accumulated. The minimum timeto qualify for a loan is six months, but largerloans, for say house purchase, take muchlonger. Around 70 per cent are for housingfinance, typically for house purchase, homeimprovement or remortgaging; 20 per cent forenvironmental or social enterprises (e.g. organicfarms, co-operative businesses, village bak-eries, etc); and 10 per cent for household goods.

A JAK loan will tend to fall in the range of twoto seven times a member’s share savings. As aresult, only 100 out of 7,000 loan accounts arein arrears and only 10 of these are delinquent.Although almost all are secured on property,only five repossessions have been made over 20years of lending.

Loan charges are based on the actual cost ofsetting up the loan, plus the cost of adminis-tering it for the length of the term. A 10 yearloan, for example, will cost 3 .5 per cent of thesum borrowed to set it up, plus one per centannually. This works out as a total creditcharge of 13.5 per cent over the full term. ThusJAK loans are a fraction of the cost of a typicalinterest bearing loan at, say, 6.7 per cent com-pounded annually for 10 years.

JAK is owned mutually by its members whopay an annual renewal fee of SKR195 for thefirst adult member of a household and SKR95for other adult household members.

The maximum amount of share capital that canbe lent out by JAK is 80 per cent, allowing forliquid assets of at least 20 per cent. AlthoughJAK could in principle provide members witha dividend each year on their savings as creditunions do, it chooses not to do so in order tokeep loan rates as low as possible. It does tar-get a small trading surplus each year of 1.5 percent to build its reserves.

JAK Bank interest-free by

Pat Conaty,

Common Futures

Jord-Arbete-Kapital

Mr Oscar Kjellberg &

Ms Monjia Sonnius

Vasagatan 14

S-54150 Skovde, Sweden

Tel. 46-500 46 45 04

Fax 46-500 46 45 61


Site: http://www.jak.se

As the JAK system also conforms to the earlyco-operative movement practices of avoidinginterest, it is a very interesting model of howthe traditional social economy tools of lendingcan be updated for the challenging social andecological needs of the modern world.

JAK stands for ‘Jord, Arbeit und Kapital’, or‘Land, Labour and Capital’ – the three produc-tive factors of the economy. The JAK Bank phi-losophy is that money on its own does not addvalue in the economy, but the three working inharmony do, and so it should administermoney in a manner which does not detractfrom this harmony. It does not charge intereston its loans, but levies an administration chargeinstead. This view is consistent with the reli-gious and ethical proscriptions against usury.

The JAK concept of modern ‘interest-free’lending was pioneered by the Danish ChristianSocialist and farmer, Christian Christiansen,during the 1930s and the Great Depressionwhen farm foreclosures by banks rose steeply.The system developed well in Denmark in thepost-war period, although in the 1970s theoriginal bank was taken over by a traditionalsavings bank. Since then, the JAK system hasrevived in Denmark and was initiated in Swe-den in 1968. Initial capital was provided by ahandful of co-operative savers in Sweden,including a wealthy philanthropist who pro-vided significant seed capital to establish JAKSweden as a non-profit, co-operative savingsassociation. The first loan was made in 1970.Today, JAK has 21,000 members and over7,000 borrowers. It secured a banking licenceto operate as a co-operative bank in 1998.

JAK uses a save and borrow, traditional creditunion system. As with the early Raiffeisenbanks in Germany, members must save regu-larly to build up the co-operative lending fundand prove themselves diligent savers to qualifyfor a loan, building up point on the basis ofamount saved and period of time over which


lending organisation (Sweden)

Practice • 77

Through its new strategy of social venture cap-ital funds, JAK intends to widen its influenceand impact. Its activity should also attract fur-ther ethical investment into ecological andsocial projects.

CRITICAL ISSUES

JAK has overcome a number of problems. Ithas refined its lending system and points calcu-lation formula for loans. It has also worked outsafe levels of loans to savings ratios. Its defaultrate on loans is very low indeed and as a resultit has become a strong financial institution.

However, its biggest challenge came in theearly 1990s, with a huge influx of members andsavings. JAK did not have enough capital tomeet the needs of new members. The manage-ment had to put most of the new savingsmoney in government loan stock with shortmaturities and ration lending, which created aqueue system for up to 18 months. It has nowachieved a larger capital base of SKR43 millionin reserves, and has obtained a banking licence.

CONCLUSION

Unlike the Danish JAK organisation, whichhas many separate JAK co-operatives in a fed-eral structure, JAK Sweden operates princi-pally as a telephone bank with only one officein Skovde, a small agricultural town in south-west Sweden. Although most JAK membersare rural, membership is increasing in Stock-holm and Gothenburg.

JAK would like to develop its presence in thelocal economies of Sweden and sees the scope todevelop local social venture capital fundsthrough an arms length company, for which itwould provide seed capital. Promoting local sus-tainable development through these risk fundsfor social and ecological enterprise is the majorchallenge for the next decade. JAK has a goodbasis for developing this, as members are sup-ported by a system of 24 local associations acrossSweden. It also publicises widely the success ofJAK interest-free lending through an attractive32 page newsletter, which is produced quarterly.

Prior to the launch of the UK Community Economic Development Frameworkthere was a lack of support structures at local level, in particular in terms offinance. This was paralleled by a need for small and medium enterprise (SME)finance, especially the smaller end of the business scale.

OUTLINE: MERSEYSIDE SPECIAL INVESTMENT FUND

In 1996 a new financial institution, the Mersey-side Special Investment Fund (MSIF), was cre-ated on Merseyside. It took three years to get itto that point. Within that single umbrella arethree funds plus an interest rate rebate mecha-nism. It has also some revolving elements.

The MSIF has three fund managers. Each ofthese is responsible for a single fund, chosenfor their relevance to the market sector. Own-ership and accountability involves the Bank ofEngland directly, the Merseyside Chamber ofCommerce and the Merseyside Partnership.

MSIF is quite a big organisation, having £25 million for direct investment. MSIF usesdifferent financial models and mostly focuseson the manufacturing sector and thus, most ofthe social economy enterprises are not eligiblefor MSIF funding. However, the potential isthere for another fund under MSIF to be cre-ated to meet social economy needs. MSIF’sSME and Mezzanine fund have been particu-larly successful. These funds basically makelarge loans and investments creating a total of1748 jobs by the end of 1998.

Political independence is important. Support isneeded at the political level, but with strict andtight investment guidelines.

Local Developmentand Job Creation:what can we learn from MSIF? (UK)by

Peter Ramsden,

New Economics

Foundation

BACKGROUND

Employment policy was written into the Ams-terdam treaty, and EU institutions have triedvarious approaches to delivering jobs at a locallevel. They have worked specifically on thedemand side, looking at how new jobs can becreated. The policy message is that a job is theroute to social inclusion. This is the drivingpolicy agenda.

So in practical terms, what are the keys to cre-ating jobs? Employability, adaptability, equalopportunity, and a recognition that macroeco-nomic policy is not going to be a substitute forlocal economic development.

The routes to labour market entry - how peopleapproach employment services - fall into twomain categories - the formal market and thesocial economy. The conventional route is topush people into the formal labour market.However, another option is to work via thesocial economy and provide re-entry points thathelp them to get back at different stages into thelabour market - intermediate labour marketstrategies. Reinsertion can bring people togetherand focus on multiple aims: local economic andcommunity development at the same time. Itenables a policy to connect needs in the localcommunity and create jobs. Thus, reinsertionhappens through local economic development.

In terms of finance, we have seen is a vastgrowth of initiatives at a local level trying tocreate jobs. Project managers were becomingexcellent at chasing grants but not thinkingabout the viability and sustainability of theirprojects. However, most of these finance pro-jects have not been sustainable, running downwithin a few years. How can these be madesustainable? These are the new social financeinstitutions, working on the ground directly -how can we replicate, strengthen and reinforcethem? A mainstream initiative we will look atnext, provides a form of analogy.


The mission of the Local Investment Fund (LIF) is to provide loan finance to economically viable,community-based not for profit organisations. It aims to bridge a gap between donations andmainstream commercial bank finance. LIF supports local regeneration by forging productive and continuing alliances between community organisations and the private sector.

CRITICAL ISSUES

The most critical issue is achieving a balancebetween demand and resources (private andpublic sector sponsorship). If local organisa-tions are to have confidence in it, a fund needsa local or regional structure. The most likelyway to manage this is through a partnership.

Overhead and core costs are difficult to fund.At the moment LIF is living off fund earnings,and it needs to find a different model of privatesector funding. EU funding is also delivered ina manner which makes it very difficult to buildsustainable funds; the five per overhead ruleimposes additional limitations, especially if theinterest payment back to funders is also withinthis five per cent.

The LIF experience suggests two main recom-mendations for upscaling funding for this sec-tor. The first is tax concessions for communityinvestment to corporate and individualinvestors (as in the US). The second is a smallfirms loan guarantee scheme for the commu-nity sector that would recover, say, 70 per centof losses to the investor. This could be linkedto EU funding – the ERDF could be used as aguarantee, rather than cash.

Within the last year, approaches to LIF havegone up dramatically. However, many propos-als go through the business planning processfour or five times in a few months but still donot cover all the issues they should. A numberof agencies and local supporters are providingprofessional expertise, but none are able to dothis comprehensively. This points to the needfor proper support mechanisms for communityenterprises.

Local Investment Fund (UK)

by

Thomas Hüttich,

INAISE

Roger Brocklehurst

Local Investment Fund,

c/o Business

in the Community

44 Baker Street

London

W1M 1DH

UK

Tel +44 020 7224 1600

Fax +44 020 7486 1700

Email:

[email protected]

Practice • 79

The fund seeks to develop borrowers’ longer-term sustainability by giving them a trackrecord of borrowing and repayment; and thenultimately move them on to commercial banks,so LIF’s resources can re-enter its gap market.Since the voluntary sector has become increas-ingly important in service delivery, it needs tobe financially independent, rather than subjectto the whims of grant givers.

LIF was established as a registered charity in1994 and is a partnership between the statutoryand private sectors, with NatWest Bank as alead partner. It has also received a grant of£115,000 over three years from the NationalLottery Charities Board and receives ERDFgrants from the EU.

LIF operates through a national office andregional community loan funds. All regionalfunds are sub funds of LIF. Each region has aslightly different model, depending on regionalpriorities and funders, and its own balance.Wales will have a separate fund of £400,000.

In its first four years, LIF has agreed loans of£1.8m, providing funding for 18 projects; themaximum agreed is £250,000 and the smallest£25,000. Two have already been repaid in full,and the remainder are all repaying satisfactorily;no bad debts have been incurred. A total of £9mhas been levered into community regenerationas a result. LIF loans have enabled clients toprovide 416 new full time jobs, 50 part timejobs, and over 1,000 training places as well asretaining 65 existing jobs, at an average cost of£4,200 per full time job. They have also helpedclients build six new buildings, refurbish threebuildings, build 20 residential units and estab-lish four community training facilities.

Low income property owners, particularly in disadvantaged urban and rural areas, often needvery small sums of capital to repair and service their dwellings –with old and dilapidatedinfrastructure. Neighbourhood Housing Services (NHS) in Chicago and its subsidiaryNeighbourhood Lending Services (NLS) have pioneered an impressive and effective systemfor delivering such a form of community reinvestment. NLS is the most developed of theRevolving Loan Funds operating in the US for housing improvement finance needs.

CRITICAL ISSUES

In practice the NLS lending has been easier todevelop than the construction supervision.Clients now choose their builder, who mustprovide relevant documentation.

At present NHS works regularly with about 15contractors. While it gives no warranty orguarantee for the repairs and improvementwork, its quality control system achieves highstandards of workmanship and can dealrobustly with standard complaints while thecontractors’ own insurance coverage can rem-edy the occasional more serious errors inde-pendently. The most important thing is thatloan contracts and improvement contractsshould be clearly separated, so that there are nojoint supply agreements.

NLS lending for home improvements is carriedout through the 12 neighbourhood offices viaits Revolving Loan Fund and city-wide via theCHIP (Chicago Home Improvement Pro-gram) Fund. Lending for home improvementsranges from a $2,500 minimum to a $50,000maximum and all lending is secured by a mort-gage on a first, second or occasionally thirdlegal charge basis. In partnership with the Cityof Chicago, NLS also provides some unsecuredloans below $2,500 a year for emergencyrepairs, new wiring, and other health and safetyrequirements. By its nature, this small sumslending is commercially a loss maker.

The NLS default rate on home improvementloans falls into two categories; late paymentsover 30 days in arrears and bad debt/write off.At present NLS has a late payment rate of about2.5 per cent on CHIP and four per cent on theRevolving Loan Fund. However its legal actionon loans is only two to three cases per year andfor over 10 years its write-off rate has been con-sistently under 0.5 per cent. It does not repossessand evict as an organisational policy; nonethelessover the years NHS has generally recovered 80to 90 per cent of bad debt capital outlay.

Neighbourhood Lending A Revolving Lending Operation for

by

Pat Conaty,

Common Futures

James Wheaton

Associate Director

Lending Services

Neighborhood Housing

Services of Chicago

747 North May Street

Chicago

Illinois 60622

Tel. 001 312 738 2227

Fax. 001 312 738 2491


NHS works intensively with the local author-ity, the private sector, non-profit agencies andlocal residents to restore pride, confidence andfaith in the future of specific neighbourhoods.Social investment plus the right advice, andsupport from local housing resource centres iscritical. NHS works city-wide to address adiversity of housing improvement needs, butconcentrates in 12 neighbourhoods where itruns district housing resource centre offices.Before setting up an office, NHS consultswidely in the area and, if there is sufficient sup-port, develops a five-year plan of targeted oper-ations and work. Funding comes usually fromseveral public, private and charitable sources.

These offices, along with local groups andstakeholders, provide advice and communitydevelopment. NHS also offers a city-widefinance service with many different loan prod-ucts. NLS delivers these to neighbourhoodoffice customers of NHS and to the generalpublic in Chicago, through three main invest-ment funds, and related programmes.

NLS sells on its performing loans through thewell-developed secondary mortgage market inthe USA; this allows its capital base to be recy-cled efficiently. For its standard lending, NLSseeks a minimum margin of three to four percent between its cost of funds and its securedlending rate. To capitalise its Revolving LoanFund, NLS initially attracted grants and zeroper cent investment from a range of sourcesincluding national, state and local government,foundations, lending institutions, and insur-ance companies. It now draws greatly on theNeighbourhood Reinvestment Corporation.

At present, NHS and NLS have a turnover ofabout 600 loans a year.

In respect to loan to value (LTV) lending ratios,CHIP will lend normally up to 90 per cent andin some cases up to 95 per cent if the loan isunder $10,000. The RLF in the 12 targetedneighbourhoods can lend more flexibly up to amaximum of 115 per cent, since NHS has sucha good track record.

NLS prefers to offer 30 year mortgages ataffordable instalments to pensioner households;these are also easier to understand than complexequity instruments. The NLS lesson and mes-sage is to keep your lending products simple andstraightforward with interest rates that are nei-ther below market nor above market rates.

CONCLUSION

Over the 26 years since NHS was founded, ithas been able to close district offices in seventarget neighbourhoods because conventionallenders had re-entered the local market andbecome active again; the property market wason the rise; and as a consequence, property wasno longer boarded up and abandoned.

NLS now operates a diverse range of funds andfinancial products as well as sophisticated‘pooled lending’ agreements with over a dozenbanks. About 75 per cent of the 600 to 700loans that NLS delivers a year are on a firstmortgage basis and over 20 per cent on a sec-ond mortgage basis.

These are handled centrally by two loanadministrators and two lending managers.NLS employs a full time fundraiser to attractadditional investment. Capitalisation of NLS isnow over $25 million. Home Improvementlending applications are both handled centrallyfor CHIP and at its neighbourhood offices forthe RLF.

In whichever neighbourhood NHS works, itsphilosophy is to sub-contract out work to localvoluntary organisations where it can (e.g. forenergy advice and insulation schemes) becauseits aim is to keep its neighbourhood officeopen only as long as necessary for the localhousing market to be revived. Its aim, as it saysupfront to local partners, is ‘to put itself out ofbusiness as soon as possible’.

Practice • 81

Services Housing Improvement (Chicago, USA)

Cambridge Housing Society (CHS) is a Registered Social Landlord, which manages over 1,300 properties in Cambridgeshire and North Essex and sees itself fulfilling an enabling and supporting function within the social economy by using its resources to assist in developing affordable solutions to a wide range of community needs.

- increasing in the savings to loan ratio, so thatsavers may now borrow up to four timeswhat they have saved

- increasing the maximum loan from £500 to£1,000 for a first loan, and from £1,000 to£2,000 after that

- relaxing the requirement to build up savingsregularly over a specified period

- offering a new loan product (limited to £150)requiring no previous savings.

At current interest rates (May 1999), the loanrate would be 6.20 per cent, which is a differ-ential of 2.80 per cent between the saving andloan rates.

CONCLUSION

The savings side of the scheme has been a suc-cess and is growing. Although it is still early tojudge the refinements to the loan policy, CHSbelieves that these have met expressed needsfor short term credit and the first loans havenow been made.

The New Horizons Saving and Loan Schemeoffers a model of partnership between a Regis-tered Social Landlord (RSL) and a mainstreamfinancial institution to reduce the financialexclusion experienced by particular groups.The model can be replicated elsewhere; RSLshave good networks with varied organisations.The New Horizons model demonstrates that itis not always necessary to create new organisa-tions such as residents’ association to providenew services, which is particularly useful forRSLs with dispersed properties.

CHS has had more success with involving ten-ants around particular issues, like money andchildcare, than in formalised approaches. CHShas also tried to ensure that the scheme is con-stantly monitoring and evaluating its effective-ness by involving students and staff from oneof the local universities, which has also helpedto generate ideas for future development.

New Horizons Saving & Loan Scheme (UK)

by

Thomas Hüttich,

INAISE

Cambridge Building Society

51 Newmarket Road

Cambridge

CB5 8EG

UK

Tel: + 44 1223 713555

Fax: +44 1223 727700


The New Horizons Saving and Loan Scheme,which opened in October 1997, is one part of anoverall strategy to support tenants. One of theobjectives of the strategy is to try to increase thedisposable income of tenants.

The credit union model was unsuitable for thisclient group, so CHS developed a partnershipwith the Cambridge Building Society (CBS).CBS’s existing systems underpin the scheme’sday to day operation.

The New Horizons Saving and Loan Scheme isbased on the concept of a Guarantee Fund, alump sum deposited by CHS with CambridgeBuilding Society. This enables CHS tenants toborrow from the CBS, without credit scoring,and also receive an enhanced rate of interest ontheir savings. The advantages of the New Hori-zons model are:- accessibility and visibility through the build-

ing society’s high street branch network- customer confidence in two well established

community based organisations- sustainable from the outset- immediate consumer benefits through

enhanced interest rate on savingscredit references.

A New Horizons Saving Account can beopened with £1. All the individual savingaccounts are aggregated together with theCHS Guarantee Fund so savers receive thebenefit of an enhanced interest rate. As at May1999 the interest rate on savings was 3.40 percent gross (2.72 per cent net).

The scheme started operating in October 1997. Atthe end of December 1999 the scheme counted for90 savings accounts with £30,000 invested.

CRITICAL ISSUES

However, at May 1999 no loans had been takenout, as most members want short term creditand do not want to have to plan their spending.Loan policies were changed:

Practice • 83

The Non-Profit Financial Centre (NFC) is one of the first specialist services to beestablished in the USA for the financing needs of charities and non-profitorganisations. NFC was founded originally in 1980 as the Donors ForumEmergency Loan Fund to assist non-profit organisations in financial difficulty.

NFC’s loan services include:

- short term loans for short term grant delays,emergencies including fire and theft, andother urgent requirements. These have amaximum length of 12 months

- revolving loans to assist organisations coverthe fluctuating cash flow needs associatedwith service contracts. These operate as work-ing capital and are for one year only

- lines of credit: working capital loans tailoredto organisations with seasonal fluctuatingcash flow variations. The term is one year.These are only available to demonstrably wellmanaged non-profit organisations.

- term loans: secured loans to finance equip-ment or to provide working capital over sev-eral years. Loans are also available for start-upcapital for new projects or programmes,building improvements, and fundraisinginvestment.

NFC also provides more specialised term loansfor organisational development and informationtechnology systems. These are tailored to eachborrower’s particular requirements and are usu-ally require a feasibility study.

During the 1990s, NFC consistently developedits training and support services, and thiscapacity building work has now become essen-tial for the success of NFC’s lending opera-tions. Much of the training syllabus has beendeveloped in response to its lending experi-ence, and focuses on organisational weakness.

NFC was awarded Community FinanceDevelopment Institution status in 1998 by theUS government and is striving to increase itsloan fund to $5 million. In addition to its ownfunds, NFC manages a Bankers’ ParticipationLoan Pool which was capitalised initially byeight Illinois banks in 1992.

Non-Profit Financial Centre (Chicago, USA)

by

Pat Conaty,

Common Futures

Delena Wilkerson,

Executive Director

Nonprofit Financial Center

111 W. Washington

Suite 1221

Chicago, Illinois 60602

Tel: 001 312 606 8250

Fax: 001 312 606 0241

email: [email protected]

www.nonprofitfinancial.org

Over the years it has increasingly widened its rolefrom refinancing activity and rescue work to abroad range of lending services and trainingwork. NFC was separately incorporated in 1987.

NFC operates with support from foundations,corporations, banks and individual donors.Loan finance and support is targeted at non-profit organisations in the state of Illinois andrestricted to organisations with an annualturnover below $3.5 million.

NFC has continued to evolve its services tomeet the rapidly growing training and financingneeds of the non-profit sector. In 1982, almostno organisations did regular cash flow projec-tions. Today, this is an indispensable manage-ment tool for even the smallest American non-profit organisation with a contract to deliver.

Non-profit organisations in the USA have alsobecome increasingly specialised in servicedelivery areas; for example, the number ofchild care organisations in the state of Illinoishas grown from a turnover of under $500,000per year in the 1980s to over $10 million annu-ally today. There are fewer and fewer multi-service providers. Government contracts areincreasingly performance related and paymenthinges on results or measurable outputs. Theneed for more and more sophisticated projectand organisational financial management skillsand tools is growing year by year.

NFC has responded to these needs in two mainways. It has diversified its financial productsand has improved and specialised its trainingand support services for non-profit managersand accounts staff.

NFC advances over 100 loans a year, themajority of which are for terms of under oneyear. To date total loans advanced exceed $15million and NFC has helped over 4,000 organ-isations. Loans of up to $100,000 are availableat rates ranging from one per cent below tothree per cent above base rate.

CRITICAL ISSUES

NFC has changed from a reactive organisationtrying to bail out non-profit organisations inserious difficulty, to a body working success-fully to enhance the management skills andprofessionalism of an expanding non-profitservice and trading sector.

It has developed several ways of intervening togive advice and guidance. For example, it runsa financial check-up service delivered on site toassess the strengths and weaknesses of a non-profit organisation’s financial systems andpractices.

In line with its origins, NFC still operates a‘crisis intervention’ service for organisations inserious financial difficulty. This serviceincludes insolvency rescue, ‘workout’ plansand, if necessary, assistance with closure andwind-up.

NFC also provides a regular newsletter andinformation service with continuous manage-ment tips and guidance on improving financialcontrols and systems as well as on enhancingoverall organisational effectiveness; a telephoneadvice service; and supply specialist accountingsoftware for non-profit organisations.

CONCLUSION

NFC’s development over the years has shownthat human and organisational capacity build-ing must underpin a successful financing pro-gramme. This training side of NFC’s work hasgrown steadily year by year and has come toovershadow its core financing work.

As a consequence, NFC is not, nor is everlikely to be self-financing, as the organisationswhich require training need a high input ofexpertise and investment. Nonetheless, NFC’slending experience, range of lending productsand effectiveness as a lender is impressive.


Practice • 85

Protecting the environment, stepping in for peace and social justice, promoting sustainableeconomic activities, taking responsibility for the future – these are the principles of theGerman Ökobank’s philosophy. In practice this means offering special, low interest loans to projects in the fields of environment, social commitment and human rights.

‘Ökovision’ was launched in 1996 by theÖkobank together with Versiko AG. Thisapplies the same ethical-ecological criteria andinvests particularly in enterprises that use envi-ronmental friendly technologies; produce ortrade environmental friendly products such asrenewable energy; or employ technologies thatreduce environmental pollution. Each enterpriseis very carefully selected and reported on. Thiscomplex procedure is worthwhile. Ökovision isknown to have the strictest ethical-ecologicalinvestment criteria as well as one of the highestperformances. Average yearly performance is6.6 per cent, ranging from 21.4 per cent in 1997to -2.1 per cent during the turbulent year of1998. The main sectors represented in the port-folio are the service industries; consumption andcapital goods and engineering; and capital goodsand energy systems. In February 1999, the fundcapitalised 35 million Euros.

Since 1996 Ökobank has also offered directinvestment opportunities in the form of closedfunds. These have secured the necessary capitalfor a bank loan, which has financed two windfunds and a property fund. Money directly ben-efits an ethical-ecological enterprise, investorsobtain a share of the profit, and losses – whichoccur especially during the starting years – aretax deductible. All potential investors are toldabout the economic risks and the realistic returnsthey can expect.

Ökonsult, a subsidiary of Ökobank founded in1998, offers organisational support and con-sultancy to private businesses as well as associ-ations and not-for-profit organisations. It cov-ers business management, human resources,leadership, strategy, environmental issues andenergy conservation.

Ökobank has recently experienced difficulties,following three large bad loans. Seeing howÖkobank gets through the next few years willbe an important test for the sector.

Ökobank (Germany)by

Thomas

Hüttich,

INAISE

Oekobank eG

Frau Bettina Schmoll

PO BOX 160651

D-60069 Frankfurt, Germany

Tel. 069-242601-430, Fax 069-

242601-499


Site: www.oekobank.de

Ökobank takes into the account the social andenvironmental as well as financial returns of anyloan. It refuses to deal with the nuclear, arms orchlorine industries, or with projects abusinghuman rights. It serves individuals, organisa-tions and enterprises that are close to its objec-tives, and does not want to exclude financiallyexcluded people. Members and customers aretold what is being done with their money; ben-eficiaries know where money comes from; andsavers get comprehensive information about thechances and risks of investments.

Ökobank obtained its co-operative banklicence and opened its Frankfurt headquartersin1988. It is a co-operative, with specialistforums where members and employees discussbusiness policy and strategies. It also offersmembers support with financial planning.

In 1998 Ökobank had about 24,000 membersand 33,000 customers. During the financial year1997 it grew by over a third and the balancesheet as at the end of 1997 was 319.3 million DM– an increase of almost 77 million DM from theprevious year. Loans to Ökobank’s special tar-get sectors amounted to 60 million DM.

Ökobank is a direct and universal bank. It hasfour offices, but most business is done electron-ically or by telephone. Products on offer includeall typical bank services; investment insurance,pension schemes and life insurance; mortgageand building loans; investment loans and othercredit services for businesses; the ethical-eco-logical investment fund ‘Ökovision’ and directrisk capital investment products (for instanceinto wind funds). Customers can make all theirfinancial transactions through Ökobank.

Ökobank money is invested in projects such assolar energy, car share schemes, self-employedcarpentry businesses, wholefood enterprisesand housing projects for single parents. Thebank has also developed special ‘promotionsavings bonds’; savers determine what kind ofproject they wish to invest in, and also forgotheir interest.

Between autumn 1997 and summer 1998 Esteban Barroso, promoter and leader of Proyecto TRUST, organised a series of meetings betweenprofessionals of different sectors in order to investigate the possibility of creating a social bank in Spain.

vices such as consultancy and technical support.Clients do not pay for these, and sometimes arenot even aware they are receiving them.Although Proyecto TRUST defines its profes-sional activities as banking practice, its smallvolume of share capital (PTS 38 million) and itslegal status largely prevents it from grantingdirect loans. It has therefore established anagreement of collaboration with the TriodosBank (NL) which granted most of the loansthat Proyecto TRUST has intermediated(almost PTS 1,000 million in 15 months).

In order to reach this level of activity, ProyectoTRUST has analysed more than 100 enterpriseprojects and initiatives in 26 months. It hascurrently seven dedicated employees and col-laborates with 18 volunteers. It has 25 financ-ing partners and an administrative council withsix members.

A further step was the creation of the Circle ofInvestors. The next phase in creating a socialbank will be to increase of Proyecto Trust’s,capital in order to obtain the status of a finan-cial institution and consequently extend itsproducts and financial services.

CRITICAL ISSUES

It is obvious that fiscal treatment and theentrance barriers (minimum social capital) –laid down to ensure the security and stability ofthe financial system – constitute a handicap forthis type of project. The strong competition inthe Spanish banking market, where the estab-lished banks dominate the financial market,makes openings for non-banking financial insti-tutions even scarcer. Proyecto TRUST believesthat a new European banking directive similarto the American CRA would be a partial solu-tion. The important thing is to transfer thedegree of diversification and deregulation avail-able to Europe, although this would be difficultgiven the greater aversion to economic risks inthe European financial culture.

Creating a social investment vehicle:

Proyecto TRUST (Spain)by

Esteban Barroso

Proyecto Trust

Proyecto Trust

Mr Eseban Barroso

Plaza de la

Constitucion 3, 1

Office No 3

E-28430 Alpedrete

(Madrid), Spain

Tel. +34 91 8571650

Fax +34 91 857 17 46

Email:

[email protected]


After analysing European experiences in socialbanking, various Spanish initiatives and differ-ent perspectives they decided this banking ini-tiative was viable because:

- financial disintermediation and increasingcompetition influence the way credit organi-sations select clients, and makes them lesslikely to select initiatives with little financialvolume and low yield

- the cost-benefit ratio of investments in emerg-ing sectors with low capital intensity, lowtechnology and slow market growth isextremely low

- the high cost of financial services and moni-toring mean rigorous monitoring (analysis andmanagement of risk) is increasingly replacedby guarantees and standardised scoring

- the preference for short-term operations withhigh liquidity, high yield and easy risk coverexcludes almost all operations with a highadded social value

- banking services are seeing increasing demandfor information and technical consultation

- banking products need to be differentiatedand personalised, as globalisation progresses

- customers of financial products and servicesare developing an increasing awareness of theculture of banking.

Proyecto TRUST was founded in July 1998, asan institution for intermediation and the pro-vision of financial services. Its main activity isfacilitating access to finance for businesses orpromoters of initiatives.

The work consists of the main elements of abanking office: analysing risks (scoring), oper-ating loans, and managing risk guarantees forlegal protection (monitoring).

Proyecto Trust’s specialisation in sustainableeconomic activities, the social economy andcultural initiatives requires complementary ser-

Practice • 87

‘Recherches et Applications de Financements Alternatifs au Développement’(RAFAD) was founded in Geneva in 1985 by a handful of development practitioners wanting to support local economies of Southern countries while avoiding dependency on traditional aid.

The main asset of the original partners inRAFAD was knowledge and networks, notmoney. The starting capital was a private con-tribution of $250 000. The following year, theSwiss Development Corporation agreed tocontribute a counter guarantee of CHF500,000 for 10 years. After early experience inWest Africa, driven by demand, RAFAD grad-ually spread its activities to other parts inAfrica, to Asia and Latin America. Over thenext 10 years, it set up quality collaborationswith a network of about 40 commercial anddevelopment banks in the South. It also drawson volunteers in the Board and the ExecutiveCommittee; an international team of experts(e.g. local representatives); and consultants anda General Secretariat based in Geneva.

The main impact of the guarantees is the lever-age effect. At December 31, 1997, RAFAD hadissued guarantees for an amount of CHF3,083,000, a sum based on contributions fromprivate foundations, international organisa-tions and governments. Thirty per cent of thisfund belongs to parties from the south. Localbanks, thanks to these guarantees, had allowedcredit facilities totalling CHF 9,153.000: hencea leverage of 3.0. The best partners are to befound in South America, where leverage canreach 12 times the amount of the RAFADguarantee, while it is about twice the guaran-teed sum in Africa. There are different modelsof risk; in certain cases, this is almost entirelycovered by the beneficiary or the intermediaryNGO, with RAFAD in second place and thebank in third, and this helps to obtain muchbetter leverage.

The quality of collateral is an important factorin negotiating credit leverage and risk sharing.RAFAD provides a letter of credit or a bankguarantee, payable on first request, given bythe first bank of Switzerland. The RAFADguarantee secures part of the risk, so a lowerinterest rate can be negotiated with the bank;

RAFAD (Switzerland)by

Thomas

Hüttich,

INAISE

Fondation RAFAD

Rue de Varembé, 1

C.P. 117

CH-1211 Genève 20

Switzerland

Tel. +41 22 733 5073

Fax +41 22 734.083


It aims to accumulate financial resources inorder to promote all forms of alternativefinancing for grassroots associations and indi-viduals in the South; and helps developmentorganisations access local credit through: - international guarantee funds - the co-operative company International

Guarantee Fund (IGF) - financial engineering services and consulting

in the field of alternative financing.

RAFAD issues guarantees that allow develop-ment associations:

- access to local credit facilities: the guarantee isrecognised by local financial institutions, soprovides a negotiation tool for local organisa-tions which cannot otherwise obtain loansfrom their local banks

- leverage: continued negotiations with localbanks have generate an average credit facilitythree times the amount underwritten; forevery dollar staked on a guarantee, three dol-lars are actually invested in a local economy inthe South

- the opportunity to mobilise local savings:guarantees also make it possible to access localfinancial resources, in particular savings insavings and credit schemes. Many countrieshave local liquidities which cannot be securedwithout a risk guarantee

- reduced risk of currency depreciation com-pared to locally invested funds: funds remainin Switzerland. Furthermore, as the guaran-tee is issued in hard currency and the creditusually granted in local currency, the collat-eral is worth even more in devaluation-pronecountries

- no fund transfers towards Southern countries:this avoids taking too much risk in countriesaffected by instability, war, economic crisis,and so on.

some partners have achieved a rate equivalentto the prime commercial lending rate. Paymentclaims on guarantees, or losses, have variedduring the past years. From 1988 to 1998 theaverage losses on RAFAD’s guarantee schemeamount to 4.5 per cent per year.

In ten years, loans obtained with RAFADguarantees have benefited more than 50 000and created up to 10,000 jobs.

RAFAD and its partners have created an Inter-national Guarantee Fund (IGF) in 1996, whichwas recently amended into a not-for-profit co-operative offering shares to partners in the Southand the North. This is because the fund needs togrow to respond to demands; many local part-ners ask for equity capital and direct capitalisa-tion of their own credit schemes; and manyNGOs are creating their own guarantee funds,and could benefit from shared management costsand risks as well as RAFAD’s experience.

CRITICAL ISSUES

Difficulties have included:- lack of interest from banks in the North - long negotiations with banks in the South - different working methods between partner

organisations and banks- difficulty in financing risks- finding complementary financing for follow up- gathering the capital necessary to set up the

IGF.

Funding the Geneva office has been a problem.RAFAD has now reduced staff at the head-quarters and hired local consultants on thefield. It has also reduced the number of coun-tries in which it operates; it now specialises inactivities and areas that receive fewer subsidiesfor micro-finance. This has pulled it back tofinancial sustainability.

The authorised capital of the IGF increasedfrom CHF 246,800 in 1997 to 595,300 in 1999.The IGF has the following advantages: a singleaccount for all investments and guarantees;shared risk; better participation for Southernpartners; and a standardised financial productto support micro-finance.

At 31 December 1999, RAFAD’s guaranteecapital of was CHF 3,308,872, which added tothe IGF makes a total of around CHF 3.9m.Planning for the next two years includes atransfer of all guarantee funds to the Co-oper-ative FIG and an increase in the guarantee fundtotal to CHF 5m in order to reach financialbalance. By then, IGF will be consideringestablishing an office in a country of the Southwill be considered and the role of RAFAD willbe completely re-examined.


Practice • 89

SOLIDEs (Société Locale d’Investissement dans le Développment de l’Emploi)are local social venture capital funds operating throughout Quebec in partnershipwith local authorities, advising and capitalising new businesses to create jobs at a local level. The first SOLIDE was created in 1993.

CRITICAL ISSUES

Creating and developing a SOLIDE dependson a strong local partnership. The FTQ bringsthe capital and the expertise, through Solideq,but it would not work without local involve-ment. The local authorities, especially theMunicipalités Régionales de Comté (MRC),which cover the SOLIDE investment area,cover the operating cost; local businesses andstatutory bodies help find the 125,000 CAN$needed to complete the SOLIDEQ capital; andthe SOLIDE’s operations are completelyautonomous from then on.

These local partnerships rely on a nationaltrade union organisation. Because they are partof the FTQ, SOLIDEs have financial credibil-ity. Moreover, if a project is too big to befinanced by a SOLIDE, or is in a particulararea of expertise, the FTQ or other specialisedfunds may be able to finance it.

Every saver who invests in the FTQ can alsobenefit from a 15 per cent revenue tax reduc-tion from the Canadian state and another 15per cent from the Quebecian state. Savers whouse the FTQ as a registered pension savingsscheme can benefit from another 20 per centtax reduction from both the federal andprovincial states. This comes to a total of 70 percent tax reduction.

CONCLUSION

SOLIDEs have successfully used all types ofresources and all sectors to create jobs all overthe territory. The results demonstrate their effi-ciency. Similar social investment instrumentsmight well consider this kind of inclusive strat-egy in order to gather wide-ranging financialand other support.

Inclusive Partnership Strategy and Governmental Tax Benefits

SOLIDE (Canada)by

Yannick Vigignol,

Federation of

CIGALES


Mrs Ch. Bouchard

Mr Jacques Duguerra

61 rue Victor Hugo

F - 93500 PANTIN

Tel. +33-1 49 91 90 91

Fax+33-149 91 90 91

Email:

[email protected]

SOLIDEs are financed, developed and advisedby the relevant local authority and the nationalco-ordinating body SOLIDEQ, which isfinanced by the Fond de Solidarité des tra-vailleurs du Québec (FTQ) as part of a largernetwork of social investment built by the tradeunion fund and the Quebecian regional andlocal authorities.

Each SOLIDE has a simple basis: Solideqbrings the financial expertise and lends one dol-lar for each dollar found locally, without col-lateral, up to 250,000 CAN$. A SOLIDE caninvest in all sectors expect retailing (because thetrade unionists stipulate that retailing does notcreate jobs, it only displaces them). More gen-erally the SOLIDE should be sure the jobs arereally created and not displaced. Working con-ditions, wages and collective agreements are allinvestigated. The SOLIDE and the FTQ alsocheck the level of financial and economic train-ing employees receive.

In 1999, 86 SOLIDEs were active, managedlocally by 600 volunteers. Eight hundred pro-jects have been financed since 1993, of which66 per cent are from the secondary sector; 36per cent are still being set up. The total amountof investment adds to 22,810,700 CAN$.Thanks to these investments 6,800 jobs havebeen created or maintained (45 per cent cre-ated), which averages out at 8.5 jobs created perproject and therefore represents an investmentof 3,350 CAN$ per job; the consolidatedresult of all the national, regional, local andspecialised funds is 78 525 jobs created ormaintained.


“Market economics values what is scarce - not the real work of society, which is caring, loving, being a citizen, a neighbor and a human being. That work will, I hope, never be so scarce that the market value goes high. So we have to find a way of rewarding contributions to it.” Edgar Cahn

Organisation Elderplan in Brooklyn, pays timedollars to over a thousand volunteers. As wellas keeping the participants healthy, this meansthey can provide lifts to surgeries, organise aseries of telephone services and self-help groupsfor the recently bereaved and others, and arange of other services like shopping or DIY tolocal people in their own homes.

Over the past decade, time banks have rapidlybecome part of mainstream American life,starting with health centres and hospitals, andincreasingly now in housing estates andschools. Their importance, and the urgent needfor more volunteers and mentors, has beenrecognised by leading politicians from all sidesof politics and from President Clinton.

EXAMPLES

Some of the adaptations of the idea include:

- Benning Terrace, a particularly notorious pub-lic housing complex in Washington, DC hasseen 300 residents log 79,000 hours of volun-teer work in 11 months last year, for whichthey earned time dollars. And as well as swap-ping services between each other, they usedthese to buy four tons of food per month at thelocal food bank. The crime rate also dropped.

- Seventeen Chicago schools have encouragednearly 2,000 pupils to earn time dollars bytaking part in a peer tutoring programme andto spend them on recycled computers. Theschools found that attendance went up whenthe tutoring was happening, grades improvedand the bullying of younger students all butstopped.

- One college in upstate New York hasredesigned its loan programme so that studentloans can be paid off partly in time dollars -partly, in other words, by their voluntaryinvolvement with the local community.

- The Brooklyn health insurers Elderplan,which allowed participants to pay a quarter oftheir insurance charge in time dollars, uses thesystem to fuel a local network of volunteers

Time Money - How to rebuild by

David Boyle,

New Economics

Foundation

Time banks began in the USA as a way of pro-viding non-medical services for old people in anage of shrinking budgets - helping them to stay intheir own homes, keep hospital appointmentsand stay healthy. It is a new kind of money - paidto volunteers - and now used successfully inalmost 200 cities in the USA to fuel volunteerschemes, health maintenance programmes, sup-port old people and a range of other local socialprojects. Research by the University of Marylandshows that time banks - or their generic name,service credits - succeed in attracting people whodon’t normally volunteer, keeping old peoplehealthier and cutting drop-out of volunteers.They are increasingly being used as ways of deal-ing with other social problems too, in schools,housing estates and the youth justice system.

Time credits or time dollars can be:- Used to recognise people’s contribution in the

community.- Earned by anyone who is making a contribu-

tion locally for the time they put in - and thisincludes elderly housebound people as well asyoung unemployed.

- Spent by those who earn them on a range ofservices, mainly from other volunteers. In theUSA, they can also be used increasingly tobuy refurbished computers, pay off mort-gages, student debt or health insurance, buyfood or clothing and much else besides.

- Kept by the young elderly as an insurancepolicy in case they become houseboundthemselves.

- Donated to older relatives, or back to the sys-tem.

Time banks record, store and find new ways ofrewarding transactions where neighbours helpneighbours. They put neighbours in touchwith each other, use people’s skills and imagi-nation - particularly older people’s - which isignored by the market economy, and build anetwork of neighborhood support.

One of the most successful health projects inthe USA, run by the Social Health Maintenance

Practice • 91

social capital

- Benwell Time Bank, co-ordinated by BarbaraDouglas of the Newcastle Healthy City Project.

- Watford, with a theme of older people andfood, organised by Watford Borough Coun-cil under the government’s Better Govern-ment for Older People programme.

- Time Bank in Peckham.

SUPPORT AND GROWTH

Time credits are zero-rated for tax in the USA,and this has been confirmed in a series of rul-ings by the IRS. They say that they are a‘moral’ transaction and unenforceable - theequivalent of baby-sitting or giving a cup ofsugar to your next-door neighbour, which isn’ttaxable anywhere.

Time banks can be set up by any organisationwhich needs the involvement of people in order tosucceed. In the USA they are run by communityorganisations, old people’s centres and churches,but also by hospitals, surgeries and health insur-ance companies, as well as universities. Theyrequire an office, a manned telephone and a com-puter. The most used software programme Time-Keeper is downloadable free from the internet(www.neweconomics.org/ timemoney).

MORE INFORMATION

About UK time money atwww.timemoney.org.uk or www.fair-shares.org.uk.

About US time dollars on the internet at www.timedollar.org.

About alternative economics in general: send large stamped addressed envelope to NEF at Cinnamon House, 6-8 Cole Street, London SE1 4YH. Tel. 0171 407 7447, Fax 0171 407 6473Web) www.neweconomics.org

About local currencies in general at the Letslink UK website at www.letslinkuk.org.

Funny Money: In Search of Alternative Cash, by David Boyle,

HarperCollins paperback , £6.99. Web: www.funny-money.co.uk

and a range of telephone services, bereave-ment counseling, self-help arthritis groupsand much else besides.

- Cahn has himself taken over part of the youthcourt under license from the District ofColumbia. Defendants are tried there forminor offences by other teenagers, who arepaid for doing so in time dollars, and whogive out sentences in community service - forwhich they are also paid in time dollars. There-offending rate is much lower than the offi-cial youth courts.

- The Washington law firm Holland & Knighthas won an award for their time dollar projectfrom the American Bar Association, whichinvolved working with a local community toclose crack houses, unfreeze local grantmoney, clean-up police corruption and keepthe local school open. This was no small task,and they needed local involvement for it towork, so - instead of giving their services forfree - they charged their retainer in time dol-lars. By the end, they had billed the equivalentof $230,000 in time, paid off by the local com-munity by helping with the clean-up, provid-ing a night escort service for old people, cam-paigning for better street lighting, takingdown the car numbers of drug dealers, schooltutoring and much else besides.

In the UK, the time bank idea was developedby the US civil rights lawyer Dr Edgar Cahn atthe London School of Economics in the early1980s, and adopted by the health trust, theRobert Wood Johnson Foundation, in a majorprogramme in six US cities which began in1987. In October 1997, he was invited to theUK by NEF and the London Health Partner-ship to introduce the idea in the UK. Threesuccessful conferences in London and New-castle were attended by a range of health andlocal government professionals, and hisappearances on the BBC – notably on Mid-week– had a major impact.

A range of organisations are at various stages ofsetting up UK time money schemes. They include: - Fair Shares in Gloucestershire, with six time

banks already up and running. - Lewisham’s Rushey Green health centre,

co-ordinated by the New Economics Founda-tion with help from the Kings Fund, Lloyds-TSB Foundation and the Carnegie Trust.


Women’s World Banking (WWB) aims to have a major impact on expanding theeconomic participation, assets and power of low income women entrepreneursand producers by opening their access to finance, information and markets.

WWB now has 34 New York-based staffmembers and 10 talent bank consultantsaround the world. The 45 affiliates in 39 coun-tries of Asia, Africa, North America andEurope are women-led micro-finance organi-sations which have over 300,000 poor female— and about 50,000 poor male – active clientsof direct credit services, with an average loan of$500. In addition, many affiliates provide sav-ings and business development services and areactive in policy change in their countries.WWB has associates as well: these are micro-finance organisations with a predominantlyfemale client base, but led primarily by men,which share WWB’s vision and principles andare committed to expand women’s decision-making roles at all levels. WWB is also active innetworks which provide well over five millionpoor women with access to financial services,and in work on the standards, support, andpolicy environment needed for the solid devel-opment of micro-finance.

CRITICAL ISSUES

WWB’s current objective is to strengthen theaffiliate base, with a target of 500,000 activelending and savings clients by the end of 2000.

At the global meeting in 1998 all affiliate lead-ers adopted standards similar to the eligibilitycriteria for accessing core CGAP funds, whichare highly rigorous and are met by few micro-finance institutions. In 1999 WWB beganpiloting innovations such as loan scoring mod-els palm pilots, and vouchers.

Women’s World Banking (USA)

by

Radhika

Holmstrom

Ms Nancy Barry

8 West 40th Street

USA-New York,

NY 10018

Tel. 1-212-768 85 13

Fax 1-212-768 85 19


WWB:- has a core network of affiliates - organises larger learning and change networks - shares successful approaches and puts policy

makers and funders in touch with micro-finance practitioners.

The organisation was founded in 1979 as aDutch Stichting or Foundation. In the earlyyears women leaders began creating localorganisations providing direct lending ser-vices to low income women, often in collabo-ration with local banks. WWB created a LoanGuarantee in 1983, backed by a small WWBGlobal Capital Fund; affiliates could offer aWWB-backed standby letter of credit to localbanks, to cover a portion of the risks for smallloans to women micro-entrepreneurs. WWBheld global meetings for affiliate leaders everytwo years to share progress and plans and buildthe WWB culture.

By the end of 1989 WWB’s Global CapitalFund totalled US$5 million and annual operat-ing revenues and expenditures were aboutUS$1 million, but the three major fundingpartners were concerned about the lack ofgrowth in affiliate reach. Over the ensuing nineyears the strategy focused on capitalisingWWB, building the staff capacity, developinghigh impact networks, and influencing policy.

By the end of 1996 WWB had mobilised US$5million for the affiliate capitalisation facility,which is now approaching full commitment;another US$5 million is lined up for 2000 to2002. WWB expanded the global Capital Fundto US$38.8 million at the end of September1999. Half of this growth was new infusionsand half appreciation over the period. The pro-gramme and operating budget grew to US$7million in 1999. Core funders have expandedfrom three to nine, with most funds providedas unrestricted support.

This article is edited

from a larger study

provided by

Women’s World Banking

Working Capital is the leading peer group micro-finance lender for start-up andmicro-enterprises in the USA. Its successful adaptation of peer group lendingtechniques in an industrialised country makes it a particularly interesting modelfor European practitioners and policy makers.

Working Capital’s group lending systemattracts a particular sort of entrepreneur whovalues support at the start-up stage or in theearly years of establishing a business. Addi-tionally, in some of its hubs or affiliates, itattracts a good number of minority ethnicentrepreneurs. Two thirds of Working Capitalmembers are women and 12 per cent are loneparent women. One in four members hasincome below the poverty line.

Four out of five of the entrepreneurs who joinWorking Capital are already trading; 70 percent of businesses trade from home; and half ofall entrepreneurs are trying to establish theirbusiness while holding down a part time job tosupplement their income.

Although Working Capital charges an interestrate of 16 per cent on its loans (12 per centinterest and four per cent in fees), this does notcover the full cost of the service. It relies uponboth subsidies from government and founda-tions to cover at least 25 per cent of its operat-ing budgets and specific business educationservices. Working Capital sources its loan cap-ital from ethical investors, foundations andbanks. Banks contribute funds at base rate orbelow and ethical investors and foundationsinvest at a low yield dividend of two to threeper cent. As a result, the cost of Working Cap-ital’s loan funds averages out at five to six percent, giving an income spread of 10 to 11 per-centage points on the credit sums advanced.

CRITICAL ISSUES

Faced with the huge challenge of meeting theenormous credit needs of unbanked Americanmicro-entrepreneurs, Working Capital hasrecently adopted quite a different approach toscaling up. The Working Capital EnterpriseAllowance Programme employs a franchisestyle strategy. Local business associations,chambers of commerce, artisans’ groups,church-based organisations and co-operatives

Working Capital: Micro-Credit Group Lending (USA)

by

Pat Conaty,

Common Futures

Practice • 93

Working Capital aims to increase the economicsuccess of the self-employed and micro-enter-prises through wider access to credit,entrepreneurial training and education, plus net-working opportunities through peer groups andother Working Capital members. Established inMassachusetts in 1990, it provides loans, busi-ness education and networking opportunitiesfor micro-enterprises. It has assisted over 3,000micro-enterprises in New England, Georgia,Delaware, Florida and Missouri, and advancedover $3 million in loans to date.

In 1993, Working Capital was officially incor-porated as Peer Partnership Inc. and todayoperates as a tax-exempt, non-profit institu-tion. It began its first international programmein Khabarovsk, Russia, in 1997. In addition toits head office in Cambridge, Massachusetts,Working Capital has offices in Florida, Geor-gia and Russia, and all have affiliates. These arebased in community organisations and raisetheir own operational funding and employtheir own staff. However, loan capital and theback office loan administration are providedthrough head office staff. The head office alsodesigns and updates the training material andhandbooks for the staff and entrepreneurs atthe hubs and affiliates.

Working Capital specialises in group loans. Ituses educational and briefing events organisedby local partners to attract prospective bor-rowers who form groups. These groups meetregularly thereafter to help each other withbusiness plans, marketing strategies and toapprove each others’ loans. Initial loans start at$500, repayable in monthly instalments overfour to six months. Second, third and fourthloans are available to group members on suc-cessful repayment performance. Through suchsteplending, loans of up to $10,000 are availablefor terms of up to three years.


can join the Enterprise Alliance Programme ifthey have at least 20 self-employed members.Working Capital provides lines of capital, train-ing, loan factoring and loan administration forits local partners. To secure a line of credit, thefranchise partner must deposit 10 per cent of thetotal sum in a central guarantee fund (so a $4,000guarantee deposit secures a $40,000 line ofcredit). Access to a larger line of credit requiresup-to-date repayments on current loans. Inter-est charges for credit lines are attractive (9.9 to10.9 per cent), and Working Capital also chargesorigination and service fees. Enterprise Alliancemembers will be eligible for initial loans of$2,000, repayable over four to 18 months. Theycan also obtain larger loans upon successful per-formance of up to $20,000.

CONCLUSION

Working Capital has struggled with a huge setof challenges since 1990. It has stuck to its peergroup approach and evolved more efficientsystems and strategies in the late 1990s toreduce both transaction costs and the incidenceof debt. However, given the high risk of lend-ing to start-up and fledgling businesses, Work-ing Capital managers do not anticipate in theforeseeable future being able to operate with-out some degree of subsidy; they are nonethe-less determined to become increasingly self-sustaining financially in the years ahead as theycontinue to scale up their operations.

The existence of the World Savings Banks Institute (WSBI) reflects the fact that savings bankshave long been a global phenomenon. The first world-wide organisation was founded in Milanin 1924 as the ‘International Savings Bank Institute’ and the WSBI was established as its successor in 1994. Its 107 member organisations in 88 countries represent the entire range of savings banks on all continents.

World Savings Banks Institute

by

Thomas

Hüttich,

INAISE

World Savings

Banks Institute

rue Marie-Thérèse 11,

B-1000 Brussels

Tel +32 2 211 11 11

Fax +32 2 211 11 99

Practice • 95

The WSBI is an independent non-governmen-tal organisation. Its mission is built on foster-ing co-operation, not only between the coun-tries of the North and South but also, forexample, through development projects incentral and eastern Europe. It does a great dealto disseminate information, to organise train-ing and exchanges and to encourage savingsbanks to participate in development projectslaunched by international financial institutions.

The WSBI’s initiatives and services are sup-ported by regional co-ordination groups forAfrica, America, Asia-Pacific and Europe.These represent the specific needs of theirrespective areas. A joint office and co-ordina-tion committee in Brussels ensure that theWSBI’s activities are co-ordinated with thoseof the European Savings Banks Group. Tech-nical support is given by seven standing advi-sory committees and temporary task forces,supported by joint office specialists and expertsfrom member organisations.

In the future, competition between banks willbecome ever fiercer. To meet this challenge, theWSBI will create more business co-operationopportunities, such as payment transfers andproduct diversification. By working togetheron such concrete projects as the fight againstpoverty, economic and social structuralchanges and the promotion of social cohesion,savings banks world-wide will continue theirrole in social responsibility and development.

INAISE is an international network

of socially and environmentally

oriented financial institutions.

Created in 1989, INAISE has grown

rapidly as the movement of social

investors gained importance, volume

and visibility in a number of European

and non-European countries.

Through INAISE, social investors from

Norway to South Africa and from Costa Rica

to Japan have been joining forces

to exchange experience, disseminate

information and demonstrate that money

can actually be a means to achieve positive

social and environmental change.

Inaise members do not only differ

in the sectors in which they invest.

They approach investing and depositing

differently from traditional financial

institutions. INAISE members go

beyond anonymous technical banking.

As collectors of deposits, they try to be

transparent institutions where people

can actually see what happens with

their money, creating awareness

and involvement.

WHERE OUR MONEY WORKS

INAISE members, through their investment

policy, foster and promote the development

of organisations and enterprises:

➢ Social Economy: co-operatives; community

enterprises; employee participation;

employee buy-outs; micro and small

enterprise creation and development

➢ Environment and sustainable development:

renewable energy; organic agriculture,

food processing and retailing;

eco-building; clean technology

➢ Social development: community housing;

employment generation; community

groups and the voluntary sector

➢ Education and Training: schools

buildings, training courses;

organisational development

➢ Health-care: community care;

programmes for the disabled;

preventive therapies

➢ North-South: fair trade; small-enterprise

start-ups through micro-credit

programmes; small business training

and counselling

➢ Culture and arts: artists; exhibitions,

theatre; dance; local radios.

I N A I S EE-mail: [email protected]

Web: http://www.inaise.org

upscaling social investment 50 case studies - united...

Documents