Social lending, what next?


Written by

Melanie Mills, Head of Social Sector Engagement

What is social lending?
Two years ago, we set out our focus on the four key market systems in which we would seek to deploy our capital. Social Lending which is a catch all for both the bank and non-bank lending and is the primary focus of lending to social enterprises and charities. This makes up around 43% of our divested capital, which has reached around 1.8k organisations to date.

Where the money goes?
It is not just about getting the money out the door but increasingly focusing on addressing gaps and barriers in access to finance, targeting the inequalities that exist. With this in mind, we set ourselves two key targets as part of our approach to investing in social enterprises and charities to improve diversity: 50% of social loans to be to be taken from underrepresented groups and reach: 50% of social loans to be available in the most overlooked communities in the UK. So far 75% of our capital is reaching underserved groups and 38% of our capital is reaching the most deprived communities in the UK as per IMD (Indices of multiple deprivation). Whilst we are happy to see the progress made so far, there is still a long road ahead to tackling the barriers which exist.

Problem solving 
In 2022 we formed the Solutions Collective – aimed at collecting insights, testing approaches and crowd sourcing knowledge; as we realise we do not have all the answers, nor the monopoly on good ideas. We are keen to invite challenges, encourage the sharing of ideas and ultimately improve the impact our capital can achieve.

Subsidy required
No longer the dirty words uttered in whispers. There is now understanding and acceptance that subsidy is required to make small deals viable, as well as to lower the cost of capital and enable greater risk taking. The key challenge is where the subsidy comes from. Recognising that subsidy is required means putting every available existing tool to work. In 2022 we ran sessions exploring the use of guarantees, tax and catalytic capital and captured insight from these sessions.

So what?
It isn’t just the great conversation and learning which underpins the value, it is also what happens as a result which we believe gives credibility to everyone’s time - so here is a quick summary:

  • Long term and permanent is always the goal – the effort required to influence, the turnover of contacts and the challenges of starting and stopping schemes has a real impact on our ability as a sector to use any tool efficiently and effectively. The argument was partially won, and the demand is clear with the Recovery Loan Fund seeing applications for over £5.29m of capital during the period of extension. However, it is still the collective goal to see guarantees as a central component to underpinning the risk that this type of lending can provide for the sector. Not a done deal and the gap in provision is deeply frustrating, but definitely a bigger prize to play for here and one we and partners are quietly confident on the progress in the background.
  • Are we asking the right question in the use of tax? - the sunsetting of Social Investment Tax Relief (SITR) in April this year will leave an obvious gap for those social enterprises wanting to raise debt from private investors and for community businesses wanting to raise equity using community shares. It feels like we are closing a route for the flow of private capital that wants to invest in social change. However, the question remains: ‘is income tax the best tax lever to really unleash the flow of this type of money?
  • Understanding investor risk appetite is key - there seems to be a compelling argument for capital preservation, where unrestricted liquidity is more important and the level of interest is not the fundamental driver. What if the next National Savings Investment was a Social NS&I Premium Bond? Rethinking the source of capital and at the same time educating investors on social impact investment could be the win we have been waiting for.
  • Return, risk and effort– this became a core narrative developed across all three sessions but particularly when exploring how the holy grail of catalytic capital might be sourced and deployed. To challenge the malaise of ‘too little return’, investments being ‘too risky’ or ‘too’ much trouble (the acceptance that leads to ‘lazy’ capital), we need to be bold and not just accept the norms. The risk for the social enterprises and charities is that if we lead with standard industry product, we will end up with capital that doesn’t meet the needs of the sector. These are frontiers and boundaries that we need not just to push but to co-create with investors who actually do have the appetite to try new things.

New Year, next up?
The Solutions Collective was has been a great way to bring together a wide and varied range of voices from Government policy makers, public financial institutions, fund managers, investment intermediaries, investors, social enterprise and charity leaders, consultants, infrastructure organisations. The attendance and conversation far exceeded my original expectations and personally I have learned a huge amount. The goal remains the same: improving the match between supply and demand within social lending. Removing barriers and improving equity of access (particularly for diverse communities), is at the heart of the change we wish to see in our next session exploring Shariah Compliant Lending. If you have topics which you believe we should be exploring in the Solutions Collective then do get in touch, we would love to hear from you.

Register for the event here The Solutions Collective: Shariah Powered Lending Tickets, Wed 22 Mar 2023 at 14:00 | Eventbrite

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