DOING CHARITY BY DOING TRADE

In today’s Nigeria (and most African nations) its financial market is skewed in such a way that social enterprises are totally left out of any financial incentive which these markets churn out. Most traditional financial intermediaries in Nigeria, like banks, are focused on short-term returns, and long term finances are only given to established or blue-chip companies, with little and often no financial incentives to social enterprises who they deem to be too risky for unsecured lending. In unusual occasions if any financing is being offered by a bank, the terms are often too arduous. As a result, social enterprises do not have the cushion of external financing to manage their various capital requirements. Like many small and medium scale enterprises, they need working capital to balance out the peaks and troughs of their business cycle. Sometimes they need bridging capital to pay for projects that are being personally – funded upon completion. And for their long-term success and ability to scale, they need access to development capital to fund capital investments and the development of new income streams. This lack of affordable funding limits their ability to deliver on their mission, hampers their ability to grow, and constrains their positive impact on society.

It isn’t a fable that Nigerian banks have an important role to play in the burgeoning Nigerian social sector. And this role is far from what you might be thinking about. The initiative explained here is a drift from the known practices and it is simple, concise and would prove effective if it’s given a chance to breathe. There hasn’t been a convincing financial model currently in place to finance the largely high risk social enterprise in the country, so instead of trying to develop a convincing business case to provide unsecured lending to higher-risk social enterprises, as the case has always been, banks should use their own philanthropic capital to finance social enterprises; which are visionary and creditable and in search of funds to develop their ideas, so as to address this market failure.

To bridge the gap between traditional bank loans and onerous grant funding (now done by the government through the You Win scheme), banks can provide capital in the form of long-term unsecured loans to social enterprises by using a fraction of their corporate social responsibility (CSR) fund. Banks’ philanthropic capital can be used to offer unsecured loans ranging from N25, 000 to N250, 000 or more depending on the capacity and/or potential of the enterprise. A single digit default interest rate could be fixed for such unsecured loans, so as to free it from the ever fluctuating monetary policy rates.

This is an innovative way for banks to achieve greater impact on the social scene and also to complement the resourcefulness and tenacity of social entrepreneurs. Banks’ philanthropic capital can then be “recycled” in the form of loans to different social enterprises over and over again, thereby achieving exponential impact over a one-off donation. When these banks make an investment using their philanthropic capital, i.e. what they would otherwise give away as a one-off donation, it wouldn’t just fizzle-out, but would generate new income streams which can be used to deal out more unsecured loan to a social enterprise. It will naturally develop into a continuous cycle when that social enterprise pays back, and money is then loaned out again to another social enterprise — over and over — until we eventually have a stream of funds which can be used to even finance huge capital projects. Hence, instead of making a one-off donation in the name of CSR, which is likely not have a desirable impact on the immediate needs of the society; of which job-creation tops the list, banks can “invest” through this model, where it is guaranteed the funds are ‘recycled’ as loan to social enterprises over and over and it achieves a much greater impact.

Of course, this is easier said than achieved. Internally, this approach requires recruiting skilled financial analysts with great people skills, since one hour they may be meeting a small community group, or a fervent individual and the next they may be structuring a corporate finance-type deal. These people are hard enough to come by; finding top talent who are also willing to forgo profit sector salaries is even tougher. There are also external challenges. While social entrepreneurs and nonprofit leaders are often smart, passionate visionaries, they may not have had any formal commercial training. As a result, reporting quality and skill levels often vary. Unlike the standardized processes and products of traditional banks, lending to higher risk social enterprises requires customized application processes, careful due diligence, and tailor-made lending offers. It is time and resource intensive.

In the current Nigerian banking atmosphere bank executives are under increasing scrutiny to demonstrate the “good side” of banking by the public and government. Innovation in social financing should be an integral part of that story. Banks already have the necessary evaluation processes, highly skilled talent, and global reach. And they also have sophisticated corporate philanthropy and CSR programs. By combining the two in a new unsecured-lending-to-social enterprise model, banks could achieve much more social impact than they are today. To be clear, this is not about a new banking product within their existing profit structures. Nor is this about developing another socially responsible investment (SRI) product for their customers. This is about generating greater social returns on their own philanthropy investment by offering unsecured loans to social enterprises that would otherwise not have access to capital. Strategic corporate philanthropy requires bank executives to take a hard look at the skills and resources they have in their organizations, to mobilize these skills and resources to achieve the greatest social impact, and to act boldly, especially when they can do what others can’t. Anything less falls short.

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