Helsinki 070205 workshop A finance

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Helsinki social enterprise conference 5-6 February 2007

Workshop A: Finance

Facilitated by: Alberto Brugnoni (Mag2Finance/Agemi, Milan), Christophe Guene (SOFI, Brussels)

A.1 Issues

The need to recognise the social economy’s core asset: “social capital”

The priority focus in previous EQUAL mainstreaming meetings on financing social (economy) enterprises has been both on how to reduce the deficiencies inherent in the sector (e.g. via training) and on developing instruments (e.g. guarantee funds) that should help to bridge the gap to the banking sector, both classical and ethical. It seemed as if the issue of “finance” for this sector is in the end not specific beyond the fact that it serves sectors and needs considered to be less profitable, often more risky than other economic sectors, weaknesses that therefore need to be “compensated” through external help.

However, social (economy) enterprises do have traditional specificities of their own, they do have sector-specific assets in the form of “social capital”. The discarding of this core capital has not only increased the opportunity cost in not seeing what the sector can deliver, but has also increased the risk of financing this sector through inappropriate financial instruments.

What is “social capital” and what forms does it take?

Social capital can essentially be described as everything that links people together and shows up in the form of increased information, mutual trust, mutual dependency, shared heritage, readiness for solidarity, risk sharing, confidence, friendship, know-how, passion. It has under different circumstances been presented also in the form of “endogenous assets” or “endogenous wealth”. Approaches that try to take account of these assets are usually associated with the concept of “empowerment” or “help for self-help”.

From a financial perspective, what matters is that investors can rely on commitments and relations that have a significant cost if not respected, and a high reward when nurtured. Traditional social (economy) finance used to be based on this asset. What used to be known as “relationship banking” for instance was nothing other than banking that relied on the closeness between a banker and his client, making it possible to provide finance at low cost and low risk on the mere basis of direct knowledge and reputation. Social economy finance has traditionally banked on this proximity, building on its involvement in a sector, a community or a network to lend or invest capital on a low cost and low risk basis. Social capital had and still has a very tangible economic value when the proper banking methodologies are adopted.

A.2 Best practice cases

Case study 1: Tavoli della Provincia (the “provincial roundtables”), or: how to involve banks in recognising the social capital of the social economy in the region, through organising monthly stakeholder roundtables to discuss the inner mechanics of banks and the intrinsic risks and needs of social economy enterprises;

Case study 2: MAG 2 Finance, or: how a financial co-operative serves the solidarity enterprises of the Milan region, without ever requiring “real” guarantees but building on the bonds, recommendations and knowledge of its co-operators organised in “districts”; Case study 3: Finanza In, or: how the social enterprise sector and micro-enterprises more generally can develop their own indicators to better show and value their social capital to the banking sector;

Case study 4: Comitato per la moneta di dono (a complementary currency system), or: how a local currency in the form of a bonus-earning chip-card can generate new bonds between consumers and the social economy sector, creating new economic flows merely out of a new “monetary infrastructure”.

Some lessons drawn from these case studies:

The most elementary way of building social capital remains to connect and network people and organisations and find moments and places for talking, again and again. The provincial roundtables which involve monthly meetings with the banks of the region could only be achieved through very pro-active dynamics of involvement (not to say arm-twisting) of the various stakeholders to generate the necessary momentum to discuss the very inner technical matters of banking;

The best substitute for so-called “real guarantees” lies in the ability to organise people in a way that makes them accountable to each other. The case of the Mag2 districts, i.e. groups of people stepping in to recommend (or not) a financial intervention for a person or a project, has been an efficient way to finance projects up to €500,000 without ever requiring the typical guarantees all banks are required to ask for nowadays.

There is not always a need for money to generate social capital. As the complementary currency scheme (Moneta di dono) shows, it can suffice to introduce a technical device (a chip-card) to generate new economic streams and transactions through connecting people and enterprises in a new way, generating markets and incomes that didn’t exist before, literally out of “nothing”.

A.3 Recommendations

Generate “political” social capital: social capital exists and there is a crucial need to take account of it in political and sector-wide decision taking. Yet is very clear that the lack of attention, lack of receptiveness and lack of understanding given to social capital has in itself to do with the absence of the same social capital at these aggregate levels. The example of the provincial roundtables in Italy show many of the aspects that are needed on the side of the sector: networking abilities, stakeholder involvement from below, capacity for sustained communication, technical expertise,… to name only these.

The sector needs both to learn about the constraints that create the given situations, and to communicate its own specificities, needs and assets to financial stakeholders who can turn out to be very willing partners.

Design money that generates social capital: there is a deep misconception about monetary aid doing good by definition, while the reality is that the way conditions are placed on grants (and does it always have to be grants?) is crucial in defining whether they will maintain the existing or even generate additional social capital in the end. Too often, grants are delivered in competition with or in replacement of a project’s or people’s self-help abilities. Let us underline again clearly that it is not welfare or state aid at such that is at stake, but the way it is delivered to strengthen social capital.

Recommendations for governments have to do with the need to raise awareness of the right financial instruments to be used and with the transmitting of the arts and crafts of proper funding methods. Places need to be created where this expertise is developed and can be learned, where the virtues of global grants versus calls for proposals, the impact of requiring guarantees (or not), the qualities of various selection methodologies can be studied.

Meanwhile, for social (economy) enterprises it has to be clear that their own purpose and survival is best served by diversifying their resources as best as possible, to base their incomes as far as possible on the services they provide (market subsidiarity) and to frame this within a medium-term development strategy, or any strategy that goes beyond year-to-year reaction to grant opportunities.

Regenerate a “European model” in social economy banking: the European social and local economy used to have its own financial institutions which, overall, did their job well. The co-op banks, savings banks and other local and social economy banks were essential in generating wealth from the local social capital they grew out of. The EU banking legislation of the last 20 years (the 2nd banking directive and the Basel 2 accords) put a stop both to the possibility of creating such financial institutions (because of the minimum capital thresholds) and to the ability of existing banks to take account of any form of social capital: they now have to focus on “real guarantees” instead. It is only natural that three of the four case studies discussed during this workshop had a direct link to these shortcomings of EU banking legislation.

Despite the worldwide fame of the Grameen Bank in Bangladesh, the EU has virtually banned such structures from its landscape (with the exception of those few member states that asked for exemptions from the banking directives). On the contrary, new member states like the Czech Republic and Romania were forced to close down their savings and credit cooperatives during their accession. There is no such thing as a European Banking model (which used to be the combination of a commercial and people’s banking sector side-by-side) any more, at least not in the EU.

Future wealth, heavily based on the knowledge and the relationship economies, is heavily based on social capital, which the present banks in the EU are not designed to take account of anymore. The Lisbon strategy, both on its focus on growth and competitiveness and on its focus on social development, would gain a lot from reviewing how banking is defined in the EU.