Establishing the demand for capital and attracting investors are key to the development of the Big Society Bank, says Joe Ludlow. 

When the coalition government was elected in May this year, a key promise was to establish the Big Society Bank to support this country’s burgeoning social sector.

The government wants to set up the bank as an independent, wholesale institution that will invest its funds through existing financial intermediaries like social investors and community lenders. In turn, these organisations will increase access to finance for frontline social sector organisations.

The bank will use the funds from dormant bank accounts, which it will expect to see topped up with money from commercial investors, social investors (seeking a mix of financial and social returns) and philanthropic donations. The target is to launch the bank in April 2011 with an estimated £60m of funds.

The arrival of this new institution is a great opportunity to reflect on the financing needs of charities and social enterprises and to think about the type of support that is needed to build a financially resilient sector.

An emerging market

The social sector is increasingly important for the UK. The economic downturn and cuts in public services remind us of the need to invest in sustainable, long-term solutions to help the most disadvantaged in society. But like all organisations, charities and social enterprises need financial capital. But three fundamental challenges persist.

Social sector organisations tend not to price their services appropriately and funders are Establishing the demand for capital and attracting investors are key to the development of the Big Society Bank, says Joe Ludlow. seldom willing to pay fair value for what is delivered.

While the supply of loan finance has been substantially boosted in the last five years, there is limited availability of funding for higher risk uses such as supporting growth.

There is limited ability in the sector to analyse financial positions, to model financial scenarios and development investment proposals. This constrains an organisation’s ability to earn appropriate revenue and to raise external capital.

The social finance market is under-developed, inefficient and often fails to meet demand. Intelligent and varied pools of capital are required to help develop the market and to allow it to mature.

A development bank

There are a number of sophisticated views of the financial infrastructure needed for the social sector. Indeed, the idea of a wholesale finance institution for the sector isn’t new – the Commission for Unclaimed Assets made a detailed proposal for such an institution in 2007. The big society policy agenda has fine-tuned this by emphasising the role for charitable giving and philanthropy alongside commercial investment and a strong desire to see financial products available on the high street.

Given the needs of the social finance market, I believe that the Big Society Bank should act more like a development bank – intervening to stimulate market development rather than replicating existing financial infrastructure whether that be investment banks or grant makers. The Big Society Bank should aspire to a long term vision of a fully functioning social finance market, but work to a roadmap of how to get there that starts with the needs of the market in 2011.

Understanding the market

NESTA has been working with the social finance market to develop prototypes of the products and services the Big Society Bank could offer based on the concept of a development bank. The project has two parts to it: research to understand the current needs of the market and a pilot fund which will trial products and services that the Big Society Bank could offer in 2011.

We are seeking to build a quantified understanding of the demand for capital from financial intermediaries working in the social sector and how that demand is likely to develop over time. We also want to test the appetite for social investment products amongst individual savers and investors. We expect to conclude this work next February.

The pilot fund received over 85 submissions and will demonstrate how the bank can offer funding directed to areas where it will make a significant impact in simple, quick to deliver ways. It will aim to leverage multiples of additional funding from commercial or philanthropic sources. Fifteen projects will be chosen with the hope of five making it to onto the shelves of the Big Society Bank.

Like the social sector itself, the social finance market will evolve over time. The Big Society Bank has an important role to play helping to underpin investor and consumer confidence so that we can continue to build our world-leading social sector. 

Joe Ludlow is a 2010 Clore Social Fellow working with NESTA