Our member Community Development Finance Institutions (CDFIs) are social enterprises. This means they are familiar with the type of slow, organic growth described in the Adebowale Commission on Social Investment’s new report ‘Reclaiming the Future: Reforming Social Investment for the Next Decade’. Bootstrapping and reinvesting surpluses year after year; unable to make the large-scale investments in technology and scaling-up that commercial firms are accustomed to. This slower growth means they can’t respond with enough urgency to the social and environmental challenges our planet is facing – but are still having impressive impact.
CDFIs are also social impact investors which invest in other social enterprises. The intertwined success of social enterprise and social investment discussed in this report is particularly pertinent for our members and the thousands of enterprises they support each year. Therefore now is the time for them to take centre stage in addressing the issues identified in the social investment market.
CDFIs lend to social enterprises, SMEs and individuals who are excluded from mainstream finance. They take a “bespoke and empathetic” approach to due diligence that the report says mainstream finance isn’t willing to. The report states that:
“There is a need for an approach similar to Community Development Finance Institutions (CDFIs) which take a different approach to risk and credit in order to lend onto businesses and individuals who have been underserved by mainstream financial institutions.”
Where mainstream finance providers cannot do the lending themselves, we firmly believe they should be compelled to invest in social enterprises and SMEs through CDFIs; using CDFIs as vehicles who can channel social impact investment on their behalf. The US already takes this approach.
We support the Adebowale Commission’s recommendations and hope the report will stimulate a refocusing on growing the UK’s social enterprise sector and put it front and centre of the Government’s levelling up agenda.
- Our member CDFIs have demonstrated that the blended finance approach works well and gets good outcomes for social enterprises seeking longer term patient capital. We are therefore fully supportive of the recommendation of £100m of new funding into the Access Foundation to enable blended finance to continue for smaller social enterprises.
- We’ve known for a long time that mainstream finance and much social investment fails to reach black-led social enterprises and other under-represented groups. CDFIs are the “excuse removers” – locally and regionally focused in most cases, and making a genuine impact on their communities, they provide access to finance for those excluded and underserved by mainstream finance, as well as social investment. We know that CDFIs lend more to black-led businesses and social enterprises than their mainstream counterparts. But we know with more investment that CDFIs could do even more. We therefore fully support the £50m new Black-led and overseen social investment fund.
- We’re also pleased to see the recommendation for a Social Enterprise Loan Guarantee Scheme as this will support our member CDFIs to de-risk their lending to social enterprises, enabling them to approve more viable loan applications. This complements our existing work on the Recovery Loan Scheme (RLS) for SMEs which we hope the Government will commit to extending after June 2022. The Enterprise Finance Guarantee scheme which preceded the RLS and CBILS schemes was instrumental in supporting CDFIs to channel investment into thousands of SMEs in the years since the Great Financial Crisis. Without the Guarantee these SMEs would likely not have received investment so wouldn’t have been able to grow, invest in technology and employ new staff.
- The report recommends more enterprise-centric finance that is patient and flexible, and not linked to property and secured investments, which would encourage more inclusion and diversity in lending, and we support this recommendation.
- Investing in social enterprise infrastructure is critical to put it in a strong position to take on investment. As place-based social impact investors CDFIs can channel money directly into places and scale to ensure social investment reaches all corners of the UK. We endorse the recommendation for a portion of Dormant Assets being earmarked for this purpose.
We look forward to working with our members and stakeholders to make the Adebowale Commission’s ambitious goals a reality.
You can download the full report here.