Chapter 7 Social Finance

Objectives To give an orientation to the concept of social finance To gain an insight into the various sources of finance that a social entrepreneur can have access to. Social Entrepreneurship Chapter 7: Social Finance

Social Capital The sum of the resources, actual or virtual, that accrue to an individual or a group by virtue of possessing a durable network of more or less institutionalized relationships of mutual acquaintance and recognition.(Bourdieu & Wacquant) the sum of the actual and potential resources embedded within, available through, and derived from the network of relationships possessed by an individual or social unit. Social capital thus comprises both the network and the assets that may be mobilized through that network.(Nahapiet & Ghoshal ) Social Entrepreneurship Chapter 7: Social Finance

Capital Sources for Social Enterprises Banks Micro finance institutions Grants & donations Social Fund Promoter Equity Venture Capital Social Entrepreneurship Chapter 7: Social Finance

Types of Entrepreneur and Fund Sources 1.Entrepreneur who actually hails from Below Poverty segment. An entrepreneur of this type has been a part of the problems witnesses by the segment and thereby wishes to create a change in the society. 2.The second type is one who has had a successful career in the past, and is financially well off. The objective of starting a social enterprise for such an entrepreneur is to express gratitude and give back something back to the society. 3.The third type is one who is a first generation entrepreneur, who identifies a business opportunity in the social sector and enters this space as a social entrepreneur on the expectation of good commercial returns. Social Entrepreneurship Chapter 7: Social Finance

Bank as a Source of Fund Banks, as a source of funds meet only limited financing requirements since it considers credit ratings and extent of equity component in the capital structure. Banks extend a good flexibility with respect to the tenure of the loan (short term or long term loans) and the nature of the loan (term loans or working capital loans). However they do come with liability of timely servicing of principal and interest repayments which can be directly witnessed in the cash outflows. Social Entrepreneurship Chapter 7: Social Finance

Micro Financing Institutions as a Source of Fund MFIs have overturned established ideas of the poor as consumers of financial services. It has shattered stereotypes of the poor as ones who are not entitled to bankable services and spawned a variety of lending methodologies demonstrating that it is possible to provide cost-effective financial services to the poor. Microfinance offered the potential to alleviate poverty while paying for itself and perhaps even turning a profit—―doing well by doing good. This potential of generating profit while alleviating poverty, perhaps more than anything, accounts for the emergence of microfinance onto the global stage. Social Entrepreneurship Chapter 7: Social Finance

Grants and Donations This source of finance is generally confined to project specific financing. They may serve long term or short term financing requirements. However, they save an entrepreneur from the repayment liability. Grants can be of two kinds: A grant (which is a form of capital investment seeking to support the creation of social value with no expectation of principal or interest return). A recoverable grant (capital with no interest, but the expectation of principal return). Social Entrepreneurship Chapter 7: Social Finance

Social Funds Social Funds are agencies, based in government, which provide finance for small-scale projects, normally infrastructure schemes, proposed by local government or community organizations. Social funds can be seen as a successful variant of the public works approach to providing employment for the chronic poor or communities hit by economic or other disasters. While short-term employment creation is typically seen as the principal contribution of social funds to social protection strategies, there are other objectives too like: upgrading social and economic infrastructures; developing civil society and social capital; promoting private sector contracting etc. Social Entrepreneurship Chapter 7: Social Finance

Characteristics of Social Funds 1.They finance small-scale schemes, typically social and economic infrastructure, but often including microcredit, business start-up funds, agricultural development etc. 2.The schemes are proposed by local government or local organizations, which are also responsible for organizing the implementation, and commonly contribute to the financing and future operation and maintenance (O&M). 3.Specially created institutions, outside the government’s established structure of administration, usually manage social funds. Social Entrepreneurship Chapter 7: Social Finance

Promoter Equity The financial capacity of the promoter decides the quantum of finance that can be directed to the enterprise. There is no loss of control in decision making in this case. The repayment and subsequent effects on cash outflows is also ruled out here. Social Entrepreneurship Chapter 7: Social Finance

Venture Capital Venture capital is resorted to when large quantum of finance is sought. It depends on company performance, social impact achieved and the valuation of the company. It’s a long term financing source. It leads to dilution of the entrepreneur’s decision making power since major decisions must have the investors’ approval. Investors play an active role in mentoring, advising and participating in investment related decision making. Social Entrepreneurship Chapter 7: Social Finance

Venture Capital as Source of Finance for SE According to the Planning Commission, India has about 17 funds which operate in this sector. However, if all one-off investments are considered it is estimated that there are more than 100 funds operating in this segment in India. The most popular funds are Aavishkaar, Lok Capital, Acumen Fund, Bellwether, Grassroots, Michael and Susan Dell Foundation, Omidyar Networks, Oasis Fund, Gray Matters Capital and Unitus among others. Social Entrepreneurship Chapter 7: Social Finance

Case Study : Grameen Bank Grameen Bank (GB) has reversed conventional banking practice by removing the need for collateral and created a banking system based on mutual trust, accountability, participation and creativity. GB provides credit to the poorest of the poor in rural Bangladesh, without any collateral. Professor Muhammad Yunus, the founder of "Grameen Bank" and its Managing Director, reasoned that if financial resources can be made available to the poor people on terms and conditions that are appropriate and reasonable, "these millions of small people with their millions of small pursuits can add up to create the biggest development wonder." Social Entrepreneurship Chapter 7: Social Finance

There are various sources of funds available for social entrepreneurs namely banks, micro finance institutions, grants & donations, social Fund, promoter equity, venture capital Choice of funds depends on entrepreneurs’ back ground, type of venture and fund requirement. Social Entrepreneurship Chapter 7: Social Finance