Finances for Social Enterprises

Posted on June 11, 2010 in Entrepreneurship

Meenakshi Gaur:

Can a not-for-profit organization be run with the same efficiency as a for-profit business? Can a not —for-profit organization stick to its motive of helping the poor without incurring losses? The answer to these questions has changed from a resounding “no” to a significant “yes”.

Today the definition of business has changed; the generation of private surplus with the achievement of social objectives and welfare are complementary rather than contradictory to each other.

It is a common notion that financial services for the poor cannot be provided without the help of subsidies from the government. This is based on the belief that it is impossible to make profit by lending to small business enterprises. There operational expense, credit risk, and clientele’s low economic status act as the fear factor for the investors.

Contrary to this belief, the recent IMF 2010 Emerging Economy survey indicates that the poor do indeed save, and micro enterprises are the foundation of most emerging economies. They are contributing significantly to economic output, exports, job creation, and technological innovation in the fast developing economies.

Bill Drayton, CEO of Ashoka (one of the largest social entrepreneurship firms of the world) says “Social entrepreneurs are not content just to give a fish or teach how to fish. They will not rest until they have revolutionized the fishing industry.”

Over time, a consensus has emerged that not only is it possible both to make money and provide essential financial services for low-income households across the Indian Subcontinent, but that whenever possible, microfinance should be done in a commercially based, financially sustainable manner.

Many new Social Investment Vehicles (SIVs) have been developed which help in rapid and smooth flow of capital in the newly emerging social enterprises. These include Bridge Loans and Social Impact Bonds as a new way of bringing extra money into public services to tackle long-standing problems at their roots and overcome budgetary constraints in this sector.

The emergence of entrepreneurs in the banking sector at the micro level has improved the condition of the existing infrastructure greatly. It has also helped in appeasing the two main concerns of the low income savers, safety and accessibility, rather than the interest paid on the deposited income. It has also helped in the eradication of social evils and saving the poor from the financial mafia which left them with no choice but to lose their land and later their lives. It has also brought with it better risk management skills including the credit and interest rate risk. Pioneering work in this field has been done by Muhammad Yunus, founder and manager of Grameen Bank in Bangladesh whose work echoes a theme among modern day social entrepreneurs that emphasizes the enormous synergies and benefits when business principles are unified with social ventures. Another paramount achievement has been done by Vikram Akula founder CEO of SKS Microfinance, the McKinsey alumnus who has started a micro lending venture in villages’ state of Andhra Pradesh. Globally, the most successful social commercial bank is Bank Rakyat Indonesia(BRI), a profitable, full-service, nation-wide bank that has assets worth over $ 1 billion in assets.