Vince Cable speaks up for CDFIs

Writing for the Guardian last week, UK Business Secretary Vince Cable  revealed that he’d be speaking at the annual conference of the Community Development Finance Association, saying:

“A common complaint I hear when I am out and about meeting sole traders or entrepreneurs is the struggle to get finance through mainstream sources. This is a serious challenge to UK growth.

It’s why I have made it one of my priorities to get credit flowing again and why only last week I announced further detail of the government-backed Business Bank. This will facilitate the provision of loans to more firms through banks and other financial institutions.

But what about those firms and organisations which still need finance but struggle because they are deemed more risky and too expensive to administer in disadvantaged areas.

We need to ensure that all levels of business in the community – including charities and social enterprises – have the opportunity to access finance which is vital to the local economy.”

It was followed up after the conference  by another  article  which stated:

“With increased profile and better understanding, the message from the conference was that CDFIs could fill the credit vacuum left by a retreating finance sector and reach social enterprises in much need of capital.”

Fair enough.  As our own work in Russia had demonstrated the potential of CDFIs. In P-CEDs 1999 research, a community development bank  had been identified as a key element for economic resurrection, following the 1998 economic and currency crisis.  The strategy would invert earlier attempts of a top -down  approach to international development in Harvard’s Russia project to place funding in the hands of those who needed it most, the poor, rather than mafia.

In an interview about a follow on project for Crimean Tatars, founder Terry Hallman described the impact in Russia which was to help create around 10,000 local micro-enterprises, with more than 80% initiated by women.   It would be replicated in several other regions and the lending model established at Tomsk, based on Grameen’s moral collateral approach, would later become the standard for the Russian Microfiance Centre.

The P-CED business model, one of profit for social purpose was referred to in the strategy paper as a Community Funding Enterprise (CFE) and this argued the case for conjunction with a CDFI for mutual benefit, saying:

“By combining a community-funding enterprise (CFE) with a micro-credit union, the limitations inherent in each one is greatly diminished. The CFE provides sufficient funding to ensure the operating costs of the credit union, reducing the risk that the credit union will have any need to use its capital to sustain itself. The credit union immediately makes available sufficient loan money to match the needs of the community, thereby eliminating the time needed for the CFE to generate the same amounts of money. Additionally, CFE profits over and above what is needed to help with the operating costs of the credit union can be put directly into the credit union. Over time, the amount of money used to originally fund the creation of the CFE is offset by CFE contributions to the credit union. The credit union is increased so that larger amounts of money become available either to make larger loans or to service more borrowers. Together, the CFE and credit union create an enterprise where the original funding not only remains but also increases with time. They complement and balance each other by addressing the economic goals both have in common and offsetting each other’s limitations.”

Having established P-CED in the UK,  over the Winter of 2003/4 we began work on a proposal for funding an emerging social enterprise sector.  A market was identified in the 6 million rural UK homes without high speed internet access – an estimated value of £2.2 billion. Our target, 5% of this market would have boosted the social economy by £100 million and continued to grow it in the social enterprises created by investing 50% of surplus revenue in CDFIs, retaining the remainder for operational expansion into Europe.

The business plan was distributed to social enterprise support agencies  and community funding bodies in 2004, warned of the  potential of civic unrest.   As the plan for Crimea  had pointed out, dealing with poverty was not only a moral but a strategic imperative. It called on government, then New Labour, for support:

Traditional capitalism is an insufficient economic model allowing monetary outcomes as the bottom line with little regard to social needs. Bottom line must be taken one step further by at least some companies, past profit, to people. How profits are used is equally as important as creation of profits. Where profits can be brought to bear by willing individuals and companies to social benefit, so much the better. Moreover, this activity must be recognized and supported at government policy level as a badly needed, essential, and entirely legitimate enterprise activity.”

It would take 7 years, but when capitalism finally revealed the insufficiency we’d described and uprisings began all over the world with both the Arab Spring and Occupy Wall Street any preventative adjustment would have been too late. Among the first to be affected by the crisis of capitalism, was Russia, where our work had begun.

With hindsight, the question for me is – why was there such resistance to business for social purpose when it could have made a difference?

Some time ago a conversation with John Mulkerrin of the CIC Association about social enterprise being handed scraps prompted a blog in which he described the emergence and subsequent failure of government to support those who’d been inspired to create this form of social enterprise.

John refers to the failure of the Social Enterprise Mark, which as I’ve related in an earlier blog was developed with the help of public funding, by RISE-SW who I’d contacted repeatedly from 2006 to 2009  describing our social business model.

I find it interesting that RISE-SW and SWRDA, one of the bodies approached with our proposals in 2004,  were both located in the city of  Exeter.

In 2005, the issue of social enterprise funding is taken up with Baroness Thornton,  then chair of the Social Enterprise Coalition.  My letter to her at the House of Lords received no response.

We joined the Social Enterprise Coalition in 2006. After paying the subscription, I introduced our profit-for-purpose model and our background in sourcing the CDFI in Tomsk.  We were told that our work lies beyond the focus of their work.

In 2007, we published the ‘Marshall Plan’ for Ukraine online. It lays out a strategy for community re-investment on a national scale via a social investment fund of 1.5 billion dollars, saying:

“Project funding should be placed as a social-benefit fund under oversight of an independent board of directors, particularly including representatives from grassroots level Ukraine citizens action groups, networks, and human rights leaders.

 This program provides for near-term social relief for Ukraine’s neediest citizens, most particularly children who normally have least possible influence and no public voice. Over a few years time, the net cost financially is zero. Every component is designed to become financially solvent, through mechanisms of cost-savings and shared revenue with other components. One component, Internet, provides essential communications infrastructure as well as a cash surplus to be used to offset any lingering costs of other components such as childcare, and otherwise goes to a permanent social benefit fund under oversight of the aforementioned independent, citizens-based non-government board of directors.

 Any number of other social enterprises can be created. Furthermore, any number of existing for-profit enterprises are entirely free to contribute any percentage of profits they wish to increase the proposed initial $1.5 billion social investment fund. If for example the total fund comes to $3 billion, that amount would generate at least $300 million per year in a hryvnia deposit accounts at any one of several major Ukrainian banks, to provide ongoing funding to continue to create and expand social enterprises.

 This strategy places adequate funding for social benefit under control and management independent of government and the very obvious vicissitudes and conflicts inherent therein.”

In 2008, we ensure that it won’t be disregarded  by submitting it to the EU Citizens Consultation. It was just as relevant to consider a strategic response to poverty in Europe,  before uprisings began in Greece and Spain.

The only conclusion I can draw from this is that we were treading on toes, big time.

2 thoughts on “Vince Cable speaks up for CDFIs

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