Ged Devlin, Programmes Manager, North West
Gen Maitland-Hudson, Head of Evaluation and Impact
“What can history tell us about financing social projects?”
Innovation has been called ‘the dominant ideology of our era’. But a relentless focus on doing things in new, ground-breaking ways can make it harder to learn from the examples of history, and build on them to support social programmes.
This is as true of social finance as it is of anything else. History is a data source just as valuable as a financial forecast. In fact, given the lows to which economic forecasting has sunk in public estimation, perhaps history is a more reliable place to look for information about how best to support the financial security of community businesses.
One thing history might be able to tell us is how intermediaries work to match lenders to borrowers. What role do they play, what skills and information do they need, what particular benefit do they bring?
This might be helpful, not least because in the current landscape of social finance the role of social lenders, Social Investment Finance Intermediaries (SIFIs) and crowdfunding is a curious one. Given the rhetoric, it can often seem as if the act of lending is more important than what might be done for social good with any borrowed money.
There is, for instance, plenty of grandiloquence about the specific brand of matchmaking provided by crowdfunding platforms. There’s no need to rehearse here the self-evident innovations in speed and accessibility provided by the internet, but aside from these features – common to all web-based projects – is crowdfunding as ground-breaking as its advocates excitably claim?
The answer is almost certainly no. It is hardly new. There are interesting historical examples, long predating the internet, of person-to-person lending that successfully bypassed the regulated banking system and effectively circulated money from those with plenty to those with less.
One of these examples is provided by Parisian notaries of the late eighteenth century, who make a dusty set of ancestors for today’s tech entrepreneurs.
French notaries innovated their way into the financial intermediary business in a way so emergent that it might even satisfy the RSA. They provided a solution to an endemic problem in the financial market of eighteenth-century France: default.
They were able to do so because of their role drafting wills, deeds, land sales, marriage and loan contracts. This provided them with an intimate knowledge of their clients’ finances, helping them reliably match a good credit risk with a lender. They were incentivised to do this well to keep their clients loyal.
They were successful. And this wasn’t small-scale lending between members of the same families. Notaries brought together the capital that financed the building of the Palais Royal. The volume of lending that passed through their hands would make the CEOs of today’s crowdfunding platforms salivate.
A rather different, but equally emergent example of financial intermediating is provided by Irish publicans and retailers between 1968 and 1976. In a perhaps surprising episode in the history of industrial relations, Ireland’s bankers went on a series of strikes during these years. In 1970, banks closed for a full six months. Money did not, however, stop circulating. People used cheques as IOUs, and cashed them with pubs and shops, whose landlords and owners shouldered the risk of potential default.
There is something important in these examples that is worth unpicking, and which tells us about the roles and motivations of investors and intermediaries involved in person-to-person lending.
There are two models here: the notaries’ formal exchange of information and the publicans’ informal one.
The Irish banking crisis gave rise to a highly personalised credit system with no definitive time horizon for repayment of debts, and credit extended in place of the banking system. Antoin Murphy describes how this system exploited local knowledge “circulating at high velocity within and across communities”, with the result that borrowers and lenders could build solid ‘microfoundations’ on trust.
The notaries’ reliability, and their skill sifting the evidence, brought careful, long-term lenders into the investment market. Philip Hoffman’s research shows that a significant number of investors were independent women, including nuns, wealthy widows and the courtesan Ninon de Lenclos. They made up a quarter of Paris’s creditors and were three times as likely to be creditors as debtors. They were a sound source of finance, a source highly unlikely to be involved in more speculative money markets.
Both these examples hold part of the answer to the design of the ‘right’ kind of intermediary for community business. The publicans used direct knowledge and relations of trust to assess risk and extend credit, in difficult circumstances when traditional systems were failing. The notaries made diligent matches between careful long-term lenders, and reliable long-term borrowers. Well-informed trust helps to lower the price of finance by reducing risk. Careful matchmaking, like that of the notaries, brings reliable patient capital into the system.
In the present day responsible finance sector (the sector most likely to lend to small organisations in the social economy) 42% of clients are businesses owned by women. 91% are businesses that have been turned down by mainstream banks. We already have the two key components of our historical examples of lending. High risk that needs to be mitigated by trust, and unusual lenders.
The third component is an alignment between the investor and their investment.
Community shareholders invest in local community businesses which provide goods and services to meet local needs. Investors expect a fair and modest return on their investment, and this long-term alignment of the interests of owners, investors and customers is at the heart of the community business movement. It works best when the social good a community business is aiming for – be it renovating an old building or building new homes – is the primary motive for investment, and where the interests of the investor are not a speculative financial return but a more stolid long-term offering. This is precisely the kind of match that could be made effectively by a notarial style intermediary.
A novel aspect of community shares is that people are invited to invest directly in enterprise. This is a new experience for most of the population, who are more used to handing over their savings to financial institutions to manage and invest on their behalf. But the number of individual shareholders on the London Stock Exchange has halved over the last thirty years (from 20% to 11% as a proportion of overall ownership), so the community shares movement has significant potential for bringing the present day equivalent of the eighteenth century’s ‘independent women’ into the investment market.
The right kind of social lender would, then, make use of trust to reduce risk, and bring down the cost of finance where it is most needed. They would bring a careful mind to the business of match-making, and aim to appeal to those lenders most likely to invest in the long term. They would support the alignment of investors and investees for a wider community benefit.
This is what Power to Change is busy doing through its Booster Programme, which we believe could, at its full potential, release £1.4m to ten community businesses. Innovation has its place, but lending has a long and sometimes brilliant history. We aren’t giving up on the old ways yet.