Open up finance. To communities
Edited keynote for the ‘European Open Societies 2030 – Challenges and Institutional Responses’ conference, Institutions for Open Societies, Utrecht University, 16 September 2019
Today’s conference is about challenges for open societies. Our session focuses more specifically on how community-led finance opens up possibilities for social entrepreneurship. But I think that one of the key challenges is to actually open up finance to communities. I will try to make clear what I mean and where (academic) research comes into focus. However, to play by the rules of the academic community, I will start by giving you my definition of community finance.
It is my understanding that community finance is one branch of the growing family of social finance. That is just another widely used concept that has many definitions, but usually refers to financial arrangements in which the investors expect a social dividend along with (some) economic return. In community finance there is always a common community goal. Furthermore, a substantial share of the investors or financial contributors are members of that community. These two are core to my whole talk: a community goal and an ‘investing community’. By the way, learning from British examples, you can stretch community goals as far as saving local pubs. Hang on, I’ll get back to that in a moment.
The rise of community finance
You might think that in the last few years community finance has soared. In some respects it has, with crowdfunding as its most significant expression. Thanks to digital technology it has never been easier to mobilise large numbers of individuals and indeed (local) communities to contribute to a particular community goal. Estimates show that the global volume of crowdfunded donations and investments got close to 9.2 billion euros in 2018 and is still growing rapidly year on year. It is not so clear, though, which proportion should be counted as crowdfunding for community interests. In the Netherlands it seems to be around 5 percent. Having pioneered with civic crowdfunding at Voor je Buurt for quite a few years, I normally tell others to look beyond the monetary value and to consider all kinds of accompanying benefits of direct community participation. Benefits that are less likely to be found in other more traditional ways of financing, like strengthening local resilience. Making it easier for people to actively join the project they support (as volunteers). Or fostering stronger public support for a project.
So, yes, it is easy to point out developments which show the opening up of finance and the growing participation of community-based investors. We wouldn’t be in this aula together discussing community finance if there wasn’t something real and interesting going on in this field.
But still, I believe, the world of social finance (or even finance in general) remains relatively closed to widespread community investing by community members.
The paradox of comprehensibility
The point is, first of all, that in community finance many of the participants are ‘layman’ investors. From my own experience I know that the majority of financial contributors to a community project or enterprise have no professional background in investing or philanthropy. They join because of the social, community goals or because friends have encouraged them. It is for good reason that crowdfunding is increasingly regulated and supervised by official authorities. But stricter rules do not necessarily make risks and legal technicalities more understable to the investing community. In fact they tend to thicken the pile of paperwork and general conditions that investors have to go through. It is a kind of paradox that better customer protection often leads to more complex and less comprehensible financial products.
Further opening up of finance to communities will therefore require new ways of communicating in a low threshold manner. Given the importance of community goals in the investment decisions of community members, attention should be paid not just to financial risks but also to the risk of not attaining or even abandoning the social goals. This might require new governance structures and community-ownership. In the Netherlands, communities most frequently use co-operations as a legal form to make sure community goals stay at the top of the list. Still, there is a lot of re-inventing the wheel at the local level, which is why examples like Herenboeren are important to highlight.
Herenboeren originates in the southern Dutch town of Boxtel. It is basically of concept of running your own farm as a community. 200 Households invest an initial 2,000 euros each to cover start-up costs, and to hire a professional farmer. They then pay a weekly membership fee of around 10 euros per person and in return get year-long fresh vegetables, fruit and sometimes meat as well. Herenboeren successfully started in Boxtel, found the best prices and balances necessary to run the farm, and are now helping around 20 other communities start their own farm. In the co-operation the members safeguard the collective goals and community-led use of the funds.
In the UK’s system of Community Shares control over community-led investments is regulated even further. For instance, the shares come with control mechanisms to prevent participation for financial profit-seeking. Over 120,000 investors have invested some 100 million pounds in more than 350 community-businesses, among which local pubs – I promised you to get back to those – are remarkable well represented. We don’t have something like community shares in the Netherlands and I am not saying we should just copy the model. But standardisation sometimes helps to make it easier for communities and investing communities to get going.
Getting invited to the table
Communication and comprehensible instruments are an essential part of opening up social finance. But there is more to it. Currently, some instruments are just not open to investing communities. Or they might be open, but community investors simply don’t get invited to join by other stakeholders. This is particularly true in the upcoming domain of results-based or outcomes-based social finance. You may all have heard of social impact bonds. With these bonds, which are not really bonds but rather pay-for-success contracts, particular interventions are financed to tackle social challenges, like countering youth unemployment. The (local) government repays the investors once particular pre-defined social goals have been attained. Those goals usually translate into substantial cost-saving for the local government (in our example resulting from less unemployment allowances), which is why investors can also receive a profit.
To date, over ten experiments with social impact bonds have been started in the Netherlands. The first trajectory has been successfully finished, delivering an annual 12 percent economic return for investors. Now, I know that social impact bonds require a lot of negotiations between the parties involved. But this instrument is potentially very interesting for community finance and for individual investors from those communities. I would really love to see new social impact bonds including that group of untapped investors. For now, most of the players at the table are banks, investment funds, endowment foundations and the occasional insurance company.
Perhaps a promising step forward is the recently started pilot with the Brabant Outcome Fund in the province of Noord Brabant. This fund is used to finance multiple impact bonds at once and thus introduces some standardisation. In theory, that is a move in the right direction for opening up possibilities for smaller investors to join. Currently three foundations with their roots in philanthropy act as investors for the outcome fund: The Oranje Fonds, Rabobank Foundation, Stichting DOEN. Now, the question is if bigger players like these feel any urge or enthusiasm to invite investing communities to the table.
Put the impediments on the research agenda
Having said this, I’ll round up with three main impediments that I think should be on the research agenda for community finance. First, there is a need to educate communities about the possibilities of social finance in ways that are clear, straightforward and sensitive to the motivations of this group of investors. People need to know where to start, what to expect, and so on without having to hire a financial advisor or becoming a trained financial expert first.
Second, there might be legal impediments to community involvement in different social finance instruments. For instance, in the case of outcomes-based finance, under certain circumstances there may be issues with local governments repaying private persons. Yet, all too often I hear legal experts say that there are no formal hurdles of significance.
Which brings me to the third impediment, which has to do with ‘goodwill’ in the literal sense. Are the established stakeholders (public sector agencies included) willing to let investing communities join or do they prefer to promote a ‘culture of a closed table’? I’m not saying that, no matter what, communities should always be involved. But I do believe that the community potential and the (non-financial) benefits of investing communities are easily overlooked or ignored all together. Research can do a lot to help get a better understanding of how important these impediments actually are, and how they can be overcome. I hope we will see a lot of progress in this field in the upcoming years.