Wednesday 11 August 2010

Loans; an ancient purpose of charity!

Well, no more sermons! The most helpful librarian of The Charity Commission, Mrs Watkins, has searched the archives and found that the Thomas Bubb Charity was removed from the Charity Register in 1991 as it had "ceased to exist"! But it has certainly given me an idea for my Will (he says alarmingly!)

We tend to think that social finance is a new form of charitable activity. But not a bit of it. The making of loans was a very popular feature of charity giving in the Elizabethan era in particular. For example, Lady Burghley gave the Haberdashers' Company a very large sum of money to be lent by them to needy householders and to tradesmen for a term of two years without interest being paid. Other donors gave money to establish a revolving loan fund so that loan money would return and be reinvested to give loans, typically for young people coming out of an apprenticeship and needing money to set up in a trade. So both loans and social enterprise were covered by Elizabethan charities!

Sir Thomas White (Founder of St John's College, Oxford) gave significant sums for loans. For example, he gave a large donation to the City of Coventry to purchase land and the income from that to be given as loans to young tradesmen of the City wanting to be tradesmen.

Bringing this up to date you must wonder why loans and investments for charitable objects fell out of favour until relatively recently. Indeed, contrary to the White example, the Charity Commission have very restrictive advice to charities and Foundations on the use of their reserves.

Many Foundations have very significant endowments. They invest these in stocks and shares etc but fail to invest in social enterprises or other forms of social capital. They could use their endowments to make loans rather than invest in wicked banks. It is time the Charity Commission reviewed its approach and returned to an approach that was widely used at the time of the very definition of charitable purposes in the great 1601 Statute of Elizabeth.

The vast sums in Foundations reserves (its billions indeed!) could be a strong vehicle for the capital growth of our sector. Foundations and Trusts should be looking to a mix of grants and social finance or loans as their forebears did. Interesting that some of these very Trusts are benefiting from the donations of benefactors who encouraged and approved of loan finance! Time for reform. Time for the Charity Commission to revise its advice in this area and encourage Trusts to invest in social enterprise and to make loans !


Phil Caroe said...

Hi Stephen, I completely agree that many foundations and trusts have a power to achieve social impact through the use of their endowments that is largely unrealised. As you say, there is huge potential here to provide support for social enterprises through investments and loans. But of course not all charitable work will fit a social enterprise model, and many charities aren’t in a position to take loan finance.

That is why Citylife developed the charitable bond model, enabling both corporate and individual investors to use their financial assets to release funds for charity. We on-lend part of the investment to create affordable housing (to a secure AA rated organisation) and the rest goes directly to the charity in one up-front lump sum. At the end of the five-year term, the repayment of the loan plus interest enables us to repay the investors.

As Fiona Ellis said when Northern Rock Foundation put £1 million into a bond, “This approach to making money work harder is a challenge to grant makers, who are usually averse to lending over giving, but the Northern Rock Foundation trustees wished to set an example for others to follow and hope that other grant making trusts will seek to maximise their assets in a similar way... We can recycle our money whilst using it to leverage far greater social value than conventional investment and grants could ever have achieved on their own.”

We’re now preparing to launch a new service that will make the bond mechanism available as a fundraising tool for all charities working to give people a better future. The new service (and a new name for us!) will be launched in November with the first round of bonds in support of a small trial selection of charities. We’ll then open it up for registration for other charities to be included in the second round of bonds in April.

If any foundations would like to make investments in support of particular charities, we’d be very happy to chat further.

donnamoore01 said...

Leading charity Citizens Advice claims that lenders are acting irresponsibly by helping push more people into debt, as regulators sit aside and let them get on with it. However, the announcement comes at the same time as figures highlighting that over half of personal loan applications are now being refused, meaning that financial institutions are already tightening their purse strings without the intervention of regulators.

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