Chapter 10. Clann Credo: A social finance provider, Ireland

Summary

Clann Credo provides retail loans, knowledge and expertise to the community, voluntary and social enterprise (CVSE) sector in Ireland. Clann Credo played a key role in lobbying the Irish government to introduce a social finance1 initiative. This led to the establishment of the Social Finance Foundation, which provides wholesale loans to community organisations such as Clann Credo. Neither Clann Credo nor the Social Finance Foundation receive any government funding towards their operating costs or capital base.

Prior to 2000, Ireland’s growing social enterprise sector was not well understood, and consequently struggled to obtain capital. Many Irish community organisations, particularly in disadvantaged areas, had no access to mainstream bank finance. In response to these identified market failures, the Presentation Sisters,2 an international Roman Catholic congregation, set up Clann Credo in 1996 as a way to deepen social justice and further its mission of social transformation. Other religious charities also provided capital.

Since its creation, Clann Credo has lent over EUR 82 million (euros) to more than 800 projects. It has also developed other activity strands addressing wider societal issues; for example, it assessed the viability of the social impact bond (SIB) concept through a pilot that secured private capital to help homeless families move into long-term accommodation.

An important pre-condition for transferring such an initiative to other countries would be to identify a market failure in the provision of loans to community organisations and social enterprises. These initiatives are driven by people who are willing to establish one or more non-governmental organisations (NGOs) (including social enterprises) and have the ability to raise capital from investors (e.g. religious charities, philanthropic foundations or private investors). The NGOs require staff possessing a knowledge and understanding of the CVSE sector, as well as the skills necessary to assess both the credit risks and potential social benefits. In Ireland, the government used its influence with the banking industry to obtain private funds to set up a new wholesale social-finance provider, the Social Finance Foundation. In other countries, governments might decide to invest directly in these types of initiatives.

Key facts

According to Forfás (2013), the social enterprise sector employs an estimated 25 000-33 000 people and posted an annual income of around EUR 1.4 billion in 2009. Social enterprise is a relatively new concept in Ireland. The idea of running a business for social purposes rather than profit can be counter-intuitive and difficult to explain. Accessing funds – whether donations from the general public, loan finance from mainstream lending institutions or government grant aid – can be challenging.

Clann Credo3 - the Social Investment Fund – is a social enterprise, charity and company limited by guarantee without share capital. It receives no government funding. Its initial sources of finance (EUR 1.9 million) came from the Presentation Sisters.4 Other religious charities subsequently invested in Clann Credo; their combined investment now stands at over EUR 10 million. Since 2007, the Social Finance Foundation has also provided funding to Clann Credo.

Clann Credo operates at the local, regional and national levels; the Social Finance Foundation operates at the national level.

Clann Credo has lent over EUR 82 million since its creation, supporting more than 800 community organisations and social enterprises. It currently has a retail loan book of EUR 18.5 million (Clann Credo, 2016).

Clann Credo loans span 3 months to 15 years and vary from EUR 10 000 to EUR 500 000; the average loan amount is EUR 120 000. For loans with a term of five years or more, the current typical interest rate is 4.95% per year variable. For shorter-term loans, the current typical interest rate is 6% per year fixed. Conditions include no personal guarantees from project promoters or voluntary board members and no penalties for early repayment, even for fixed-rate loans.

In 2006, in response to advocacy by Clann Credo and others,5 the Irish government encouraged the banking industry to set up a social finance wholesale provider. The Social Finance Foundation was established as a not-for-profit company in 2007. Twelve Irish retail banks6 provided seed capital of EUR 25 million, with contributions proportionate to each bank’s market share. In 2009, the banks provided an additional EUR 72 million through commitments, at a preferential interest rate, over the following 12 years. This has been implemented through lending EUR 6 million per year.

Figure 10.1. outlines the flow of capital in the Irish social finance model.

Figure 10.1. Flow of capital in the Irish model

Objectives

Clann Credo aims to build stronger communities. It provides social finance to help groups and organisations build their capacity and skills in project/business planning and management; manage and access funds; and identify areas of social impact. It supports organisations that address particular issues of disadvantage, such as drug addiction, early-childhood education, unemployment and housing. It provides loans to develop community infrastructure, e.g. childcare facilities, community enterprise centres, amateur sports facilities and new community-based services.

In addition, Clann Credo performs research on social investment with the potential to strengthen the CVSE sector and explores new financial tools (e.g. SIBs) to develop innovative solutions to social issues. It informs political institutions on the importance and growth potential of the CVSE sector. Finally, it works with the Social Finance Foundation to ensure that the social-finance sector remains viable and has adequate resources to support the CVSE sector independently of government funding.

Rationale

Created in 1775, the Congregation of the Presentation Sisters traditionally responded to society’s needs by sending its members into the field to address the issue. Due to the institution’s aging and diminishing demographic, this model was no longer deemed viable; the Sisters decided to use the funds more effectively, by supporting development opportunities for disadvantaged communities. Sister Magdalen Fogarty, the Sisters’ Bursar General, was charged with turning this vision of social justice into reality. Clann Credo was the culmination of this work.

Within a few years of Clann Credo’s foundation, it became apparent that new sources of funding would be required to meet growing demand. Through roundtable events and commissioned research (TSA Consulting et al., 2013), Clann Credo and other organisations7 lobbied the government to establish a wholesale social finance provider. Recognising the contribution of social finance to developing social capital and community infrastructure,8 the government committed to examining ways to expand social finance provision9 and worked with the banking industry to set up the Social Finance Foundation.

Activities

Clann Credo provides loan finance to CVSEs that meet its key lending criteria. Clann Credo’s social finance executives evaluate the proposals based on the promoters’ skills, experience and plans for the organisations’ future development; the loan’s size and duration, relative to the size of the social enterprise; the enterprise’s financial position and repayment capacity; the social issue it aims to address; and the anticipated social benefits. They then submit a detailed report to Clann Credo’s evaluation sub-committee, which decides whether to approve the loan.

Once the loan proposal is approved, Clann Credo seeks wholesale funding from the Social Finance Foundation,10 whose credit-review committee may on occasion decline a loan application: while both organisations have similar assessment criteria, their perceptions of risk and social benefit may differ. Clann Credo pays an interest rate on the loans it receives from the Social Finance Foundation, and consequently charges a margin on the loans it makes to social enterprises and community organisations. In the event of a loan default, Clann Credo and the Social Finance Foundation share the loss equally.

Once the loan is approved, Clann Credo sends a letter of offer to the social enterprise’s promoters, outlining the terms, conditions and repayment schedule. When the offer is accepted, the necessary mechanism for drawing down the loan is put in place.

Clann Credo’s social finance executives and risk-advisory committee (comprising volunteers with knowledge and experience in banking, risk assessment and the social sector) conduct formal lending reviews. They remain in touch with the promoters throughout the lifetime of the loan, to ensure that any difficulties are recognised and addressed early – e.g. by rescheduling loan payments, extending the loan period, converting bridging loans to term loans, or nominating someone to the social enterprise’s board.

Finally, Clann Credo performs research on issues of relevance to social finance provision and the CVSE sector. Clann Credo and the Social Finance Foundation are founding members of the Social Enterprise Task Force, established in 2009 to promote the development of national policy and strategy for social enterprise, including sector financing.

Challenges encountered and impact

Table 10.1. summarises the strengths, weaknesses, opportunities and threats (SWOTs) for Clann Credo.

Lessons learnt and conditions for potential replicability

Using private capital and the banking industry to provide wholesale and retail social finance to social enterprises is an innovative approach that could be replicated in other countries. Core components of this model include:

• one or several NGOs – which could also be social enterprises – that provide finance to community projects and social enterprises

• an NGO that acts as a wholesaler and intermediary between social-finance providers and private capital sources.

Ireland has made significant progress in addressing the financial exclusion of community organisations and social enterprises. With a population of 4.6 million, Ireland now has EUR 100 million in social finance to lend, thanks to joint work by the government, banks and NGOs.

A number of preconditions need to exist to enable replicability:

1. The first prerequisite is a clearly identified market failure that is not being met by either the government or mainstream financial institutions, with the result that social enterprises are struggling to access funds – specifically loans by mainstream lending institutions. The existence of this market failure enabled Clann Credo and its partners to make a strong case to the government for implementing new mechanisms supporting social finance.

2. Prior to engaging in strategic advocacy, Clann Credo developed a proven operating model over many years before advocating for expanding social-finance provision. It informed the government’s decision-making process through its own research and analysis, which it shared in roundtable discussion events.

3. The third prerequisite is the existence of interested individuals or NGOs willing to invest in social finance and establish social finance providers, so as to provide greater choice and competition. Clann Credo’s early investors showed patience and commitment to the idea of social finance and believed it could make a difference in providing access to capital. This enabled Clann Credo to explore innovative solutions.

4. Social finance providers need to have or develop core competencies, such as the ability to raise capital from investors (e.g. religious charities, philanthropic organisations or private investors). They also need a knowledge and understanding of the CVSE sector, and the skills necessary to assess both the credit risk and potential social benefit.

5. A fifth prerequisite is the existence of key champions in the political system, the civil service and the banking industry who are committed to expanding social finance provision. In the case of the Social Finance Foundation, the government played a key role as a catalyst in encouraging the banking sector to fund a wholesale organisation at a very reasonable cost. As a result, funds were made available to the CVSE sector at interest rates and conditions that facilitated – rather than hindered – access to finance.

6. Finally, an existing retail distribution infrastructure developed by social finance providers, such as Clann Credo, can benefit/facilitate the development of wholesale providers such as the Social Finance Foundation. Barring that, wholesale social-finance providers would have to hire their own staff to identify potential projects, assess loans and support projects. In effect, they would have to become retail providers of social finance, thereby increasing the cost of providing loans to customers.