Social finance is an approach in managing money that gives both a social dividend and economic returns. It is defined by investing in socially responsible and sustainable businesses.
Co-operatives, charities, social enterprises, and other impact focused organizations often encompass the social finance space.
Social finance dispels the idea that social progress and capitalist are incompatible.
Governments have historically held the role of solving social problems, however, the amount of capital needed exceeds the government spending abilities, which has been compounded by the huge growth rate in the world and a global recession. The gap to solve social problems can no longer be left to philanthropy alone.
It is a constant argument in the industry today that social finance can fill the gap of social and environmental protection, with one approach being social impact bond,- which is gaining attention in the mainstream media.
A social impact bond is similar to a regular bond, however, the payments are based on hitting a social goal, like education for girls/boys, or access to clean water for the masses.
Enterprises that aim to improve society and the environmental problems face challenges raising capital, especially in their development stages. This is because they have high upfront costs but relatively low-profit margins, as they do not focus on profits as much as conventional startups.
Social finance, therefore, provides flexible, mission-aligned capital that meets the needs of social enterprises that align to their mission and vision statements.
Social finance refers to investing with a view of stimulating both environmental and social returns for investors and society as a whole.
Kenya has seen various social finance ventures that aim to promote social welfare with the biggest movement of Co-operatives. The co-operatives are designed to assist members in creating wealth, alleviating poverty, connecting farmers and producers to markets, and providing funding.
Co-operatives support both social and environment, creating opportunities for produce chains and other goods and services. Their value can be seen across the nation and their impact felt in the financial space.
Microfinance operations are also examples of social finance enterprises that went where traditional banks feared to go, offering loans to low-income earners. Microfinance, therefore, improves the income and quality of life for the marginalized or socially vulnerable groups.
Sustainable businesses are not a new concept. For a long time, the global community has encouraged invention of sustainable solutions to businesses and services across the world. Sustainable and inclusive practices are the trend in the country and tend to attract more investors into any business. Social finance includes how a business is run, its values and its practices towards the consumer, the environment, the community, and also towards their employees.
Despite the visibility it is gaining, some investors have raised concerns that the social finance market’s development has been held back by lack of suitable products to invest in, with confusion surrounding the propagation of industry terminology and questions of whether or not investments can be profitable given their limited track record. This leaves the mainstream investors hesitant to join the social finance space.
To address the challenges, the sector must come up with better ways to measure non-financial metrics, have a wider variety of investment products, and increase the transparency of social environment impacts on financial performance.
Social finance investors should engage policymakers, pilot new innovations, and seek technical expertise to use best practices. With social finance gaining more support in the industry, it stands a great chance to generate both financial returns as well as having huge impacts on both social and environmental issues.
I believe social finance will be a huge phenomenon in the future of finance. Development of secondary markets where social impact bonds and other impact investment products that can be traded by investors, and creating a market that is liquid would attract a wide range of investors and more capital.
Kenya is among 34 countries that have introduced banking reforms to expand sustainable lending, making emerging markets a major force in driving development and fighting climate change, according to the first comprehensive Global Progress Report of the Sustainable Banking Network, an IFC-supported organization of banking regulators and associations.
The Kenya banking industry in March 2015 adopted the Sustainable Finance Initiative (SFI) Guiding Principles that guide the banks in balancing their business goals with the economy’s development priorities and socio-environmental concerns.
In 2016, the Kenyan Bankers Association launched the Sustainable Finance Catalyst Awards to celebrate institutions that practice catalytic finance which has a direct impact on the financial industry, the economy and the society at large.