Banking the Underbanked
Building a house, buying a car, saving money for a comfortable retirement … for most our key moments in life, we typically rely on the assistance of banks to help make them possible. Few people have the funds to finance a home out of pocket, nor do they have enough money stashed under their mattress to splurge on a convertible. Debt and other financial instruments like credit cards and savings accounts help provide the means to realize small goals, ambitious objectives, dastardly dreams.
Banks therefore possess great catalytic potential – not just in the life of individuals, but also in the development of communities, NGO’s and social enterprises. Through different financial instruments, they can provide vulnerable communities with the financial means to take more control of their lives, while also offering equity to support starting or scaling social enterprises.
There are hurdles and obstacles in this story, however. Access to banking, for example, can be quite limited or even non-existent in many regions and communities, creating a group of unbanked or underbanked people who are left largely to their own devices when it comes to management of capital. This exposes them to all kinds of loan sharks and financial vulnerabilities. On the other hand, many banks struggle to reconcile their profit-oriented activities with their potential to generate social and environmental impact.
These same caveats hold true in many of the countries that house Collaborate For Impact (in Eastern Europe) and Impact Together! (in the MENA-region), our two EU-funded market building programmes. Policy and awareness about the social economy are less advanced in these regions, meaning banks, too, are less invested in these types of efforts. To foster stronger connections between our national partners in these projects and their respective stakeholders from the corporate and banking world, we organized a three-part webinar series to help inspire future collaborations. After all, many of our members are knowledgeable in this department.
The many faces of Erste
To kickstart these exchanges, we invited Peter Surek, Head of Erste Group Social Banking and CEO of Erste Social Finance Holding, to share his insights and experiences. It’s hard to think of a more relevant speaker: Peter has over 10 years of experience in the field of social banking, leaving a trail of impact throughout Central and Eastern Europe. His presentation guided all present through the impactful accomplishments of Erste, zoning in mainly on the social SDG's.
For those unfamiliar, the structure of Erste takes some explaining. Simplifying slightly, we can state that the two big constituents. The first is the ERSTE Foundation (one of our members) and the largest shareholder of Erste Group. The Foundation operates mainly in the philanthropic world of social impact. The second big constituent is Erste Group, which is one of the largest banking groups in Central and Eastern Europe and is geared towards traditional retail and corporate banking.
Erste has launched its first Social Banking initiative, bridging the social and financial world, already in 2006, years before the start of the current ESG movement. A considerable amount of the activities of the Group Social Banking focus on access to finance and consist of loans, extended to starting entrepreneurs, micro businesses, NGO’s and people with financial difficulties. As these activities are still a part of the banking concern, the loans aim to at least go break-even, sometimes bringing in lower grades of interest. Since the launch of the Social Banking branch in 2016, 47.291 clients benefited from the Social Banking services, totaling an impressive 595,6 million euros of funding provided. An estimated 97.011 jobs were either created or preserved as a direct consequence of this provided capital.
Some more encouraging numbers:
10.012 starting entrepreneurs
were financed, 34% of which indicated they could not have started or expanded their business without the loan provided by Erste Social Banking1.220 social organizations
were financed, 68% of which have since increased their social impact23.730 clients with financial difficulties
were supported with the help of Zweite Sparkasse, 95% of which can now pay regular expenses on time
This type of impact measurement matters, especially when communicating back to their key stakeholders. Bi-annually, Social Banking conducts a survey of the clients it has served. For its last edition, 1.190 clients were interviewed, painting an image of the material impact created by Erste Group Social Banking.
Other more complex impact investment operations are typically ran by Erste Social Finance Holding, which in many ways operates as an impact investor or an impact investment fund. As a financial vehicle, it takes its funding largely from ERSTE Foundation and Erste Group, while also accepting public funding and impact investments from third parties. In addition to providing loans for specific projects, the Erste Social Finance Holding is continuously eyeing opportunities for collaboration with existing local players.
The power of collaboration
One positive example of this pioneering work is seen in their efforts to improve the life of the Roma in Slovakia, a minority that has been stubbornly persecuted and ostracized throughout history. As a result, they live segregated lives, illegally occupying plots of land in dire conditions. Nevertheless, they represent around 8 percent of the country’s population.
Providing improvements to their situation is one of the most motivating achievements, says Surek. Erste's local bank Slovenská Sporiteľňa (SLSP) and local non-profit Project DOM.ov initiated the project Self-built Houses for Marginalised Roma Communities. The goal? To provide the Roma families with the financial means and literacy to buy a plot of land and build a home of their own. It’s a tale with many moving pieces, uniting financial investment with non-financial support and ultimately making a massive difference by laying the bricks for over 100 new houses at the time of writing. It’s a story we have covered before, and one that we urge you to read in more detail.
The partnership with SLSP goes further than this success story. Together, Erste Social Finance Holding and the Slovak bank founded SLSP Social Finance, a joint venture that extended the efforts in co-founding a dedicated social housing company, Dostupný Domov (Affordable House), together with a public investment fund. This social enterprise scouts for residential buildings to buy and subsequently rent to people with financial difficulties, thus providing housing to a vulnerable demographic.
SLSP Social Finance has an older counterpart in Romania, BCR Social Finance, which is similarly a joined venture of Erste Social Finance and Banca Comercială Română engaged in providing microfinance especially to farmers in rural areas. More recently the company enlarged its scope providing finance to social organisations and for education.
Erste Social Finance also act as an intermediary in the distribution of Social Impact Bonds. These are typically launched by public authorities, in a bid to find solutions to social challenges. One such bond was pre-financed by ERSTE Foundation, and allocated for social innovation delivery to atempo. This non-profit organization retrains women who have lost their job or who are long-term unemployed to become care assistants for disabled people. It’s a win-win situation, providing employment opportunities while also fostering a more inclusive environment for the disabled community. Once the impact of this action has been evaluated, public authorities repay the initial investment by ERSTE Foundation.
Another innovative way in which Erste Social Finance helps scale social or green businesses and develops social real estate, is by providing quasi-equity. This funding is issued as subordinated debt but allows organizations to supplement their own funds (equity) with the provided loan capital. This enables them to access senior loans that would otherwise not be available, effectively functioning as a form of catalytic capital. So far, 7 clients were provided a quasi-equity loan, with plans to expand this offering in the future.
At the end of Peter Surek’s admirable exposition, it's fair to wonder how a bank that is only just beginning its impact journey can best tackle the challenges ahead. It is one of the first questions that came forward during the Q&A-round, and prompted some pieces of advice from Surek.
An initial focus is to move from grant based CSR support to repayable loans for impact organizations, he states. This will typically be more effective, teaching clients how to build a sustainable business model that knows how to account for debts on their balance sheet. It makes them more robust and lessens their dependencies on grants. He added that providing these loans can be a small part of the entire banks' portfolio at first, but that it can be instrumental in scaling those organisations and creating loyal clients for years to come. After all, one does not easily forget the bank that stood by them when times were hard.
This can be a part of the puzzle when convincing banks to get involved in the social economy, too, Surek elaborated. Bringing in additional guarantees from external funders, like the InvestEU Fund that backed Erste Group Social Banking in its efforts, helps alleviate fears and offers a psychological argument to invest. However, in reality, the risk of providing loans and equity to NGO's is already very low. Gradually, riskier investments like social businesses and micro-businesses can be incorporated in the strategy.
Helping banks and other capital providers understand the subsidy landscape in which many social enterprises operate, too, can be beneficial. As many subsidies pay a large part of the allotted sum near the end of a project, this can be a convincing argument to provide bridging loans, knowing that the likelihood of repayment is large.
The exchange left ample avenues to explore. Two more webinars will take place, in March and in April, to offer further examples of positive interplay between banks and other impact players.