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Why We Believe in Lending Below Risk-free Rates to Social Enterprises

We lend at interest rates between 0-4%. In many of the countries in South Asia, these rates are so low that social enterprises could borrow from us, put the money in the bank, and earn money (obviously we don’t allow them to do so). However, we believe that this form of capital is crucial in enabling social enterprises.

While donations have always been associated as the funding mechanism for NGOs and debt/equity investments for normal businesses, there has been little innovation on funding mechanisms for social enterprises operating on the ground in Asia – especially for the smaller social enterprises. Instead, much of the funding for social enterprises today are carried on from either the business or NGO world. Concepts such as market-beating impact investments (little different from a normal venture investment), debt from microfinance or banks, and donations/grants are often what is seen today.

The unfortunate fact is that most social enterprises are unable to compete in profitability with their more traditional business counterparts due to their social mandate (they have been amazing exceptions to this, but it’s largely the case for most small social enterprises). With social enterprises being somewhere in between NGOs and normal businesses, we believe there needs to be a funding mechanism which is similarly in between equity/debt and donations.

Our loans at Givfunds was largely inspired by the social business investments present in Bangladesh. An idea started by the Nobel Peace Laureate Professor Yunus, these are interest-free loans given to social businesses that contains a processing fee, resulting in an effect per annum rate of about 6%. These loans have been around for more than a decade in Bangladesh and loaned through various organisations affiliated with Professor Yunus to hundreds of social enterprises. They have worked incredible well in helping social enterprises to scale, all while maintaining a high repayment rate!

Having travelled to and visited over a hundred social enterprises and meeting hundreds more, I saw similar social enterprises to those in Bangladesh. They are financially sustainable (though not insanely profitable) and were changing lives but were not able to gain access to capital. Social Business Investments’ success in Bangladesh convinced us that a similar solution could be implemented in the rest of South Asia.

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