Banking on the community

The way banks behave is under scrutiny. After bailouts of monumental proportions public perception of these institutions is predictably negative. But not all banks deserve to be tarred with the same brush. One example of this is Charity Bank.
Established in 2002, Charity Bank’s focus is on the third sector, providing the investment for community and voluntary groups in the form of low-interest loans. As with any other bank, it relies on investors, but these investors are keen to help communities while preserving their capital and even earning interest.
“We are a community development organisation that uses finance as our tool rather than just being a bank,” explains Malcolm Hayday, the bank’s Chief Executive. “Because we are not shareholder driven, or short-term profit driven, we can look at the much longer-term needs that the [third] sector has and so build bespoke responses.” These responses have, since its launch, added up to £85,893,000.
For the community waste sector, the bank and its ethos come at a crucial time, when the availability of grants and other forms of funding are increasingly scarce. Indeed, with multimillion-pound funds, such as the Community Recycling and Economic Development (CRED) Programme, coming and going (and making little impact), the bank is determined to help third-sector organisations to help themselves. This can only work if the organisations have plans for long-term financial sustainability. A key aspect of this, Hayday is eager to note, is that these organisations should be entitled to make a profit from their activities and their customers; local authorities and the like need to recognise this.
It all reflects the radical shift that has been going on in the third sector over the past decade. However, Hayday believes that some community-based enterprises are going to continue to need some form of grant money, “equivalent to the equity that goes into private-sector organisations”.
In 2009, the bank’s loans ranged from a few thousand pounds to over a million (Harefield Parochial Charities were lent £1.1 million), with the average loan coming in at £159,000. Hayday observes that although the third sector as a whole has not had environmental impact high on its to-do list, the bank is now seeing some positive signs that this is more of a priority. The bank is now exploring the idea of discounting loans for organisations that comply with certain environmental measures – perhaps even a precursor for other banks as reducing carbon emissions becomes a widespread corporate goal.
Of course, a major hurdle for third-sector organisations is demonstrating that they can scale up to deliver, thereby winning the contracts in the first place and showing that community finance initiatives can work and come in at less than private finance initiatives in the long term. Hayday believes it is essential that the risks and benefits of forming an alliance with a third-sector organisation are understood by both sides. “I think, in fairness to local authorities, they can argue that if their job is at risk because of non performance, and shall we say SERCO doesn’t deliver, they can sue SERCO and know that the local authority is protected. They can’t sue a much more fragile social enterprise organisation.”
With this in mind, one of the things that the bank has been talking to government about is the possibility of providing a performance bond, thereby guaranteeing satisfactory completion of a project by the social enterprise the bank is backing, so the purchaser knows that whatever happens their risk is removed.
With a bond some way off yet, Charity Bank, nevertheless, undertakes a thorough evaluation of the strengths and weaknesses of an organisation before an offer of a loan is made. Of particular focus is longevity, especially when tight margins mean there’s not the opportunity to keep reinvesting and renewing every few years. Indeed, in Hayday’s opinion, any organisation coming to the bank for a loan needs to first ask itself some difficult questions: “Is there actually a market for what you want to do? If there is, have you got the right marketing skills and selling skills – a range of skills that are not necessarily prevalent in a grant-based organisation? How big is your marketplace – is it really worth scaling up to meet the needs of that market? Should you be looking at a bigger market than you’re currently looking at? Have you got the support of the directors as well as simply of the officers so that if something goes wrong there is corporate ownership, not just the ownership of one individual, which for many social enterprises is a major issue?”
In fact, sometimes the bank will only advance money if an organisation increases the number of people on board. “There are occasions when people kick against that and say ‘No, we’re not prepared to do that,’ in which case we say ‘Okay, we’re not prepared to lend you the money.’ But a lot of them, I think, do recognise and were planning to do that anyway. So in many ways, we’re the catalyst that makes them get on with it.”
Hayday believes it’s all about having the courage of your convictions. “It’s knowing what to postpone or jettison while you get on with something that actually makes you money.
“The other thing that I think we have to be very honest about is that business and – at its extreme – charity don’t necessarily sit well together. We’ve seen in some organisations a point where the business can become quite successful and as a result the people in the charity start to say ‘Is this what we wanted to do?’”
He adds: “At the end of the day, although this is probably hypocritical coming from a banker, don’t be frightened of failing. I think it’s about working out where the future for the private sector in this industry is and then where the community sector sits alongside that. And it shouldn’t be about mimicking what the private sector does – it should be about understanding each other’s boundaries.“
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