Scotland pioneered savings banks and pensions; now, it’s time for social enterprises to lead the way in engaging local individuals as micro-investors, says Pauline Hinchion. That could be a game-changer for organisations – providing them with flexible, patient capital – while benefiting investors’ own communities.
Sometimes going forward is about looking back and learning – remembering the legacy from our past. When it comes to the history of using money for public good, Scotland has often been at the forefront of innovations established for the benefit of ordinary people.
Savings banks began in Scotland, with the world’s first set up in 1810 by the Reverend Henry Duncan; the pension industry started from the concern of two Scottish church ministers at the poverty affecting the wives and children of deceased clergymen; and the Fenwick Weavers Society, formed for the benefit of its members, is recognised as the world’s first consumer cooperative. So, ordinary people coming together to meet their own social and financial needs is not new.
Ordinary people coming together to meet their own social and financial needs is not new… Citizen investment is based on the same principles
‘Citizen investment’ is based on the same principles – ordinary people investing in their local economies and facilities with the expectation of receiving a financial return, in addition to a social return to their neighbourhoods. It is a socially productive form of investing, that is rooted in a ‘community of shared interest’ which in many instances is very local in nature.
Ultimately, the concept is about making sure that our money brings the maximum mutual benefit to our communities and towns by bolstering the real economy where most of us live and work.
What this means in practice is amassing the micro investments of lots of people, most of whom do not appreciate their role as investors or realise that they can be investors, to create a fund that is valuable and meaningful. This fund is then used to ensure that local, community and social enterprises can access the essential finances they need to grow and develop.
That finance can be a game-changer: since 2008, access to affordable business finance has been a key blockage point for such organisations. According to a 2018 House of Commons Treasury Committee report, bank lending to SMEs has still not reached its pre-2008 level, stifling the finance needs of local and social independent shops and services.
Flexible, patient and good for the community
Citizen investing is not an abstract idea but an emerging reality. In a world defined by Covid, organisations such as my own, Scottish Communities Finance, are tapping into an appetite for positive community and social engagement by issuing ‘community bonds’ to raise capital for social and community enterprises. These bonds are both conventional and alternative: conventional in that they offer interest on the investment, but alternative in that they turn the usual risk-return calculus on its head. They are non-tradable and unsecured, and not protected by the financial guarantee scheme. Although they do pay a return, given that they can be intrinsically high risk, this can perhaps be less than expected. However, in today’s low interest environment the returns can be on a par with ISAs or other savings. In addition, the citizen investor gets a ‘top-up’ from the social and environmental benefit that arises from the economic actions of those businesses that secure the finance raised.
As a more democratic and less intermediated form of investment than loans, citizen investment offers organisations the ability to raise capital at a much more affordable rate. It provides much more flexibility – community bonds will be and have been used to capitalise bespoke business loan funds, for community renewable energy schemes, and to purchase buildings and renovate theatres – and is often more patient investment with current maturity periods of 3-15 years.
Citizen investment does more than provide capital: it can stabilise and cement local economies
However, citizen investment does more than provide capital. It can stabilise and cement local economies by giving people monetary reasons to engage more fully as customers and clients with the business activities that benefit from their investment.
There are a variety of ways in which organisations can make citizen investment a reality for their communities. They can either partner with an existing issuer of community bonds (a service my own organisation provides in Scotland) or they can register with the Financial Conduct Authority to become a community benefit society and issue community bonds themselves. The FCA has rules and regulations that govern the raising of investment from people, particularly people with little understanding or history of investing (which applies to most citizen investors). However, there is a growing body of knowledge and expertise in this arena that organisations can tap into.
The power of personal savings
When we think about how we might ‘build back better’ as Covid-19 recedes – or as we develop ways of living with it – it is obvious that capital will be required to underpin the various transitions and adaptations needed in the short to medium term. Against a difficult economic outlook for the next few years, and the effect that will have on the availability of grants and donations, where will this crucial ‘transition finance’ come from?
There is no reason why all third sector staff and volunteers should not be leading the way by becoming citizen investors
One suggestion – and it is only likely to be a piece of the answer – is from repurposing and redirecting a percentage of existing personal savings. Repurposing them from a passive state, where they sit accumulating little or no value in an individual’s current or deposit account, to more active deployment in specific ventures of clear economic and social benefit. Redirecting them into supporting local economies with their associated employment, retention and circulation of money within communities, local service provision and social capital benefits. There is no reason why all third sector personnel (staff and volunteers) should not be leading the way by becoming citizen investors in their own communities.