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CSIopinion: Marco Morganti on Social Finance at a Social Bank

Marco Morganti is the CEO of Banca Prossima

Banca Prossima, a social bank created by the Intesa Sanpaolo group, aims to create social value. Article 4 of the Statute of Banca Prossima states: " Banca Prossima has as its goal the creation of social value (...) To this end, credit will support the best initiatives for non-profit services to individuals, the spread of culture and education, enjoyment and protection of the environment and art, access to credit and to work."

1. How do you define social value? How do you measure it against more traditional standards of value—financial value, for instance?

We do not define social value precisely; we think that we do not need a very specific definition today, because mostly we contribute to social value creation by supporting non-profit entities. They do most of our social value creation: our job is to maximize that support. 

On principle, we do not choose projects on the basis of their social value only; instead, we finance them whenever we think they are sustainable and satisfy a minimum social criterion. Most of the times, the existence of such a minimum can be ascertained easily, at a very basic level; say you meet a cooperative that assists old people with Alzheimer’s at their homes, and thereby relieves their families. That’s social value all right, without much further thinking, although determining “how much” social value is hard. Today, keeping it simple is enough for us: we can finance all sustainable projects and we do. We do recognize that in time we may have to choose and at that point we may need something more. We are working in that direction, but we keep our expectations moderate. We doubt, for instance, that it is possible to compare a health care initiative with a job-to-the-weak programme. If it were possible, it might be too arrogant for our taste.

As to social vs. financial value, we recognize that value comes in many shades. Social value is one of them. Environmental and social value are other obvious examples, but other types exist: e.g. faith organizations may be said to create religious value, often complementary to social value.  In our mind, economic value is mainly a part of social value; destroying money also destroys social value. It is true that sometimes economic and “purely social” value clash. In those cases, we won’t pursue economic value at the expense of society, and we’ll also refrain from producing social value by systematically burning money.

2. You have a social mission built into your governance. Can you tell us about what that actually means for you as a bank? Are you different to other banks with a social mission? If so, how?

As I say, we pursue our social mission indirectly, by maximizing our support to the third sector. Our specific contribution is grounded in whatever banking skills we have, and based on our capacity to innovate by finding new avenues of non-profit expansion.

Most other banks with a social mission support the projects they like, judging from their perspective of what social value is or should be. A variant of that is that some support the local economy. We do neither. Or rather, we do both but with no intention of stopping there. We claim no right to decide what is socially “very” valuable and what is not. If it is sustainable, we finance it. We think we understand most ideologies that lie behind social work, but in business we do not espouse a specific one. We like supporting the local economy, but we are a nationwide bank and we keep our geographical mix diversified.

3. The landscape for social innovation in Italy is significantly different to that in the UK, where the public sector generates, and makes use of, a significant percentage of social innovations. Can you tell us more about the tradition of social innovation and enterprise in Italy, and why you think there is a role for social banks?

Well, we could take a very-very-long-run approach to this issue and start talking about Le Misericordie, Tuscan faith-based institutions supporting the poor, dating from the Middle Ages; or mention that the almost-failed states of central and southern Italy in the 1800s survived socially thanks to Catholic charities, even in Rome where some 40% of the population in the early years of that century were beggars. We could actually go back to early Christianity. We could celebrate workers’ mutuals and the Socialist movements of the late 19th and early 20th century, and even a liberal-minded cooperative movement in the same period. But you had most of this, mutatis mutandis, in the UK as well. Perhaps you also had a more efficient State, which did not have to fight two fringes, one Socialist, one Catholic, pursuing separateness from the State and/or full subsidiarity.

Whatever the historical roots, the fact is that today Italy has a large “productive” third sector, which grew astonishingly in the 1990s and 2000s partly as a result of massive outsourcing of production by the public sector. That contrasts with a relatively weak “redistributing” third sector, whose largest representatives (banking foundations) were effectively created by law in the 1980s, by splitting savings banks into a joint-stock bank and a foundation. So, as you see, the public sector plays an important role in Italy too, both in setting the stage and in providing money or demanding services directly. It is true that we have a tradition of non-profit activity flourishing autonomously in the civil society, which becomes very important today as public resources shrink.

There are two ways in which a bank may help. The first is by playing the financial institution “organic” to the movement (at least one bank per movement, as there are several). This is what the Catholic co-op banks did in the late 19th century and early 20th. It is legitimate, but it is not our way. The second is to specialise in financing nonprofits. This may relieve credit constraints they face; this was probably a problem a while ago, and some remnants may still be there. Certainly nonprofits feel the same pinch as SMEs in today’s credit crunch. But I believe that this is a side story. The main problem is that non-profits are not well understood by the traditional banking sector; rating tools, for instance, mechanically transpose for-profit logic and therefore forget about such things as fundraising ability, networking ability, capacity to win public and private contracts, ability to attract volunteer labour, etc. We strive to improve on that, and on the many other ways that nonprofits can be serviced better by a bank – that is our main role. More abundant credit then comes as a by-product.

4. Each year, you pay at least half of your profits into a fund for the development of social enterprise. How does this fund support social enterprise, and what do you hope to accomplish by nurturing this kind of business?

Paying at least half of our economic profits into the fund is our way to be, well, low-profit (in Italy, non-profits are legally bound never to pay out anything at all). The fund is a reserve, part of shareholders’ funds.  Therefore it absorbs first losses on credit. As the fund is not repayable to shareholders, it is money that effectively is bound to be used in supporting the third sector. We “assign” to the fund loans to marginal borrowers, that would otherwise get no loans or higher rates. So the fund ends up financing smaller projects, with a high weight in the South and in sectors which have less ability to finance themselves, such as associations.

The general goal is naturally to create social value. To do so in accordance with our statutes, we draw a line between paying out money and setting up guarantees for credit. We don’t do the former, as we are not a foundation, but we do the latter; the fund is an aspect of this.

5. The European Commission places a lot of faith in Small and Medium Enterprises as a strong force for change. What needs to occur, at an international level to support SMEs to effect positive change?

That is difficult territory for us as a national bank. Let me say generally that small can be beautiful (innovative, efficient, flexible) and it can also be bad (lacking scale, exploitative, undiversified). We see all this in non-profit as well as in for-profit. Now, with no pretence of great wisdom, all that takes out the bad is desirable. For instance everything that helps in reaching economies of scale – legally well-defined networks, group buying, facilities to exchange information, etc. – is clearly good. All this is a matter for national legislation and policy, but it has a transnational side because the EU can push (and finance) projects that spur single states to take initiatives. Possibly the most useful thing the EU can do is to clarify the relationship between this activity and competition policy. An obsession with competition – such as we find in some European public figures – may stand in the way of schemes to help SMEs (for- or non-profit) to find levels of aggregation at which they are economically efficient. This should be pursued squarely by Italy, as home to one of the largest SME sectors in Europe.
Specifically for nonprofits, I tend to think that small is often necessary to keep an effective root in the local territory, but it is also compulsory to ask “how small”. The Italian non-profit sector seems to me too granular for full effectiveness and I am sceptical that many existing non-profit “networks” and “forums” are efficient coordination devices. So I expect a phase of outright consolidation. Actually, some of that is even happening in religious orders, which have a totally different issue of demography. This shows that identity issues can be overcome when the situation calls for it. Help may come by private parties, like us, but there may be an issue of public schemes on which we’re frankly trying to build a picture.

6. Have you found that different kinds of funding are appropriate for social enterprises at different stages of their development, and if so, how does the growth of a social enterprise affect its financial need?

I think that there is little difference between the financial needs of for- vs. non-profits, given their development stages.
We believe that non-profit start-ups in Italy need to receive  more qualified support for example to draw up a viable business plan. Therefore we support our clients also in this area.
Non-profits’ projects should also focus on stabilizing their revenues, a great part of them coming from fundraising.  We launched an innovative web site, called Terzo valore (Third Value), that allows non-profit organizations to raise donation or loans directly from citizens. People are reassured because our bank analyses the project, adds it on the web site and partially finances it. We also started an advisory service in partnership with an Italian University to advise non-profits about their fund raising strategies. 
We also experienced that NPO, especially during their “early stage”, often are not familiar with the different financial needs in the short and in the medium/long terms. We consider the strategic management of NPO financial needs another important consultancy area.   

This interview was kindly arranged by Intesa SanPaolo