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Financing Social Innovation in Hungary

Cultivating the market

We must take a serious look at a range of civil society organizations (CSOs) and ask ourselves: what is their capacity to engage in social innovation? The article will forego an exploration of the tendency for “project society” initiatives with EU- or state-funding to be donor-driven. Equally, this piece will not explore “alternative (non-grant) financing forms” for social innovations which are currently seeing rapid development. Instead it will focus on the current funding environment in which CSOs in Hungary must work.

The social finance market in Hungary is very small and impact investors can literally be counted on a few fingers. The wider context of civil sector development across Europe allows us to conclude that the financing models at work in Hungary strongly support profoundly risk-averse behavior among CSOs. For example, several of the grant lines emerging from the Structural Funds are arranged so that when CSOs attain both social and financial success/sustainability, they are obligated to repay their grant, in part or in full. This grant structuring effectively deters CSOs from social business thinking. Grant dependency of the majority of CSOs does not allow for developing social business capacities which would support strategic innovation as well as risk-management. This environment results in a significant lack of financial expertise in the sector.

Based on the experience of DemNet Foundation in the development of the non-profit CSO sector since 1996, the impression is that revenue sources of civic organizations are scarce and funding sources are not diversified enough—project-based grant financing dominates. Most CSOs take short-term, bridge loans to secure cash-flow in between grant installments and the market for smaller scale capital investments is literally absent.

Aside from the three key-players in social investment—NESsTMagNet Bank Ltd., Microcredit Ltd.—investors in Hungary have not considered impact investment at all. At present, the most suitable financial partners of all for civic organizations in Hungary are savings cooperatives with extensive branch networks in the countryside. However, the services they provide to CSOs do not extend beyond short-term bridge loans or account credits. Several foreign investment groups, however, are becoming interested in the market of social cooperatives and social enterprises in Hungary.

Many financial service providers have not heard of impact investment and, if asked about social investments, will immediately evoke corporate social responsibility (CSR). CSR, however, has been an ineffective form of investment. CSR is organized centrally and is consequently concentrated in Budapest. Bank branches in the countryside are reluctant to adapt CSR to their local context, have no information or guidance from their headquarters, and are difficult to approach. Most financial service providers “outsource” corporate social responsibility to a grant-making activity (often to a corporate foundation), which does not, in fact, support the sustainability of CSOs. Instead, it merely complements the grant-based funding system.

A non-exhaustive list of conditions for market-development:

  • Serious investment must be made in building financial expertise in the civil sector, with special regard to risk-management and adequate long-term financial planning, to enhance investment-readiness.
  • Accessible (and affordable) business-support for small scale social initiatives must be developed as part of a wider fundraising-strategy focusing on diversification of resources in the civil sector, to ensure access to capital.
  • Close, mentoring partnerships must be created in order to foster sustainability; intermediary organizations, with their knowledge of a sector and its contexts, may be necessary to develop these relationships.
  • Promotion of tools for impact assessment, as well as more developed methodologies for impact analyses among CSOs will be necessary to enhance impact investments and thus capitalization of the sector, as well to increase refinance rates.
  • Specialized product-development is important to meet the real demand for capital, as well as know-how.
  • More capital providers are needed.

In sum, more “mentoring support” for early business development, as well as market development for social investments, is necessary to foster a culture of experimentation and risk-taking, and to match supply and demand for patient capital.

This summary article is based on the preparatory research for, as well as the discussions and outcomes of the workshop, “Emerging Actors on the Financial Market,”[i]organized by DemNet Foundation in partnership with Euclid Network, on January 13-14, 2011.

More early stage support is urgently needed:

http://www.triplepundit.com/2011/06/social-entrepreneurs-lag-behind-impact-investors/

http://www.alliancemagazine.org/en/content/nesst-doing-great-job-social-enterprise-needs-more-actors


[i] http://demnet.hu/index.php?option=com_content&view=article&id=197%3Aa-mhelymunka-kapcsolodo-anyagai&catid=36&Itemid=72&lang=en , accessed on 30 July, 2011.