Like other social enterprises seeking to solve social and environmental challenges alongside generating financial returns, microfinance firms face headwinds to becoming financially sustainable and independent from donors. Banco Compartamos proved it was possible.
The company has gone through the full social enterprise lifecycle: from experimental non-profit to publicly listed company, and it used subsidies from donors to do it. These financial instruments helped the company attract private capital, and shift from an early emphasis on grants to debt and equity later on, and eventually an initial public offering.
The case illustrates how subsidies, which are ubiquitous in developed economies but are often seen negatively as market distorting devices, can scale the impact of social enterprises. Indeed, the type of microfinance provided by Banco Compartamos has emerged as a key tool in the fight against global poverty in recent decades. The company helps to alleviate household financial constraints and provides the capital for borrowers to generate income.
There remains a historical and implicit bias that social enterprise is more of a charitable cause than a business activity — one major barrier is overcoming these misguided stereotypes. And although there has been an explosion of interest in environmental, social and governance (ESG) investing, large institutional investors such as pension funds typically eschew allocations to funds that invest in social enterprises until they reach a sufficient scale to justify the high transaction costs from due diligence that ultimately eat into investor returns.
Social enterprises often struggle to reach sufficient scale to cover their fixed costs in part because they lack experience and proven competencies just like all startups, while the ‘triple bottom line’ of people, planet and profit makes them appear more opaque and risky to investors. The measurement of non-financial impact is, indeed, notoriously challenging.
Philanthropists searching for social value creation alongside financial returns have stepped in to fill this gap in funding between the seed and growth stage of social entrepreneurship, through a range of subsidies such as grants, debt and equity instruments.
These wealthy individuals have shown an increased willingness to write large cheques in the hope of contributing to society, with the most famous examples being Microsoft founder Bill Gates, investment legend Warren Buffet, and media mogul Michael Bloomberg.