According to the literature, the foundational principles of SBs entrench three dimensions (Becchetti et al., 2011; San José et al., 2011; Cornée and Szafarz, 2014). First, the “double bottom-line” approach combines social impact and business sustainability. It states that profit maximization is not an objective per se but just stands as a means for achieving economic sustainability while sticking to social goals. In this line of thought, profits should be fairly distributed among stakeholders through appropriate governance mechanisms. The second dimension relates to the nature of the financial operations SBs undertake; namely SBs focus on financing the real economy, as opposed to trading in speculative markets. More specifically, they support their communities through transparent, prudent, and simple intermediation principles. The third aspect concerns the social characteristics of financial products. This is the starting point of this paper.
Social banks (SBs) supply credit to social enterprises, which put the emphasis not only on financial returns, but also—and often as a priority—on social aims (Borzaga & Defourny, 2001; Defourny & Nyssens, 2008). The social orientation of both owners/investors and deposit holders plays a pivotal role. This paper theorizes that these two groups of motivated agents accept below-market remunerations of their capital as long as SBs invest in projects that correspond to their values. In other words, the business model of SBs is value-based intermediation, namely channeling the funders’ financial sacrifices to social enterprises by means of favorable credit conditions. We speculate that the DNA of social banking relies on the integrity of social values throughout the intermediation chain. Our theoretical model includes three theoretical predictions, which are testable with balance-sheet information only. Each prediction relates to a difference between a given group of SB stakeholders and its counterpart in conventional banks (CBs), where CBs are defined as banks that lend and borrow at the market rate. In short, we theorize that the possibility for accomplishing the social mission is made possible by the financial sacrifices of fund providers. We also contend that this business model is specific to SBs. Short of a social orientation, CBs are indeed unable to attract investors or depositors willing to consent financial sacrifices.
Next, we bring our model to the data. Our investigation relies on a European dataset consisting of around 5,400 European banks and covering the 1998-2013 period. Out of this large group of banks, we identify 29 SBs, and test our theoretical predictions with panel regressions. The empirical results suggest that SBs benefit from a lower cost of funding from both their owners/investors and their deposit holders, and charge below-market interest rates on their borrowers. The empirical tests not only confirm our theoretical developments; they also help to clarify the frequent confusion between SBs and stakeholder banks by underscoring the distinctive features, but also the similarities, of the two types of institutions.
In a holistic approach, this paper contributes to understanding the business model of socially-oriented financial intermediation. In light of the recurrent issues faced by the mainstream financial system, there is little doubt that much more can be learned from the (few) experiences of alternative paths, such as social banking. To remain in business, SBs need to be financially sustainable. While the market gap they fill is delivering credit to social enterprises which are typically not profitable enough (or too risky) for getting loans from conventional banks, their business model taking advantage of social motivation makes it possible to survive in a competitive credit market. This is a remarkable achievement, which brings additional proof that the fruitful development of social economic initiatives is possible without public subsidies in a market-oriented economy.
References
Becchetti, L., M. Garcia, and G. Trovato (2011), “Credit Rationing and Credit View: Empirical Evidence from Loan Data,” Journal of Money, Credit and Banking, 43: 1217-1245
Borzaga, C. and J. Defourny (Eds.) (2001), The Emergence of Social Enterprise, London - New York: Routledge.
Cornée S. and A. Szafarz (2014), “Vive la Différence: Social Banks and Reciprocity in the Credit Market,” Journal of Business Ethics 125: 361-380.
Defourny, J. and M. Nyssens (2008), “Social Enterprise in Europe: Recent Trends and Developments,” Social Enterprise Journal 4: 202-228.
San-Jose, L., J.L. Retolaza, and J. Gutierrez (2011), “Are Ethical Banks Different? A Comparative Analysis Using the Radical Affinity Index,” Journal of Business Ethics, 100: 151-173.
4. Financing issues for social enterprises, philanthropy and social finance
