Pioneers Post

Big four ‘realistic’ about Big Society Bank returns says O’Donohoe

5 April 2011
Big Society Bank advisor Nick O’Donohoe

'Profit maximisation commercial is not the way they’re thinking about it and not the way we’re thinking about it'


Big Society Bank advisor Nick O’Donohoe

The UK's big four banks will sacrifice profit maximisation to invest in the Big Society Bank, claims government advisor on the bank Nick O’Donohoe.

O’Donohoe, who is one of only two advisors driving the creation of the bank, told the Voice11 conference last week that social enterprises should not be put off by the fact that the banks will be providing £200m to the bank on ‘commercial terms’.

‘I think the sector has been a bit put off by the term “commercial”,’ said O’Donohoe.

‘However, profit maximisation commercial is not the way they’re thinking about it and not the way we’re thinking about it. I think there is a high level of realism about the likely returns. I think discussions of ours have been very constructive.’

O’Donohoe added that the banks had a ‘much greater awareness’ about social investment and were seeing ‘a real demand from investor clients’.

‘There’s a big role the banks have to play in developing and distributing their [social investment] products and the Big Society Bank will help them,’ said O’Donohoe.

The Big Society Bank, which is government supported but which will be an independent institution, is due to become operational this summer and will be the first wholesale bank in the world to focus on social investment.

Its role will be to invest in social financiers, which will then on-lend to social ventures. It will be capitalised mostly through money in dormant bank accounts – accounts untouched for 15 years or more – which all UK banks are being asked to hand over to the government.

However, as a result of government talks with the banks – dubbed Project Merlin – Barclays, Lloyds TSB, HSBC and RBS/Natwest agreed to provide an extra £200m on commercial terms, bringing the total initial capital available to the bank up to around £300m.

Social Enterprise contacted Barclays, Lloyds TSB, HSBC and RBS/Natwest. However, none of the banks would comment on whether they would be willing to accept lower financial returns as a trade off for social returns.

The former Labour government had hoped to launch the Big Society Bank, then called the Social Investment Wholesaler, with £200m from the dormant bank accounts alone. The amount of money estimated to be available from dormant bank accounts was revised down to around £100m after banks started to hoard cash as a result of the financial crisis. Eventually it is estimated this amount will grow to £400m.

The UK is the only government in the world that has taken a voluntary approach to the handing over of dormant bank accounts rather than adopting forced regulation.


CDFIs would serve better

The approach we've been advocating since 2004 is one of continuous community re-investment by means of a profit-for-purpose business which operates as a local franchise to invest at least 50% of profit in CDFIs. This would place funds where needed within the direct reach of community organisations. The investing entity would also benefit from tax relief which offers the incentive to accept a lower return on financial investment for an outcome measurable in human terms.

This was our bottom up empowerment approach which sourced a community bank in Russia after the Harvard trickle down approach which empowered financiers rather than people, led to an economic collapse.

It would seem that we're planning to repeat history without learning any lesson.

Jeff Mowatt
People-Centered Economic Development