Is financial innovation a natural progression of social innovation? As we work to build social enterprises in the Arab countries, scores of organizations are branching away from traditional social sector practices by pioneering more creative, effective, and scalable social products and services. This is evident in the portfolios of organizations working to foster social entrepreneurship in the region, such as Alfanar, Synergos, and Ashoka Arab World. However, even the most innovative social entrepreneurs in the region have not yet been able to cut the cord from traditional financing mechanisms such as donations and grants. The heavy reliance on fundraising, charity, grants, and international aid agencies has bred a donor-dependent mentality in the social sector. Risks of this mentality include the tailoring of products and services to the ever-changing agendas of donors; restrictions imposed by grant agreements, logframes, and budget lines; and constant competition between social entrepreneurs for funds instead of impact.
To make the leap from traditional charity to more disruptive social change, we challenge social entrepreneurs to put more “skin in the game”—to wean themselves off donor funds and international aid agencies, and take a stake by backing their own social ventures.
The finance world has used this line of thinking for over a century to refer to the management of corporations by individuals who are willing to invest in their own institutions, and thus demonstrate a vote of confidence to stakeholders. Numerous nonprofit organizations in the United States (such as the Nonprofit Finance Fund, Acumen Fund, and RSF Social Finance) and in the United Kingdom (including Big Issue Invest, Charities Aid Foundation, and Shared Impact) have clearly demonstrated that diversifying financial tools for social ventures can go a long way in scaling and sustaining impact. But less-developed social enterprise markets like those in Arab countries have yet to foray into these innovative financing mechanisms and tools. Why have social entrepreneurs in this region yet to take this leap?
In some countries, cumbersome government policies regulating social impact organizations (such as those imposed by the Ministry of Social Solidarity in Egypt) can present barriers. In others, the civic sector is still nascent—in Libya, for example, the first non-governmental organization (NGO) was not registered until 2011. The dearth of impact investors could be another factor. Impact investing organizations have begun to emerge in Dubai and other Gulf cities, but their portfolios consist largely of investments in other regions, such as Africa, rather than the Arab countries. In Jordan, we see pioneering private-public partnerships, such as those catalyzed by the entrepreneurial corporation Aramex, but there is still a noticeable divide even in these initiatives, between the traditional donor model and commercial enterprise model.
In our recent article “Financing Social Entrepreneurship in the Arab World: The Case of Lebanon,” we interviewed nonprofit, for-profit, and hybrid social enterprises in Lebanon to understand their concerns and priorities regarding the use of diverse financing tools. As expected, the majority expressed a preference for grants and donations; however, there was also an interest in equity investment and low-interest loans, which increased when offered in conjunction with grants. Social entrepreneurs expressed an interest in receiving more information on these different financing options. Nuances we observed were that certain sectors, such as the environmental sector, and larger-scale social enterprises seemed more open to loans as an option for financing. Most importantly, we noticed an increase in interest when we explained loans or reworded them in a way that broke through cultural stereotypes. When we replaced the words “low interest loan” with the words “patient capital,” for example, participants expressed a higher degree of interest.
All of this suggests that there could be a market for these financial tools with a focus on education, formulation, and sensitization. We propose that offering non-financial support (business planning, marketing, and other technical support) in conjunction with financing could boost the confidence and capacity of social entrepreneurs to take bigger risks. Fear of failure and lack of support are leading obstacles faced by social entrepreneurs in the region. By mobilizing the business sector, government sector, investors, and philanthropists, together we can create that support system to help social entrepreneurs take the leap.