What is a Social Impact Bond?

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Nick Moules
5th March 2013

At rebuildingsociety.com we believe strongly in the social benefits of peer-to-business lending as well as the returns offered to lenders, so an article that caught our eye in The Economist on 23 February was a story about private investors funding a scheme to help rough sleepers, with returns paid if targets are met.

In short, Social Impact Bonds (SIBs) pay investors returns as social objectives are achieved – so in the example given by the Economist, investors stand to gain a 6.5% return from the Greater London Authority if two charities that deal with homeless people perform well. Conversely, investors could lose everything if the organisation doing the work fails to meet targets.

Of course, privately funded initiatives are nothing new, but unlike others where long-term repayments are crippling public finances this scheme protects the taxpayer from paying out for sub-standard work.

Although this scheme will surely help solve the problems of homelessness and the associated costs of it in London, you might argue the returns don’t match the risk of losing everything. How would your average Joe know whether the targets are realistic? It’s also a lot of faith to place in an organisation dealing with a notoriously difficult issue.

With peer-to-business lending through rebuildingsociety.com, lenders can decide the level of risk they’re happy with in a business. Returns are paid back monthly, rather than at the end of the term and there’s the option to sell on loans in the secondary market so a five year loan doesn’t have to mean a five year commitment. Lenders can also buy Micro Loans when they’ve seen a business successfully make repayments.

We believe if businesses can be successful there will be more people in work and more money in circulation, which will find its way to charitable organisations through taxation and donations, to tackle social issues like homelessness. It’s just a different means to the same end.

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