I recently attended the Tenth Anniversary Conference of the Social Finance Foundation – a wonderful organisation I’d never heard of. Social Finance Foundation is the bank for social and community bodies that find it hard to get funding from normal banks. Working through four agencies they provides loans to businesses, social enterprises, community organisations and individuals. They had great stories to tell on the day and Third Space is a part of that story.

Here’s my big learning from the conference. SFF have lent over €70 million in the ten years. The default amount on those loans is about €300,000. Now I’m not great at maths but that looks like less than half of 1% to me. And here’s the funny thing – SFF are taking on what the banking industry sees as “high risk loans.” In other words they’re lending to people that the bank wouldn’t lend to because they believe there’s a high chance they won’t get their money back. But the repayment rate is 99.5%.

I came away pondering why this would be. And here’s what I’ve come up with – feel free to shoot me down. The reason the repayment rate is so high is that these loans are all about relationship. The organisation making the loan, in our case Community Finance Ireland gets to know the body that’s seeking the loan. They call in regularly, building relationship and getting to know what’s going on. They look at the figures and the spreadsheets in the light of what they’ve seen and the relationship they’ve made.

In our business we also deal with the banks. And our local banking staff are friendly and helpful. But here’s the difference. When dealing with the banks you never get to form a relationship with the decision makers – you never meet them, they never meet you. The person that you have met with, usually the manager, is not even in the room when the decision on your application is being made.

I wonder if the banks might have something to learn from Social Foundation Ireland. There is a lot of talk about the banks being risk averse but maybe what they really are is relationship averse. And maybe in becoming more relationship averse they have actually increased, not decreased the risk of default.

On the same day as the conference the press carried a piece on AIB’s bad loan problem of €8.6 billion. Part of the solution is to sell some bad mortgages to Goldman Sachs at 50% of their value. So the people with those mortgages will now receive a letter from a body they have never dealt with telling them they now owe them €X. Relational it is not. And of course other banks are dealing with these kinds of issues in similar ways.

To their credit some of the major banks are very involved in Social Finance Foundation. But perhaps as well as funding them they might also learn from them. Financial arrangements that are strong on long-term relationships are much more likely to succeed. And when they do both lender and borrower are winners.

Seán Mullan

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