Background image of ATM sign with Salmon Nation logo in upper right corner


Mobilizing capital to drive social change

Regionally focused financial institutions can plug many of the gaping holes in the current financial system.

The total value of the world’s financial capital, including equities, deposits, private and government debt, topped $196 trillion in 2007, on the eve of the financial market meltdown that dragged economies worldwide into recession. At that point, growth in financial markets had continuously outpaced the growth in real economic activity; the value of financial assets exceeded global GDP by 359% in 2007. A serious bubble.

Yet around the world, in developed and developing economies alike, there was (and still is) mounting evidence of unmet capital needs: the failure to provide more than 1 billion people access to food, safe drinking water, sanitation, and shelter; crumbling and absent infrastructure; under-funded social programs and schools; the degradation of natural capital; and the slow pace of clean energy innovation.

Money flows to those who promise the biggest return on investment. In financial markets, the larger the transaction, the richer the market, and the more assets in collateral brought to the table, the more likely a project is to receive funding. This narrow criteria — this bottom line — excludes the capital needs of the global majority and much needed social and environmental innovation, while privileging activities that impose costs on society at large.

The role of the financial system in any economy is to help direct resources from savings to investment activity. At present, many social enterprises and innovations lack access to capital. The financial system effectively discriminates against certain types of borrowers and activities. Women, the indigenous, low-income families, and racial and ethnic minorities have been disproportionately denied access to affordable credit, or preyed upon by unscrupulous lending practices.

Unmet capital needs have stifled innovation in the face of unprecedented social and ecological challenges. This is perhaps the greatest indication that the system is failing. But the system also fails from the perspective of savers. Savers who want money invested in socially beneficial activities that enrich their communities find few options in today’s financial system.

In every region, we need new institutions capable of meeting broader capital needs. We need institutions that invest simultaneously for economic, social, and environmental returns — a triple bottom line that can align the interests of finance capital and the social economy. We need institutions that are locally rooted and specialized in delivering resources to the low end and the new end of social and environmental change. Finally, we need more institutions like One Pacific Coast Bank, the Center for Community Self-Help, and the Four Bands Community Fund  that are innovative in the design of programs, tools, and initiatives that can empower individuals at the grass roots level through savings, asset building, entrepreneurship, and more.

Compared to commercial banks, regional financial institutions are more likely to benefit people and place. Access to local, place-based knowledge can ensure more efficient and sound lending practices. Knowing which grower to lend to and what crops can be grown locally, for example, can translate into lower collateral requirements and higher repayment rates. Depositors who reside in a region are more likely to demand that their deposits yield high returns for their communities. And unlike commercial banks, regional institutions are less likely to siphon local capital off to other regions.

Regionally focused financial institutions can plug many of the gaping holes in the current financial system, and get credit in the hands of many who could not otherwise afford it. But not all financial activity should be regional in scale; the capital needs of many regions will exceed the capital that is available locally. Examples of financial innovation at multiple scales can now be found across the world. I’ll highlight some of these innovations in my next post.