Social Rating Agency - Social Secondary Credit Market

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Social Rating Agency - Social Secondary Credit Market

Greece
Project Summary
Elevator Pitch

Concise Summary: Help us pitch this solution! Provide an explanation within 3-4 short sentences.

A Social Rating Agency (SRA) committed to provide the world's credit markets with reliable, timely and prospective opinions regarding the Social Responsibility of financial institutions. The services of SRA will give market participants greater insight into the social impact of the practices that financial institutions use, in order to enable them to make informed and responsible business decision

About Project

Solution: What is the proposed solution? Please be specific!

The recent economics crisis has revealed a major injustice regarding the way markets reacted to certain financial institutions. We have witnessed in many cases banks that although they might have misjudged certain risks, they served many SME’s with their funding and created many jobs, to become victims from the practices of other financial institutions that employed speculative practices and have contributed to a much less extent to the general social good. The results of this phenomenon have lead many banks to either seize operations, being sold or merged with other “better capitalized” institutions or at least after the recent Stress tests, end up in desperate need of capital increase. On the other hand governments are making efforts to revive the lending to SME’s by providing liquidity to financial institutions but it is just serving the purpose of strengthening the balance sheets and is not being supplied to real economy. But why should markets evaluate financial institutions only on the basis of their future earnings, credit quality etc and not take under consideration and their social contribution. Why should all financial institutions have the same privileges regarding the government liquidity operations and other government incentives? Shouldn’t all market participants be informed which bank contributed more to the society? The Social Rating Methodology is unique since all rating agencies until now are focused only on the analysis of the Credit quality of the financial institutions. This Methodology will take under consideration criteria that prove significant involvement and impact to the society such as financing SME's, sustainable investments, jobs creation and many others using quantitative and qualitative methods and comparing the numbers relatively to the size of the institutions. Although there are efforts in company evaluation with social criteria the methodology used in most cases is only epidermic.
Impact: How does it Work

Example: Walk us through a specific example(s) of how this solution makes a difference; include its primary activities.

If the Social Rating Agency succeeds, it will create the need to the financial institutions to include in their business model a social responsible portfolio of investments with projects similar to the following examples taken from other social banks. Mibanco As well as delivering microfinance to thousands of entrepreneurs across Peru, Mibanco, offers extensive training internally and externally. One important element of this work is training for women. Mibanco is carrying out a project called “Strengthening Peruvian Entrepreneurs’ Abilities through Training, Access to Capital and Access to Networks,” in collaboration with Goldman Sachs, the Australian Agency for International Development (AUSAID), Thunderbird, and the Inter-American Development Bank (IDB). The primary objective is to train 100,000 women in 4 years, forming networks between the participants as a support component. Mibanco also carries out a training program called “DIME”, which trains micro-enterprise owners in a variety of subjects that help them better run their businesses; to date it has trained 100,000 micro business owner clients. XacBank / Mongolia The mission of XacBank is to contribute to sustainable development of Mongolia that can come only from educated and skilled people and competitive and dynamic businesses concerned equally about Planet, People, and Profit. The Bank will provide equitable access to transparent, reliable and responsive banking products and services to the Bank’s clients, including its traditional Micro-entrepreneurs as well as Small and Medium businesses. Brac Bank BRAC works with people whose lives are dominated by extreme poverty, illiteracy, disease and other disadvantages. With a holistic approach, BRAC strives to bring about positive changes in the quality of life of the poor. BRAC’s Microfinance Programme works to ensure the economic sustainability of the poor by making available credit which they can invest in productive activity and also encouraging them to save.
About You
About You
First Name

Emmanouil

Last Name

Manousakis

Website
Your Organization

Groopio

Country

, EM

About Your Organization
Organization Name
Organization Phone
Organization Address
Organization Country
Organization Type

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Your solution
Country your work focuses on
If multiple countries, please list them here. If your solution targets an entire region, please select it below

Global

Region(s) your solution focuses on:

Europe and Central Asia.

Range of turnover in your target firms, in USD

Less than $1 Million.

Average turnover in USD of your target firm

50,000

Number of employees in your target firms

5-24.

Average number of employees of your target firm

101

Specify the size, average and range of expected loans or investments in each target firm

In the Social Secondary Credit Market all Social Rated Companies and financial institutions can list their Debt Instruments for trading. Including Bank Loans aimed at SME's of Developing countries, Senior Debt and Subordinated debt, commercial paper and other. Therefore the size of the loans depend on the success of the market.

What stage is your solution in?

Idea phase

Innovation
How does your proposed innovation leverage public intervention in catalyzing private SME finance?

As already mentioned the assignment of the Social Ratings to the financial institutions will be based upon certain criteria. These criteria will have weightings that reflect the current needs set by local governments, such as financing SME's with focus on certain geographical areas or industries, the creation of jobs and many other.

The criteria are going to be challenging yet achievable that will encourage companies to strive to meet them. All the reviews will be reported periodically and a final Rate is going to be assigned. These ratings are going to provide to the public and to investors such as asset managers, a social responsible investment guaranty for socially responsible investing.

Another role of the agency will be to create a market for potential investments that financial institutions can undertake in order to improve their social rating score. Non Profit organizations, Microfinance Companies, Small development companies and many others will be able to post their needs for funding and the agency will provide consultation and assign ratings to these projects making it simple for an institution to start creating a portfolio of social investments.

The SRA Methodology - A Synopsis.

The SRA will use a format that will divide the analytical task into several categories within a framework that will ensure that all different issues are considered. The analytical groups will use a numerical expression of the scores for every criterion. As already mentioned governments will be able to affect the scores of the criteria according to their needs.

The following categories presented are only indicative:

Categories

Geographical Areas

Political Risk
Economic Risk
Rural/Urban
Not Served by Financial Institutions
Climatic Events
Economic Poverty Profile

Socio Demographic

Gender
Education
Vulnerability of Households
Access to Water, Sewage, Electricity, HealthCare
Financial Exclusion

Business Characteristics

Industries (Eco Friendly, Sustainable)
No. of Employees
Creation of New Jobs

Loan Sizes

Size of the Companies
Amounts
Lack of Collateral
Type of Loans
Loans/Size of the Banks

Services

Fair Pricing
Product Offering
Clear Conditions/ Contracts

For the rating of the projects that organizations will post for funding, the methodology will be similar to the above. The basic criteria will remain the same apart from the ones that are related to the financial institutions such as Services, or Type of loans etc.

How will governments be able to affect the weightings of the criteria?

Governments will be able to influence the rating scores by assessing the weightings of the criteria according to their current needs, which are going to be prioritized as Low, Medium, High or Urgent and they are going to be expressed numerically in the methodology. The higher the priority, the bigger the weighting.

Twice a year the SRA will conduct a survey by inviting all interested parties such as local governments to participate in order to identify for example geographical areas , which have special needs for funding. Finally in collaboration with international organizations such as the United Nations, EBRD or Central Banks the final assessment of the priorities will be set and the scores for all the investment projects that fall to these categories will be adjusted.

What barriers does your proposed solution address?

Lack of collateral, Lack of financial capacity, High transaction costs for financial intermediaries to serve SMEs, Lack of competition / incentives for financial intermediaries to serve SMEs, Underdeveloped local capital markets (term local currency funding, exit options for SME equity), General barriers to SME development related to investment climate, Lack of financing to women entrepreneurs, Specific barriers to fragile and weak states.

If you checked any of these barriers, describe how your solution addresses them

Financial Institutions are reluctant to provide loans to SME's in developing countries due to the many risks involved. Providing loans to companies with lack of collateral, to SME in fragile and weak states or to women entrepreneurs will be criteria with a big weighting in the methodology. If a financial institution needs to obtain a better rating in order to gain access to certain incentives it could either pick a project from the Agency's market place or provide all documentation needed as evidence that it realized an investment in those categories.

A high Social Rating from the agency will provide access to the financial institutions to certain incentives such as low interest funding. This could reduce the high transactions costs to serve SME's and serve as an incentive for serving them. This funding can be in the form of Government loans, accepting as collateral, bonds from the financial institution but with a leverage effect.
For example if a bank provided loans of 100,000,000 Eur to SME's in developing countries, the Bank could borrow 200,000,000 from a central bank liquidity operations by depositing assets as insurance, such as bonds, securities and packages of loans.The level of the leverage and the access to other incentives will be based on the Rating of the institution.

Apart from government funding, companies with a high Social Rating will attract funding from Social responsible private and institutional investors through secondary markets. Socially responsible investing (SRI) is a booming market in both the US and Europe. Research estimates by financial consultancy Celent predict that the SRI market in the US will reach $3 trillion by 2011 with the Government-controlled funds such as pension funds to be large players in this investment field. If these Government-controlled funds adopt policies for investing a percentage of their assets only in Social Rated Financial institutions, this will become a great incentive for banks to incorporate in their strategies and a social direction.

The same principal can be applied and to financial institutions that have transactions with government bodies. If there is a policy that financial institutions that are not socially rated will not be able to have any form of transactions with government entities, this will serve as a major incentive for banks to pursue a social rate as they do with credit rates.

Impact
Provide empirical evidence of your proposed solution's success/impact at present. If your project is in the idea phase, please provide evidence that speaks to its potential impact

In the last 40 years, new social banks or private development banks have been created.These banks are quite different as to the volume of their operations – balance sheet totals vary from EUR 30 million to several billions, and their financing capacity from EUR 50,000 to EUR 25 million per project. All together they are currently financing tens of thousands of projects with added social value mobilizing the savings of more than one million people and institutions.

Triodos Bank from the Netherlands with more than EUR 3 billion assets under management and with its profits linked to ideals, currently lends more than EUR 850 million to about 4000 projects. Through investment and lending to approximately 60 microfinance institutions in 30 countries (Asia, Africa and South-America) and financing the Triodos Bank Group is contributing globally.
The Group also manages environmental, social and ethical investment funds.

The Social Rating Agency by practicing a high degree of transparency will inform savers on what their bank is financing with their money and this way they will be stimulated to develop their own interest and participation in positive action deployed by social entrepreneurs and other borrowers at their bank.In Triodos Bank for example donations in the cultural and development sphere are systematically stimulated and Private Banking clients receive personal advice on the ethical aspects of their investments.

If the Social Rating Agency succeeds in each role, it will create the need to the financial institutions to follow a business model similar to that of Triodos Bank. If Triodos by it self currently lends more than EUR 850 million to about 4000 projects the impact of such shift in the strategies of some of the main financial institutions will be phenomenal.

Another paradigm that illustrates the impact of the Social trend among banks that the SRA will create and promote is the “Global Alliance for Banking on Values”, an independent network of banks using finance to deliver sustainable development for un-served people, communities and the environment companies. This network consists of 11 banks, representing over seven million customers, reaching 28 million people through their combined activity with combined assets of over $14 billion. They are committed to raise $250 million in new capital for sustainable banks over three years, and to touch the lives of billion people by 2020.

The proposed Social Rating System will create and become a similar Global Alliance of Social Banking. All Social Rated Financial institutions will be members of a Global Social Marketplace with common goals and interests, where new ideas for products can be developed and where new coalitions may emerge. If the SRA evaluates 10 financial institutions every year and the Governments offer to them the right incentives (at the beginning at least) the social impact will be major.

How many firms do you expect to reach?

This solution will reach thousands of SME in developing countries.

What is the volume of private SME finance you aim to catalyze?

The volume is expected to be billions of Euro.

What time frame will be required to reach these targets?

2-5 years

Does your solution seek to have an impact on public policy?

Yes

What would prevent your solution from being a success?

The collaboration of G20 governments in order to provide the incentives and access to the financial institutions.

Sustainability
List all the funding sources that are required for the sustainability of this solution

Government, Private.

Demonstrate how your proposed solution has the capacity to graduate from dependence on public finance. What is the time frame?

The Social Rating Agency will have a business model similar to those of the other Credit Rating Agencies such S&P, Moody's etc. It will publish the social ratings on a range of debt obligations and the entities that issue such obligations in markets worldwide. Revenue will be derived from the originators and issuers of such transactions who use the Social Ratings to support the distribution of their debt issues to socially responsible market and investors.

Moody’s for example, as of December 31, 2009, had ratings relationships with approximately 12,000 corporate issuers and approximately 25,000 public finance issuers. Additionally, the Company has rated and monitors ratings on approximately 106,000 structured finance obligations (representing approximately16,000 transactions). Most of Moody's revenues come from rating fees (approximately 90%) paid by security issuers.

The fees that Moody's charge for any particular rating are based on a variety of factors, such as the type of rating being assigned, the complexity of the analysis being performed, and the principal amount of the issuance. Depending on such factors, fees for Moody's rating services may range from $1,500 to $2,400,000.

Demonstrate how your proposed solution will survive a potential loss of its largest private funding source

By expanding the rating system to other industries apart from the financial services, such as Energy,Chemicals and addressing issues related to the environment.

Please tell us what kind of partnerships, if any, could be critical to the greater success and sustainability of your innovation

Government for providing incentives, Credit Rating Agencies to provide insights on methodology, non profits and governments in order to provide information regarding the need for funding on certain geographic areas or population.

Are there non-financial issues that could threaten the sustainability of your proposed solution?

The unwillingness to cooperate from the financial institutions.

Please tell us if your proposed solution aims to scale up through a high growth sector, expand immediately to multiple sectors, and/or scale up geographically

As already mention the Social Rating Agency can expand its services to different high growth industries such as technology, energy and other.

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