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I recently organised a seminar for our members to learn about financial instruments, in cooperation with the European Commission, our member Housing Europe and fi-compass.

The key questions we wanted to address in this seminar were: what are financial instruments, how can they be used, and can they be used in the social sector?

Targeting projects with potential economic viability, financial instruments provide support for investments by way of loans, guarantees, and other mechanisms offered by financial intermediaries. Financial intermediaries can be banks, foundations, investment funds, NGOs, which usually combine loans, guarantees and other instruments with technical support and advice.

The use of financial instruments in the social sector is difficult, mainly because projects or services do not usually guarantee revenue. Another reason that makes their application complex is that social actors are used to working with grants and are not familiar with dealing with financial intermediaries.

It can be useful to use financial instruments when the Authorities that are managing the Programmes (the European Structural and Investment Fund [ESIF] or the EU Programme for Employment and Social Innovation [EaSI]) transfer money to financial intermediaries and the latter are able to attract additional money, thus producing a leverage effect. The investment made is then able to generate revenues or savings of public money: in one way or another, resources go back to the Managing Authority (this is called a ‘revolving effect’). As investments in the social sector do not usually generate revenues, the use of financial instruments can be interesting when an investment is deemed to produce savings of public funding in the medium-/long-term.

In conclusion, when it is assessed that an investment can produce both leverage and a revolving effect, it is worth using financial instruments; otherwise, their use is not advisable. To know more, you can view fi-compass’s presentation.

One typical application of financial instruments in the social sector is financial and technical support to individuals who are unemployed and want to set up a small business or start working as self-employed. There are financial intermediaries that are specialised in providing support to people in vulnerable situations, including with migrant backgrounds, who for instance could not get a loan from a commercial bank.

For example, in Poland financial instruments were set up in the frame of ESIF by a Region to help fight unemployment and 151 personal loans were provided. In Germany 1,781 enterprises – of which 35% are social enterprises – were supported with €74.5 million channelled through financial instruments in the context of ESIF: 7,775 jobs have been secured in this way. Another interesting initiative was the one launched in Italy, where Finlombarda, a body linked with the Lombardia Region, attracted financial intermediaries that were asked to give€ ,4000 to disadvantaged people to become members of social cooperatives and be employed by them. In this way, it was possible to employ people in vulnerable situations and increase the capital of social cooperatives. This initiative could be replicated to employ young people not in employment, training or education, the so-called NEETs. Other examples can be found in fi-compass’s presentation.

Similar instruments have been put in place in the frame of the EaSI programme, to increase the availability and accessibility of microfinance for vulnerable groups and micro-enterprises and to facilitate access to finance for social enterprises (see slides).

Financial instruments can also be used in the area of housing and social housing, for example to promote energy efficiency of buildings thus contributing to fighting fuel poverty, to refurbish dwellings that are not safe and healthy, to provide accommodations to migrants coupled with the provision of services such as counselling, education and inter-cultural learning. You can find specific examples in Housing Europe’s presentation.

It is important to point out that financial instruments are not suitable for all cases. Therefore, they are an additional instrument in the tool box of financial support. They do not replace grants, but in some specific cases their use could be more effective than grants.