Dormant bank accounts boost social finance growth


Helen Avery
Published on:

Big Society Capital hits £600 million; Portugal, Japan, Israel adopt model.

Bright spark. Big Society Capital funds projects like Plymouth Community Energy’s solar farm in the UK

Can dormant bank accounts be the springboard for expanding social finance as an industry? 

In January, the UK government announced it would be distributing £100 million to social investment firm, Big Society Capital. An extra £35 million is also being placed with Big Society Capital and Access – the Foundation for Social Investment, with the specific aim to increase the sustainability of the UK social investment market

The source of the UK government money is dormant bank and building society accounts. Some £300 million has already been deployed to Big Society Capital since 2008, when the UK government introduced the Dormant Bank and Building Society Accounts Act. 

Accounts dormant for more than 15 years in banks and building societies are placed into a fund called the Reclaim Fund to be verified and then split between the Big Lottery Fund, managed by the National Lottery for Scotland, Wales and Northern Ireland, and Big Society Capital in England. 

Big Society Capital, set up as an independent institution, sources projects and co-invests the money across a range of social and environmental initiatives in England, targeting returns of 4% to 6% that go back into the pool. Several of the UK’s largest banks have also been required to put money into the fund. Big Society Capital now has around £600 million.

Set up in 2012, Big Society Capital began investing in 2013 and has so far put £356 million to work in 70 investments. Co-investors have added a further £640 million. Intermediaries are used to invest the funds in order to help create a social finance market. 

“By investing into intermediaries, co-investors are able to come in alongside us, making more capital available for charities and social enterprises,” says David Dinnage, communications director at Big Society Capital. Some 8% is paid out in fees and capital to intermediaries and arrangers as the market builds in scale. 

More than half the funds are invested in charities and social enterprises in the form of bridge loans, property funds, social impact bonds and charity bonds; they span loans to purchase care homes, affordable loans to low-income households and financing for the installation of solar arrays. 

Dinnage says it is too early to show returns as most investments have a five- to seven-year tenure, but the firm has been conducting research to see where it can have the most impact. 

The focus of future investments he says will be in three pillars: “Providing homes for people in need, supporting communities to improve lives and early action to prevent problems.”

Too small

Social finance has been far slower to grow than environmental finance largely because projects have tended to be too small to catch the attention of large financial institutions. 

The average size of Big Society Capital’s investments is about $5 million, although the median is £150,000. 

Green bonds and renewable energy projects by contrast are of sufficient size for large banks to commit them. The structure of allocating funds such as Big Society Capital enables smaller projects to be invested in that would not be on the radar of banks. 

Social finance is much needed. Data is limited, but a report in 2012 from the Community Finance Development Association (now called Responsible Finance) estimated the gap in community finance alone to be around £6 billion for the UK annually. 

The role that channelling dormant bank account money can play in growing the social finance market and filling the gap is large.

The latest annual data for the UK, for example, estimates outstanding social investments at the end of 2016 to have been almost £2 billion – a 30% increase from the end of 2015. And Big Society Capital accounted for 7% of that 2016 UK total; with its co-investors, that increases to some 24%. 

The role of Big Society Capital as capital provider to intermediaries has also encouraged the growth of non-banks in the social finance market. In 2016, there was £326 million of non-bank investment deal flow compared with £216 million in 2015. Non-bank capital includes charity bonds, community shares, equity-like capital, non-bank lending and SITR [social investment tax-relief] products, social impact bonds and social property.

The model of using dormant accounts is being seen as an increasingly viable means of accessing finance to be used for impact investing. 

In December 2016, for example, Japan’s National Diet passed the Dormant Deposit Utilization Act, which will come into effect in the middle of this year. The volume of dormant deposits is thought to be three times that of the UK. A dedicated fund is expected to receive around $500 million from the accounts to begin investing in charities over the next 18 months. 

South Korea, Portugal and Israel are looking at dormant bank accounts as a source of social financing. Several US states also use dormant bank accounts for public funding.