Financing Social Enterprises with FinTech: A Regulatory Approach

• In Event: Social Enterprise Policy and Law

Abstract

This paper is part of an ongoing research project funded by Thailand Science Research and Innovation, the Ministry of Higher Education, Science, Research and Innovation of Thailand. The study aims to explore whether, apart from a legal measure such as the Social Enterprise Promotion Act of Thailand, a more innovative FinTech regulatory framework could facilitate better access to finance for social enterprises. The study uses the qualitative research methods with in-depth interviews and focus group discussions based on semi-structured and open-ended questions. The purposive sampling method is used for selecting participants of over 100 people representing registered as well as prospective social enterprises, government agencies, e.g., the Social Enterprise Promotion Office, the Securities and Exchange Commission of Thailand, the Revenue Department and the Bank of Thailand, financial institutions, e.g., the Government Savings Bank and the SME Development Bank, as well as social investors.

Social enterprises need reliable access to finance just like any mainstream business. However, social entrepreneurs have found it more difficult to access capital due to the hybrid nature of the social and financial mission. That is, they have greater difficulty in obtaining traditional financial instruments, which focus on profit-making. According to OECD, the problems being faced by social enterprises include difficulty in assessing possible business risks, a lack of tailored financial products, high transaction costs, and biases among lenders and investors. Therefore, appropriate FinTech products and financial literacy could be a solution.

The paper argues that while social enterprises need creative funding to suit their hybrid nature, a suitable legal framework for both FinTech and social enterprise is necessary. In addition to the hybrid legal forms, social enterprises need a legal framework that promotes hybrid financial tools such as flexible convertible bonds, social impact bonds, specialised tax regimes, crowdfunding platforms, quasi-equity debt security, and peer-to-peer lending, among others. Even though there are currently a few financial innovations in Thailand, such as peer-to-peer lending regulatory sandbox, the SE crowdfunding platform, social impact bonds, cryptocurrency exchange platforms and Initial Coin Offering, it is still not easy for social enterprises to access them. Law is thus an important factor to facilitate access to innovative financial services for social enterprises.

References

(1) Bugg-Levine, A., Kogut, B. and Kutatilaka, N. (2012). A New Approach to Funding Social Enterprises. Harvard Business Review. https://hbr.org/2012/01/a-new-approach-to-funding-social-enterprises
(2) Defourny, J. and Nyssens, M. (2017). Fundamentals for an International Typology of Social Enterprise Models. Voluntas, 28, 2469-2497.
(3) Lam, S.S. and Zhang, W. (2016). Public Perception Study on Social Enterprises in Singapore. Commissioned by raiSE and supported by NUS.
(4) OECD. (2022). Policy Brief on Access to Finance for Inclusive and Social Entrepreneurship: What Role can Fintech and Financial Literacy Play?. Luxembourg: Publications Office of the European Union
(5) Reiser, D.B. (2010). Governing and Financing Blended Enterprise. Chicago-Kent Law Review, 85(2), 619-655.
(6) Reiser, D.B. and Dean, S.A. (2014). Creative Financing for Social Enterprise. Stanford Social Innovation Review. https://ssir.org/articles/entry/creative_financing_for_social_enterprise
(7) Reiser, D.B. and Dean, S.A. (2015). SE(c)(3): A Catalyst for Social Enterprise Crowdfunding. Indiana Law Journal, 90(3), 1091-1129.
(8) Roth, B. (2021). Impact Investing: A Theory of Financing Social Enterprises. Harvard Business School Entrepreneurial Management Working Paper No. 20-078.

Author

• Prapin Nuchpiam, National Institute of Development Administration (NIDA)