Finance and the Australian Not-For-Profit Sector

By Ingrid Burkett of Foresters Community Finance, March 2011

This report, commissioned by National Australia Bank (NAB),  represents the first substantive piece of research completed in direct response to the recommendation made by 2010 Productivity Commission Report on the Contribution of the Not-for-Profit Sector that ‘Australian governments should assist in the development of a sustainable market for not for profit organisations to access debt financing’.

The key questions addressed by the report are: what are the financial needs of the not-for-profit sector, how are these needs currently being met or what is the sector lacking, and what further research is needed better understand the not-for-profit capital market in Australia?

In answering the first of these questions the report examines defining characteristics of not-for-profit organisations that influence financial needs. Size and financial resourcing (e.g. grant funding, earned income or donations) are identified as determining characteristics of the financial needs of organisations while legal structure, charitable status and activity focus are recognised as influencing characteristics that affect the types of financial products and services that may be needed.

The report draws the conclusion that small to medium sized not-for-profit organisations that are predominantly grant funded are the most financially excluded organisations while large, market– based and revenue-diverse organisations are most likely to have access to financial services.

Recognising that financial exclusion is a reality for many not-for-profit organisations the report identifies key barriers for the development of a not-for-profit capital market. On the demand side financial capacity, management, legal structure and culture are identified as the key barriers. On the supply side lack of sectoral understanding, inappropriateness of mainstream credit policies and assessment tools and transactional/operational costs are identified as key barriers.

Lessons from the overseas not-for-profit capital markets are then contextualised for the Australian market. Importantly it is noted that ‘exploration of financing not-for-profit organisations cannot only focus on debt capital but needs to consider how capital of all kinds could strengthen the impact and build the viability and sustainability of not-for-profit organisations’. The report also highlights the need for potential financiers to align products and services to not-for-profit business models understanding that there are differences in not-for-profit business models and for-profit models.

The final lesson discussed is in regard to the need to explore the potential role of mainstream financial institutions in the development of a not-for-profit capital market. A much needed exploration, but one that I would strongly encourage is not pursued to the exclusion of other sources of finance that could (and should) play a significant role in catalysing the development and capitalisation of a not-for-profit capital market. Much activity in the overseas market has been catalysed not by mainstream financial institutions but by nimble, flexible forms of capital such as that coming from private foundations, high-net-worth individuals and niche social impact investment funds.

The report concludes by making five recommendations focused principally on the role of financial institutions and Government in the development of the not-for-profit capital market along with encouragement to the not-for-profit sector to develop better understanding of the role non-grant capital could play in building their impacts and sustainability.

Congratulations to Foresters and NAB to what is an important and pivotal piece of research that will help progress discussions on the development of a social finance in Australia.

To read the full article see: www.foresters.org.au/site/DefaultSite/filesystem/documents/Research%20Report%20Finance%20&%20Australian%20Not%20for%20Profit%20Sector%202011.pdf

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