Feasible Institutions of Social Finance: A Taxonomy

Abstract

This paper unpacks the continuum of social finance institutions (SFIs), ranging from foundations offering pure grants to social banks supplying soft loans. The in-between category includes under-researched “quasi-foundations” granting loans requiring partial repayment. We develop a model under which SFIs maximize their social contribution arising from financing successful social projects, under a budget constraint dictated by their funders. Our model determines the feasibility of each SFI category and reveals that quasi-foundations are efficient and adapted to environments with low market rates. Finally, we show that value-based unconditional reciprocity from SFI borrowers can elicit a so-called “hold-up” effect, whereby the SFI maximizing its social contribution charges a high interest rate to its loyal clients.