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Social Investment
Nov 2009, Conning, J. & Morduch, J.

Incentives and constraints that guide social investment

This paper examines the possibility that social investment can, under the right conditions, address market failure by side-stepping government failure through a careful choice of intermediary structures. >p>The paper discusses social investment, the support of nonprofits, social businesses like Grameen Bank of Bangladesh, and profit-maximizing businesses serving the poor. It states that:

Social investors aim to generate a financial return alongside a social return;
Social investors choose projects in which the strength of social returns compensates for weaknesses in financial returns;
Social investors use funds to build institutions that can achieve scale and attract additional revenue and financing; • Social investors need to achieve leverage and could do so by mobilizing locally-held capital; • Subsidized social investments can boost output in ways that traditional commercial capital cannot; • While some market segments can be served profitably, others cannot.

There can be no presumption of a fortune at the bottom of the pyramid, particularly when serving the poorest communities. Moreover, financial strategies like securitization have sharper limits in the social investment context, and contrary to popular belief, higher profitability alone cannot deliver higher leverage.

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Publisher(s):
Institute for International Law and Justice