Supporting Income Generation Programs (Foundation Building Best Practice Study Excerpt)

This section focuses on foundations that have developed innovative ways of supporting local income and employment generation programs through a combination of grants, loans and venture capital.

Example 1: Venture Capital, Technical Assistance and Credit
Esquel Ecuador Foundation
Example 2: Strengthening Micro-, Small and Medium Enterprises
Corona Foundation (Colombia)
Example 3: Prioritizing Non-Grant Financial Instruments
Foundation for a Sustainable Society, Inc. (Philippines)

Many foundations to promote the economic progress of low-income communities. In the pursuit of this end, they have sought for new economic options for the poor and have developed strategies that are both grantmaking and non-grantmaking.

How can new economic options be generated?

Summary Points

Increasingly foundations are exploring new ways of stimulating the economic empowerment of low- income communities. The use of options such as the provision of credit and equity to micro-, small and medium enterprises can permit foundations focusing on economic empowerment to reach more beneficiaries and broaden their impact. These programs can be managed in-house or implemented through grants or loans to credit institutions.
Those foundations that directly manage credit, venture capital or loan guarantee programs need to recognize the risk involved. Foundations that have taken this approach require appropriate expertise amongst their staff, Board and consultants to reduce risk. Management of these programs requires special skills in areas such as the selection of credit and equity recipients. Those decisions involve assessment of business profitability in addition to social and environmental risks. It is also advisable to developing risk-sharing arrangements with other credit institutions, both public and private.
Another option is for the foundations to put their energy into strengthening existing credit institutions. Here, the foundations identify those credit and loan institutions with the highest potential to offer an effective service to borrowers and provide them with the technical and financial support they require. As part of their technical support they can link those institutions to other sources of finance and expertise. In some cases they also support increasing the availability and improved quality of small-enterprise management training in existing educational institutions, corporations and NGOs.

Foundations have devised a range of program strategies. Some have opted for the direct delivery of financial services to small and micro enterprises at the community level (frequently in partnership with other institutions). This support includes grants, loans and equity investment. It usually incorporates the provision of technical assistance as an essential element. The Esquel Ecuador Foundation (FEE) has opted for this type of program intervention. Other foundations decide to focus their program on increasing the effectiveness of existing institutions specializing in the provision of financial services and/or influencing policy and practice in the field. Corona provides an example of this approach.

As with other program areas, foundations identify areas where they can bring added value and achieve high impact with their resources. The experience of the Foundation for a Sustainable Society, Inc. (FSSI) shows that by partnering with mainstream financial institutions it was able to leverage additional resources and increase the reach and quality of other programs. A few foundations such as FSSI opt almost exclusively for the use of loans and social venture capital as opposed to grants because they want to both foster an entrepreneurial spirit and recover their investment. This strategy enables them to benefit a larger number of businesses.