Social finance has lately begun to show promising outcomes. It demonstrates that it is the most effective way to mitigate the effects of previous financial and economic crises. In this article, we will discuss social finance and its role in the economy.
What is Social Finance?
Social finance is an approach to managing investments and certain funds that generate financial returns while including measurable positive social and environmental impacts. The process of making investments with a social or environmental impact in addition to financial returns is known as social finance. It is a mechanism for mobilizing private money to benefit the public good.
Even if social finance is a relatively new idea, its roots from much further, social finance adopted several features of the Islamic financial system. Islamic finance strictly follows shariah law, which prohibits riba (interest) and gharar (uncertainty). In addition, it prohibits sinful industries like pornography and alcohol and unethical practices like obsessive speculating and gambling. These constraints are comparable to the negative screening process used by socially responsible investment, or SRI, becoming a more popular component of Social Finance.
Financial Activities of Social Finance
- Impact investment
Impact investments aim to have a beneficial, measurable social and environmental impact while also providing a financial return. You can make impact investments in both emerging and developed markets. The return is ranging from below market to market, depending on the strategic aims of investors.
- Social banking
Individuals and groups that provide social, environmental or sustainability advantages receive financial assistance from social banks. Clients benefit from long-term partnerships with social banks and a direct understanding of their economic operations and risks. They describe themselves as long-term, autonomous, transparent, inclusive, and resistant to interruptions from the outside world. An example of social banking is Erste Group, the first Austrian savings bank that made social banking as the cornerstone of their ESG strategy.
Unlike traditional banks, social banks incorporate these values into their fundamental culture and strategy rather than adding them as an afterthought to conventional aims like increasing shareholder value or maximizing profits.
- Charitable banking
Charity Bank is an ethical bank that aims to provide loans to charity and an ethical option for individuals to invest their resources. An example of charitable banking is Charity bank. The bank uses the money from their savers to make loans to charities, social enterprises and organisations with charitable purposes.
- Crowdfunding for social enterprise
We term the process of crowdfunding for social change and using the cash obtained to implement positive tactics in your community “social crowdfunding.” Crowdfunding initiatives to start a social venture are frequently referred to as “social enterprise crowdfunding.”
Conclusion
Many governments attempt to combat poverty through various methods such as social policy, taxation, social work, social welfare, and philanthropy. Poverty persists in this operation since we only solve their problem for a brief period. This isn’t the way to go. Social finance, which is aimed to support economies where everyone benefits, is one of the best answers to this problem. Social finance will impact the unemployment rate, long-term disparity reduction, poverty reduction, environmental protection, and directing our energies into social innovation.
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