Impact Bonds: An Unutilized Way To Mobilize Funds ?

As the pandemic has swept through the country, the need for compassion for a comparatively impoverished country like Bangladesh is starting to prove ever necessary. The affluent portion of the population has not disappointed so far. We have seen organizations like BRAC and Bidyanondo collect donations of crores during this lockdown period.^[1] We have also seen four banks donating BDT 152 million to the Prime Minister’s relief fund.^[2] These are just the larger organizations. There are many smaller organizations which in total have also raised a huge amount of donation during the pandemic.

The large number of donations show that there are resources which people are willing to spend for the betterment of society. However, it has been argued that charity is not a very efficient way to mobilize funds. As the BBC discusses in its ethics section, charity has a wide array of problems. For examples, it has been seen that charities often tend to try and solve symptoms and not the core problem. ^[3]  

This article tries to discuss if Social Impact Bonds could be a better way to mobilize the funds people are willing to spend for the good of the society.

Impact Bonds: How Do They Work?

Impact bonds are partnerships geared toward improving social outcomes for service users. However, the investors shall get a return only if the required social outcome is achieved.^[4] Neverthless, it is different from both traditional bonds and traditional charity in the following ways. 

Impact Bonds can be of two types which are Social Impact Bonds (SIB) and Development Impact Bonds (DIB). While they can be structured in different ways, they include three parties: 

• Investors: They provide the up-front capital. They are the buyers of the bonds. 
• Service Provider: They deliver the social services to the population in need.
• Outcome Funder: They repay the investors their principal plus an agreed-upon return on investment.^[5] In SIB, the country’s own government acts as an outcome funder and in a DIB the funders are typically international development funders or international foundations from an outside country.

The following chart illustrates the feasibility criterias of Impact Bonds.

The feasibility of Impact Bonds show that they are more sustainable than traditional charities. Since there is no return in case of traditional charities, it is not possible for the donors to continue donating indefinitely. For example, if the current lockdown due to Covid-19 were to continue for some more time, there is a possibility for the donations to dry up. Moreover, due to the structure of an impact bond, there is more accountability of the fund users which lead to more efficiency in the usage of funds.

Impact Bonds in The Global Context

Globally, there are 176 impact bonds as of January 1, 2020.^[6] A total of USD $408.22 million capital has been mobilized through the use of impact bonds.The following map gives an idea of which countries the impact bonds are being implemented in.

Examples of Impact Bonds in developing and returns which have been given from them have been illustrated in the table below. 

It can be observed that among the South and South East Asian countries, India is the only country to have started the use of impact bonds. This can be ideal for Bangladesh since the socio economic scenario of the two countries have a fair degree of similarities.

The India Educate Girls DIB has been especially exemplary. It’s main purpose was to tackle the root cause of gender inequality in India: Female Education. As the following graph shows, it has surpassed its primary targets in two out of three outcomes by an impressive amount. 

Bangladesh can follow this very successful endeavour by its neighbor and roll out similar Impact Bonds. 

Impact Bonds to Ensure Sustainable Use of Funds Currently Spent For Social Causes

Along with charitable donations, we have also seen people and organizations spending upto USD $50 thousand behind a single item.^[8] However, the following recommendations can be considered to gain the trust of the investors.

1. Formation Of Regulatory Body To Ensure Trust of Investors:An independent regulatory authority for Impact Bonds should be formed who shall ensure that the funds are being used properly and efficiently. This body should have experts from both public and private sectors.
2. Bond Issuance Must Be By Reputable Organizations Only: The bonds should only be released by reputable public or private organizations like BRAC, Ministry of Health, Grameen, Asian Development Bank, etc. This shall not only help gain the investors’ trusts but their previous experiences in the development sector shall enable more efficient usage of funds.
3. Private Developmental Organization Should Contribute to Making Impact Bonds Popular: A major hurdle in front of the success of Impact Bonds is the fact that the general populace are not aware of how it functions. Private Organizations like BRAC, Sajida, Grameen, Bidyananda which have the trust of the people should work to educate investors on the potential of Impact Bonds.

Like most other developing countries, there is a large wealth gap in Bangladesh. However, we have also seen proof that individuals and organizations with access to funds are willing to spend it behind the development of the society around them. Impact Bonds can be an important tool to mobilize these funds and use them efficiently.

Kidwa Arif, Trainee Consultant at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: [email protected]