The Big Society Bank should provide grants and loans at below the market rate, according to the think tank New Philanthropy Capital.
Its report, Understanding the Demand for and Supply of Social Finance, says its findings are "challenging" for the Big Society Bank, which the government has said will not give grants and will lend money on a commercial basis.
If the bank prioritises commercial returns, "it will fail to support those that it is set up to support and displace capital in investments that would otherwise have been provided by a commercial investor", the report says.
The report, published yesterday by the National Endowment for Science, Technology and the Arts, looks at three areas in which the bank might invest: social finance, financial exclusion and social housing.
It says social housing needs are large-scale and outside the scope of the bank, while the main needs in the other two markets are for "patient capital", which is lent over a long period, and for subsidies to grow capacity, fund overheads and develop new products.
Nesta also published a second piece of research, Investing for the Good of Society, which concludes that "mass affluent" individuals, with between £50,000 and £1m in investment assets, could be a major new source of social finance.
The report says that 67 per cent of individuals with between £100,000 and £1m to invest were likely to put the money into a financial product if it offered a social return, as well as a financial return comparable to mainstream products.
The report says that investors aged under 40 are more likely to invest in social products than those over 55.
The four largest motivations of "mass affluent" individuals are:
- Personal involvement in a project or charity
- Being able to visit a project or charity
- Liking the idea of social investment
- Knowing that their money might come back to them so that they can re-use it for another social investment.
Nesta has also announced 20 proposals for new financial products that the social finance sector could offer in a third publication, Twenty Catalytic Investments to Grow the Social Investment Market.
Four of these will receive £1.2m of funding, already announced and provided by Nesta and the Panahpur Foundation. The organisations being funded are: Fair Finance; Finance South East and Resonance; Impact Assets; and Charity Bank.