Meet Jean-Guy, a middle-aged man of African descent, who has lived in France for the past six years. He relocated from his hometown in Senegal in search of a well-paying job that would allow him to save the equivalent of 6,000 Euros. Once obtained, Jean-Guy intends to use his savings to start a water distribution service that will allow him to support his large extended family and secure himself a sustainable retirement in his beloved village.

Jean-Guy's story is not uncommon to many immigrants from the bottom billion, indeed it points to persisting failures in contemporary approaches to poverty alleviation in the developing world. International aid discussions give little thought to the likes of Jean-Guy, who are fundamental drivers of African economies, and how they can be engaged in sustainable wealth creation opportunities. It is no wonder, then, that the latter vote with their feet and simply relocate to most of the G8 countries for better economic opportunities.

Social finance can help fulfill this very necessity, it can help engage economic drivers like Jean-Guy with its incentive-centric and result-driven strategies designed to flexibly adapt to operational difficulties. Conventional aid projects tend to theorize about potential population needs instead of actually engaging with local stakeholders in bottom-up collaboration. Even worse, failing initiatives  are typically rewarded, sustained and subsidized due to a lack of feedback and information from the stakeholders on what works and what does not.

Social finance-driven initiatives, on the other hand, put managerial incentives directly in line with their chosen stakeholders', allow room and weight for realist feedback on operational success, and therefore are specifically designed to satisfy enablers and stakeholders in the reaching of their operational goal. Unlike most conventional approaches to international aid projects, social finance-based approaches cost-efficiently reward operational success and appropriately deter the opposite. This is precisely what development thinking needs in an era of fiscal austerity and donor fatigue.

Let's follow up on our man's story. Could social finance help Jean-Guy? It very well could, indeed a local development-minded social finance enabler would deem him eligible for "patient-capital." Patient capital basically entails the lending a given amount, provided that it is reimbursed in a commonly agreed period of time. Building a well in sub-saharan Africa can cost between $1500-3000 for about fifteen years of use. The average village in the region will have about 30+ households. Given a modest price of say two dollars per year per household, you can easily expect this well to be paid for and generating returns within three to four years. No municipal debt-overhang, no need for overpaid staff unless Jean-Guy needs it, no lee-way for corruption since Jean-Guy's own wallet is at risk. This is the ideal development scenario and it's already happening.

Development enthusiasts have long bemoaned obstacles such as corruption, NGO-bureaucracy, mission-drift, information deficit and incentive misallocation when explaining why $500+ Billions of aid spending has continuously failed to help. The above approach to helping Jean-Guy allows him to be the main actor and beneficiary in making his community a better place, it puts tax-payers monies in safe and properly deterred hands, and it rewards local stakeholders who take initiative in driving local economic and social activity. As economic slumber, fiscal austerity, and donor fatigue threaten humanitarian budgets worldwide, it is crucial that we become proactive in our handling of aid funds. Social finance allows for precisely that.

Read Social Finance and the Renewal of International Development (Part 1) >>

Photo credit: http://www.flickr.com/photos/gsfc/4387582220/

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