RSF’s Lending Process As Inspired By Rudolf Steiner
July 6, 2009
By Esther Park
At a recent RSF board meeting, I was asked to provide some detail on how our lending process is inspired by the work of Rudolf Steiner. In RSF’s early days, board members were often intricately involved in our lending process, so they never had to wonder how we imbued our values into our work. But today we operate under policy governance, which means that the board is less involved in our day-to-day operations. While we strive to wear our values on our sleeves, I thought readers would benefit from a glimpse into how we operate differently than other lenders.
1. Because we seek two levels of impact – direct impact of our borrowers and our own impact – educating prospective borrowers about the structure of our loan fund is an important part of our work. There is a unique and distinct story behind our pricing (it’s based on the return we provide to our 900+ individual investors) and our loan products (some specific products are meant to intentionally build community behind a project) that we like to share with potential clients.
2. With regard to our borrowers’ social impact, we believe we hold a high bar for what qualifies as a “social enterprise.” For example, it’s not enough for us if a company gives away a percentage of their revenues or profits to charity. While we consider this activity to be admirable, we insist on seeing social values embedded in all areas of the operation, from what is publicly seen, to what happens behind the scenes. This is the first hurdle for us, before we even go down the path of financial analysis.
3. Further to the previous point, we find that mission alignment is an important part of our discussion in credit committee, and sometimes we spend more time on that than on the financial feasibility of a project (though the latter is always given rigorous review).
4. We have adopted a “work-through” policy for when loans become troubled. For many traditional lenders, this is otherwise known as a “work-out” policy. We named our policy thus in order to better reflect our intention of working through problems with borrowers instead of just trying to find the fastest way out.
There are also a number of other unique practices that are close on the horizon. Some examples include:
1. Pricing – Our medium term goal is to convert to a “community-based” pricing model that would be driven collectively by our investors and borrowers.
2. Social Covenants – Just like financial covenants, social covenants would be hard-baked into loans, which means that non-compliance could trigger a default. A handful of our loans currently have these, but as we progress on the social impact work, we hope to institute these covenants broadly across the portfolio. These are not meant to be aspirational, but would be intended to act as minimum thresholds.
3. Peer-driven social impact goals – We hope to address the aspirational part of improving an organization’s social impact by offering our borrowers a carrot rather than a stick toward achieving greater social impact over time. In the future, this will likely be done collaboratively through a peer-review process, and outstanding work may be financially rewarded via a borrower’s interest rate.
4. Creating more community among our borrowers – Some recent ideas that have surfaced include a peer learning network, online bartering/advantageous sale platform, a closed listserv.
Although it may not always be explicit, each of the above ideas and practices is directly influenced by Rudolf Steiner’s insights and teachings on economics – many of which are rooted in the theory that money and finance are ultimately meant to connect people in relationships of service. As a result, we seek to carefully assess the impact that we and our borrowers are having at every step of the lending process, and to create opportunities for partnership and collaboration with our borrowers. We also place great importance on Steiner’s core belief that economic processes should be transparent, and hope that our actions in lending reflect these values on a daily basis. In that spirit, I invite your questions and comments, and look forward to continuing this dialogue.
To find out more about how RSF is inspired by Rudolf Steiner, visit: rsfsocialfinance.org/values/inspiration/
Esther Park is the Director of Lending at RSF Social Finance.
- Published by Kyle Foley
- Categories: Deals, Economy, Governance, Investing, Lending, RSF Board & Staff, Social Finance, Steiner
Esther:
Nicely done. You have a soft touch for someone in the lending business. I wonder if we also distinguish carefully between what is a loan and what is a gift. Steiner described differences that must be hobored as part of good relationship. With money, all transactions should be transparent, personal and clearly differentiated, especially since we do almost everything.
Don’t bother to answer. I just wanted you to know that I read it and liked what you said!
Siegfried
Comment by Siegfried — July 13, 2009 @ 10:02 pm
To add to the above for those who may wonder. Loan wears out over time, and then its residual, the redeemed loan capital that also is exhausted of its capacity to loan again, a separate condition, is gifted to be restored back to trade capital. And, in the meantime, there are not strings attached to the gift.
If any reader has question or comment on that, I would like to read it.
Thank you.
Comment by tom norman — July 28, 2009 @ 9:30 pm
“Community-based” pricing model, I am intrigued.
“Community-based” pricing immediately puts me into the inquiry of, “Is this an improvement that brings borrower and lender together cementing a more solid relationship without abridging the self interests of either but clarifying them so they determine more effectively the old fashioned way if it is a good deal for them or not?…
Or is this an ‘ideal’ that asks them to set aside their self interest and put the community first and so arises not out of the economic forces, but out of economic activity that leaves the “community” ‘feeling’ they got a better or ‘more fair’ economic deal…?
Or is it an ‘ideal’ out of the rights activity in the community? In the latter, it would then be a critique of open market pricing in favor of the new more-equitable-to-all model?
So with that as background…please tell me more about ‘community-based’ pricing model. My comment and question is kind of like a ‘better mouse trap’ question. I am interested in deepening my understanding of how to improve the mouse trap, which in the analogy arises purely out of the economic sector or life or forces.
How is equity determined?… equity, which seems central to all pricing. How do the lender and borrower across a necessarily two sided table arrive at consensus differently than traditional open market price formation?
In other words, each has a valid point of view and self interest to be articulated, fully and freely expressed and exercised …so they go forward into the future having left nothing on the table behind.
How does the ‘community-based’ pricing model augment or surplant that?
On the level of ‘being fair’ itself, is their intelligence in the community-based model or the community in short that is not being introduced between lender and borrower in the open market?
Is it outside of the oversight of the ‘rights-life’ which stands outside of the economic life?
…[These questions are posed inside of the assumption that there is in existence a 'vital' rights life or necessary 'fair playing field' oversight in existence... and so the new model is not working out of or on the rights sector down into the economic sector.]
Or alternatively… Is in fact the ‘community-based’ pricing system seeking to address the lack of a fair playing field, something that is a structural or systemic unfairness.
Tom Norman
tomdnorman@sbcglobal.net
p.s.: I recreated this in layers. Pardon wordiness. It was very frustrating because I clicked on “Manage you subscriptions:” below… since it looked like that was next to do before the button “Submit Comment”. To my dismay, when I returned [from having made no changes to my subscription] my comment space was empty — ugh!
Comment by tom norman — August 9, 2009 @ 7:14 pm