Home Economics & PolicyEnvironment Could social enterprises lead Lebanon’s economic recovery?

Could social enterprises lead Lebanon’s economic recovery?

When doing good translates as doing well for businesses

by Michelle Mouracade

Lebanon continues to sink into its worst economic and financial crisis since the end of the civil war, witnessing soaring poverty, double-digit unemployment and unprecedented social hardship. Meanwhile, the ongoing political stalemate further undermines Lebanon’s ability to implement desperately-needed reform and receive any kind of financial assistance. In such dire circumstances, the ability to attract foreign investment is clearly a challenge.

There is, however, a significant and untapped opportunity to attract what is known as impact investment. In addition to seeking a financial return, the objective of impact investors is to support social enterprises, companies that generate a social and/or environmental impact that is measurable and scalable. In recent years, institutional donors have increasingly recognized the untapped potential of social entrepreneurs as new actors seeking sustainable market-driven solutions to old problems. But support remains limited to short-term funding for start-ups, with a lack of longitudinal follow-up to ensure successful implementation. As a result, both growth-stage social enterprises and those graduating from accelerators are left struggling to survive with scarce resources. This is the funding gap that impact investors have their eyes on.

With the deteriorating socio-economic situation and the need to create economic opportunities with impact, there has never been a better time for Lebanon to be a magnet for such impact investments, tapping into a global market valued by the Global Impact Investing Network at around $715 billion.

Historically, one of the main factors hindering the growth of impact investment in Lebanon has been the small pipeline of investment-ready social enterprises. The fact that social enterprises can only register as either regular companies or non-profits is also confusing and misleading. Although there are clear advantages for social enterprise to have a separate legal entity – including to benefit from tailor-made tax incentives – this has not prevented established social enterprises such as Fair Trade Lebanon, Souk El Tayeb, BOT and FabricAID, from operating as such and attracting impact investors.

Regardless of the legal entity under which it’s registered, three main criteria have to be met for a company to qualify as a social enterprise. First, the company needs to be solving a social, cultural or environmental problem by applying private sector business principles (i.e. selling market-based products and services). Second, its impact should be measurable, scalable and clearly mentioned in the company’s bylaws. Finally, it should reinvest the majority of its profit into the growth of the business.

So is the pipeline of social enterprises in Lebanon small or are we simply not classifying and supporting “businesses with impact” the right way? We strongly believe it is the latter, if we support “businesses with impact” in better modelling, measuring, scaling and communicating their impact, they could be classified as social enterprises and easily attract impact investors.

This is the mission of impact-focused accelerator programs and venture philanthropy organisations that provide social enterprises with grant funding, training, management support and access to markets. However, there are very few ecosystem players whose mission is to support social enterprises in Lebanon – Makesense, Fondation Diane and Alfanar are the only ones who are entirely focused on this sector. Moreover, as social enterprises grow, their funding needs can no longer be covered by grants, and can only be matched by impact investments.

Such impact investments also offer great opportunities for competitive financial return. The average realized gross returns of private equity impact funds in emerging markets in 2020 ranged between 11 percent and 18 percent.

Today, there is a real opportunity to strengthen the impact sector in Lebanon and attract impact investors and their fresh funds, while helping solve ever-growing social challenges. This will take time, but if ecosystem players come together – including social entrepreneurs, the diaspora, angel investors, institutional donors and foundations – the stage could be set for one of the most attractive impact investment markets in the MENA region, while supporting vulnerable communities in a more sustainable manner.

As Nobel Laureate economist Muhammad Yunus recently said, “When you hit the darkest part, you come up with the brightest ideas.” In doing so, we need to “throw away the old thinking and be outrageously bold” to reshape society post COVID-19.

Impact investment can significantly contribute to saving Lebanon’s socio-economic fabric. There has never been a better time to do this, by supporting social enterprises, paving the way for impact investment to be the norm, and building the foundations for a more equitable Lebanon that provides for its people.

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Michelle Mouracade

Country director at Alfanar venture philanthropy.

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