Radical Reciprocity

To unlock the transformative potential of impact investing, we must confront the questions of who makes decisions about the allocation of financial resources and who benefits from those decisions. Two principles of Catholic Social Teaching (CST)—the principles of subsidiarity and reciprocity—invite Catholic investors examine the power imbalance between investor and investee. By looking at our relationships to wealth and the communities we support through the lens of power, we can begin to confront issues of racial, economic, and environmental justice and the inequities that continue to pervade our investments.

The principle of subsidiarity says that higher level institutions—which are often referred to as the state but can also include powerful economic interests—should not usurp the rightful autonomy of lower level communities. Decisions should be taken at the lowest level possible and the highest level necessary. Pope Francis makes a strong case that the solutions to our ecological and economic crises should be rooted in place and responsive to local cultures and practices. He argues that “quality of life cannot be imposed from without” and that “complexities of local problems demand the active participation of all members of the community” (Laudato Si 98). Local populations are more responsive to threats to creation, as “they are concerned about their own future and that of their children and can consider goals transcending immediate economic interest” (Laudato Si 121).

Laudato Si argues that the ownership of resources and the outsized political and financial power that ownership puts in the hands of the wealthy few as one driver of the current crisis and a critical barrier to progress. “Access to ownership of goods and resources for meeting vital needs is inhibited by a system of commercial relations and ownership which is structurally perverse” (Laudato Si 37). For an example, Pope Francis often turns to the corporate consolidation of agriculture and its negative impact on the lives of small, family farmers. He argues that the “expansion of oligopolies” is hurting rural farmers and forcing small producers to purchase their seeds from large companies.

Well-meaning initiatives that fail to put the ownership of financial resources directly into the hands of those who need it neglect the root causes of our current crises and risk causing more harm than good. The history of charity—and of impact investing—is largely a history of powerful interests acting on behalf of the marginalized. White—predominantly male—investors, fund managers, and donors invest in social entrepreneurs and NGOs owned and operated by outsiders that prescribe solutions to poverty, hunger, joblessness, and the ecological crisis without the input of those within the community impacted by these issues. At best these initiatives often fail (such as failed experiments with clean cookstoves that did not reflect local cultural practices) and at worse they can make conditions worse (e.g. carbon credit trading that shifts an increasing burden of pollution to vulnerable communities). Perhaps the most glaring example of this is the effort by several of the largest foundations in the world to promote a “Green Revolution” for Africa, which has instead ruined small farmers while hunger has increased.

Putting decisions about investments into the hands of those local communities through democratic models of finance (explored later) puts wealth created by human labor and with our shared natural resources back into the common good. Ensuring that local communities benefit from our investments in clean energy, water, food etc. means supporting local owners and entrepreneurs, who can help to create resilient, shared prosperity. The real economy of jobs, families, and care for creation always lives someplace local, “where working together for the common good instinctively makes sense” (Making of a Democratic Economy, 21).

While the principal of subsidiarity invites us to examine who makes decisions about the distribution of resources, reciprocity and gratuitousness suggests everyone should benefit equally. As per our reading, reciprocity suggests that “we should care about the well-being of the person on the other side of the economic encounter.”  As defined by Pope Francis, the principle of gratuitousness refers to “the ability to do some things simply because they are good in themselves, without concern for personal gain or recompense” (FT 139). Ultimately, “all economic behavior should be driven by logic of gift and the principle of gratuitousness.”

 Investing rooted in the principle of reciprocity closely aligns with the model of non-extractive finance. As defined by Seed Commons, non-extractive finance means that returns to the lender can never be greater than the benefits to the borrower. Seed Commons uses three common non-extractive terms:

  1. No repayments greater than profits. Borrowers are not required to make interest or principal repayments until they are able to cover operating costs, including market-rate salaries,
  2. No personal guarantees: financing agreements never use assets for security unless the asset has been purchased with the financing agreement proceeds, and
  3. No credit scores. Instead, Seed Commons uses close relationships between local loan officers and potential loan recipients to establish a borrower’s reliability.[1]

These principles are animating several highly impactful loan funds around the United States. For example, Cooperation Buffalo operates a community-controlled, non-extractive loan fund that supports both the start up of new worker cooperatives and conversions of existing businesses to worker ownership. Cooperation Buffalo provided a loan and technical support to workers seeking to purchase an early childhood center that was at risk of closing and provides critical services in an area with a lot of need. Cooperatives that receive support from Cooperation Buffalo join the governance of the organization and the loan fund, participating in democratic decisions regarding loans, long-term strategy, and what services to provide. This model reflects the rich associational life of subsidiarity and described beautifully in Laudato Si, while building wealth and power in a community heavily affected by inequality.

Non-extractive finance offers a way out of the trap of market-rate returns versus concessionary investments. Currently impact investing—including Catholic impact investing—is benchmarked against risk adjusted market rate of returns. Rather than using the traditional market—devoid of moral or ethical considerations—as our yardstick, Catholic investors could measure our returns using the principal of reciprocity, ensuring our investments empower rather than enrich. 

Looking forward, FSM is in a unique position to support leaders looking to build living, thriving economies in the frontline communities where our sisters have a long history of ministry. We have the trust of frontline leaders necessary to bring a relational approach not just to our giving, but to our investing as well. Our sisters’ Mission and Focus is rooted in humility, recognizing that those who are closest to the pain have the solutions and we are called to support them with our resources and our Presence.

Yet there are many conditions that need to exist in a community before non-extractive finance can be deployed in the way described here. The non-extractive funds and their partners that make up the Seed Commons are built on many years (or decades in some instances) of community organizing, research, training, and building in distinct places. Entrepreneurs and workers from marginalized communities must have access to education and training around how to establish and manage democratically-owned enterprises. Technical assistance is needed for the myriad of challenges these enterprises face. And we need place-based financing vehicles that can deploy capital in non-extractive ways.

And so our charge at FSM is how to help cultivate an ecosystem of supports for a living economy in our community, one that respects the rich associational life of cooperation and the radical idea that our investments should never take more than they give.


[1] See “Seed Commons’ Approach to Non-Extractive Finance” for more at https://seedcommons.org/about-seed-commons/seed-commons-approach-to-non-extractive-finance/

3 thoughts on “Radical Reciprocity

  1. Before reading Felipe and your blog posts, I had not heard of Seed Commons or their definition of non-extractive finance. I like the framing of this strategy, which is one area where I think John Kohler could have gone further in developing the Demand Dividend model (https://thegiin.org/assets/Santa%20Clara%20U_Demand-Dividend-Description.pdf). The two financing structures seem very similar with non-extractive finance bringing in rationale for the % of cash flow / % profit and fixed payment amount / profit sharing described by Seed Commons and Santa Clara, respectively. The Demand Dividend brings an assumption of a lower interest rate and cap on % of cash that can be used for repayments, which is balanced with a larger fixed payment amount. It also highlights the need for a ‘honeymoon’ or grace period. Importantly, the Demand Dividend concept states that this type of financing works best when matched with an early-stage start-up with some track record of throwing off cash or at least a path to a positive cashflow within a year.

    Generally, I like these quasi-equity structures – especially to address fx or liquidity risk, and I believe both non-extractive finance and the Demand Dividend are an improvement on royalty-based models for early stage businesses that need their cash for operations. The big difference that I can see between the two models is the moral imperative attached to non-extractive finance, while the Demand Dividend is just one more tool to be matched with the right type of financing need. I’m not sure how to feel about this moral imperative being attached to a very specific vehicle. On the one hand, I agree that finance should not exploit people. On the other, I believe that traditional debt and equity are useful and even better than this specific financial tool in some cases. For example, Seed Commons charges 7% interest and profit sharing, which strikes me as being much higher than a bank would charge. I can understand this because they are doing their own intensive diligence, maintaining a loss reserve, and sustaining their fund. However, a large bank that is staffed and set up to make a similar loan seems like they would be able to undercut this cost of capital significantly, even though they may require collateral. I could be wrong, but it seems like both entities are not going to take a huge risk on the companies where they deploy capital, while one may pass the cost of intensive diligence and a loss reserve on to the client and the other may take collateral. Do you know if the companies financed by Seed Commons were disqualified by banks / other impact investors or faced higher total payments?

    As I write this, I’m coming down on the side of ‘non-extractive finance’ – as defined by Seed Commons – being a good financial tool, but not one that fits every situation. While we do not want to exploit borrowers or investees, we also do not want to make decisions for them about the risk they are willing to take thereby limiting their financial options. By putting a loaded term like ‘non-extractive finance’ on this tool, it seems that a normal loan or equity stake would – by default – be considered extractive, and I’m not convinced that they all are. However, I’m happy to learn more.

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    1. I am totally in agreement with this! When I first learned about Seed Commons, I was very excited. However, once I started to dig deeper into the terms of the loan, I felt a little frustrated. The 7% interest plus profit sharing seemed like it was actually more than what most traditional loans would costs the borrower. I appreciate your insight regarding the cost of capital and the question about did these borrowers not qualify for loans from the bank first. I too would like to understand who is applying to Seed Commons and under what restraints. I also understand the Seed Commons model to include a value about investing in cooperative businesses so I think the 7% interest plus profit sharing is in part that–putting the money toward building more efficient infrastructure in the solidarity economy for the long term. It’s just not as cut and dry though as I thought it was at first glance!

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