The source of almost all philanthropy has been and remains the profits of successful business ventures – some recently created or from profits invested over one or more generations. In almost every case the source grew out of a successful small business, a small corporation, a smart investment and sometimes the would-be entrepreneur being at the right place at the right time with the right idea.
In almost every case, the entrepreneur received two (2) helping hands on the way to success. The first, was a small loan from family or friends, an introduction to the first client, a guarantee for the first small bank loan. The second, was access to bank financing to launch or expand the business, and continued working capital to grow the business into a large and very profitable venture. In many cases, the sale of company stock on public markets provided even larger sources of capital – and substantial personal profits to the entrepreneurs – and the basis for many private foundations.
This process of generating sources of philanthropy leverages OPM (other people's money) to create substantial wealth – primarily bank and public financing. While over leveraging can increase risk as we have seen recently, leverage has been and remains the primary wealth-generating vehicle.
Until recently however, individuals and foundations have not focused on deploying leverage to maximize the impact of their philanthropic giving, particularly in Israel. Historically, those with the means and the proclivities have not applied the lessons of their own wealth generation to their philanthropic giving. In some cases, those that do, fail to take advantage of the maximum leverage that may be available. While many philanthropic needs cannot be financed using leveraging, support for economic development provides many opportunities.
Koret Israel Economic Development Funds (KIEDF) is but one example of how philanthropic funds can be leveraged to utilize OPM, provide multiple returns and impact other third-sector needs at the same time. KIEDF leverages funds with Israeli banks to facilitate financing to small and medium-sized businesses unable to secure credit on reasonable terms. Starting in 1994, KIEDF has leveraged $230,000,000 of bank financing (OPM) to nearly 6,000 small businesses to create and support over 45,000 jobs in the private sector. Each dollar of guarantee deposit has facilitated 6.5 dollars of financing – with further multiple leverages as the loan repayments are re-loaned to additional businesses. Historic program costs (loan losses, interest subsidies and administration) have been 4% of credit facilitated, including guarantees paid to banks of 1% of the credit guaranteed.
KIEDF is also the only national microfinance lender in Israel – having so far facilitated 3,000 micro loans ($1,200 - $6,000) to Israelis (estimated at nearly 50% of the population) unable to get any form of business credit. KIEDF provides ex-bank financing to Israeli Arab, Jewish and Bedouin women and guaranteed bank loans to micro borrowers throughout the country at a leverage rate of over 50 to 1.
KIEDF recently initiated a major multi-year initiative to facilitate up to $275,000,000 of new credit ($20,000 - $350,000) to small and medium-sized businesses at very attractive rates in the greater Negev and Northern Israel (from Hadera and Afula to the Lebanon border). The program has multiple leverages - participating banks are providing leverage of 7 to 1 and the Overseas Private Investment Corporation (OPIC) of the United States government is providing a second-loss guaranty to the banks up to $20,000,000.
It is a universal axiom that small business is the engine of economic
growth. Small business creates new jobs and supports existing jobs;
increases government tax receipts; reduces transfer payments; and
improves the quality of life of both employers and employees. Support
for economic development and job creation using leverage is a very
efficient and cost effective use of philanthropic funds, either as
contributions or as long-term, low-interest loans, to organizations
operating small business support programs.
The long term impact of the recent financial crisis and weakness of the
US dollar continues to have serious consequences for non-profits in
Israel dependent on philanthropy for sustenance and growth.
Philanthropists and foundations would do well to focus on how some of
these growing needs can be met more efficiently by leveraging OPM to
meet the challenge.