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The first financial instrument to finance network, innovation, economic and social impact
The Network Basket Loan - NBL
The Network Basket Loan - NBL
The Network Basket Loan (NBL) is a network oriented financial instrument aiming at cope with adverse social selection, which consists of the capital market failure to finance according to the social rate of return instead of the economic rate of return, and partial selection, the market failure due to lack of capacity of accounting for positive externalities across individual investment projects.
NBL finances contractual networks of profit and nonprofit organizations with positive social aggregate outcome and joint liability, and, consequently, avoids adverse social selection and partial selection market failures.
Its positive externalities internalisation and the two market failures avoidance justify governmental support.
Overview
Overview
Definition
Definition
A Network Basket Loan is a collective loan scheme through which multiple organizations, profit and no profit, jointly access concessional credit under a network contract, provided they generate a positive aggregated social impact and assume joint liability. The goals are to internalise positive externalities and trigger network synergies.
Advantages and unique features
Advantages and unique features
Network synergies improve contract network’s members credit access, reducing the risk and, consequently, the interest rate, in such a way that credit access itself can be the network scope. The contract can include join liability, that furtherly reduces risks and costs and increase accessibility. Accordingly, NBL can be a strategic financing tool, insofar as network survival and thrive demands special credit access, typical for social projects, and strong ties among its profit and nonprofit members. NBL focus on externalities and network candidates NBL as an economic policy.
Sogial goals
Sogial goals
The NBL aims to cope with two market failures: Adverse Social Selection (AdSS), which consists of the capital market failure to finance according to the social rate of return instead of the economic rate of return, and the Partial Selection Failure (PSF), a market failure due to considering financial viability of investment projects alone without accounting for their aggregate synergies.
Key points
Key points
The NBL cope with these market failures and presents several features and associated benefits.
Impact evaluation is conducted on an aggregate basis, allowing the inclusion of organizations that, on their own, may not meet standard lending criteria.
The aggregate assessment enables the partial or complete internalization of externalities within the network.
Joint liability among participating organizations, formalized through a network contract, reduces overall risk and fosters mutual support, thereby enabling the emergence of network synergies.
Assortative matching within the network contract contributes to risk mitigation for both the basket as a whole and its individual members.
Portfolio diversification, stemming from the heterogeneity of participating entities, further reduces risk exposure.
Transaction costs are lower in comparison to Social Basket Loans and Social Basket Bonds because, in the case of the NBL, interaction with the financial arranger are carried out at the level of the network contract rather than for each individual borrower.
For the same reasons the costs to monitor the ESG goal compliance is low.
Access to public guarantees, subsidies, and tax incentives, justified by the network’s aggregated positive social impact, resulting in a win-win outcome for both borrowers and welfare-maximizing governments.
The emergence of territorial networks enhances local social capital and the genius loci, generating additional benefits for regional development.
It increases aggregate welfare when other social impact instruments fail (see this)
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