The business model of social banks

Abstract

Based on an extensive literature review, this paper proposes to define social banks (SBs) as social enterprises that run banking activities with the social mission of supplying credit to other social enterprises, which are typically less profitable than for‐profit businesses. This definition marks our starting point for developing a theoretical framework to explain how SBs survive without subsidies in the banking market. We build on a two‐pillar business model of value‐based financial intermediation, which comprises an ownership structure that limits residual ownership claims and preferential credit conditions associated with financial sacrifices from motivated depositors. We also clarify the link between SBs and stakeholder banks and weigh up the importance of market interest rates for facilitating the business of SBs. An empirical analysis based on panel regressions on 5,400 European banks over the 1998‐2013 period attests to the relevance of our theoretical framework. It also confirms that a low interest rate environment raises concerns about the sustainability of the SB business model.