26 Jul 2021

One of the more controversial trends to emerge in the charitable sector is direct cash transfers. This stems from the philosophy that instead of having an aid worker fly over to a country to distribute funds, or impose specific spending conditions, the money should be given directly to recipients, to spend as they see fit.

This process, particularly favoured by entrepreneurs and wealthy philanthropists, shows a shift from the traditional, perhaps rather colonial approach to charity in low and middle-income countries; the type of approach that was criticised as “poverty tourism” when Comic Relief flew Ed Sheeran to Africa to meet poor children there.

Putting money where it’s needed

The argument in favour of direct donations is that the recipients know what’s really needed, so they should have the power to make their own decisions, resulting in the more effective use of donated funds. That’s sometimes countered by the view that the lack of oversight on spending might deter some charities and donors.

So how do you check on the impact of what happens with these direct cash transfers? If you transfer £100 or $100 to everyone in a community, what will they spend it on? Do they invest in more livestock or pay for their children’s schooling? Whatever they do will be what’s most important to them. Perhaps not all the money will be spent well, but does that necessarily matter?

There’s a marginal cost in sending the money, compared to big NGO programmes that cost hundreds of thousands or even millions of dollars to deliver aid.  At worst, this is administered by people from high-income countries who are staying in hotels and being paid expenses. The challenge: is the donor really gaining enough additional value from this programme than just sending the money directly?

Encouraging local initiative

Give Directly – the first and largest non-profit to let donors send money directly to the world’s poorest – pose the question “can all the extra expense really be justified, compared to putting money directly in the hands of those who need it?”

Besides letting people choose how best to improve their lives, their research has found very little directly donated money is inappropriately spent. In fact, the cash was used for essentials such as medicines, cows and goats, water, irrigation and schooling children. It’s also invested in business initiatives to generate local income and help communities be more self-supporting.

Wealthy philanthropists and unrestricted funding

This approach has been mirrored by one of the most prominent large-scale philanthropists, MacKenzie Scott. Over the last couple of years she has given away billions of dollars to a range of mainly US non-profits. It has proved hugely transformative for them; charities that have received a multi-million dollar windfall have suddenly found their whole annual budget doubled.

Unsurprisingly, there’s been considerable interest in exactly how MacKenzie Scott has chosen to distribute the money. She has avoided many of the trappings of grant funding, and therefore avoided the criticisms of grant applications becoming an industry in itself. Instead, her approach is completely different.

There are no invitations for applications. Using her own research and consultations with advisers, she contacts the charities she wants to donate to and in essence tells them, “We’d like to give you $XX million. You don’t have to fill in a form, you don’t have to spend weeks or months waiting for it. You can have it this week and crucially, it’s not restricted. We’re not going to tell you what to spend it on – you can use it to cover your electricity bill if you want, pay staff salaries or whatever. You don’t have to deliver us KPIs every week or every month. All we want is an annual letter or report to let us know what you spent it on.”

The fundamental point is it’s unrestricted money, not restricted funding. Those on the front line are trusted to make the right decisions about how to spend their windfall.  Beyond the injection of cash, it is striking how many recipients have described how empowered they feel by this infusion of trust.

A simpler, swifter process

That mirrors a trend towards unrestricted funding we saw in the UK during the COVID pandemic. London Funders, which represents funders and investors in London’s civil society, published a series of principles during the pandemic about good funding. Some of the issues with grant funding and funding applications came to the fore during COVID and whilst we consequently saw grant application forms being simplified, there was also an accompanying trend towards unrestricted funding. In July 2021, London Funders was shortlisted for a Third Sector Award for Breakthrough of the Year.

This is happening internationally and appears to demonstrate that when you put funding under pressure rather than allowing it to develop into its own industry, you end up with potentially a better outcome.

Does the risk matter?

There is potential risk with unrestricted funding – a recipient could do something inappropriate or even illegal with the money, that becomes high profile news. Charitable funders also need to take care to comply with the rules that apply to their grant-making.

However, charities who’ve received substantial funds from MacKenzie Scott believe the positive impact on trust justifies the risks. Unrestricted funding serves to encourage those charities to feel what they’re doing is important and valuable, and that other people recognise their good work. This creates an environment that encourages further donations.

Sometimes this model may fail, and this is perhaps why it has seen most take-up among entrepreneurs and philanthropists, who may be more likely to view failure as an important learning experience or an acceptable risk.  Philanthropic capital is, sometimes, described as risk capital for non-profits.

By contrasts, if you’re a government body or maybe an institutional funder, you’re regulated and held to account by the public, parliamentarians or charity regulators on how your money is spent. If you’re a well-known national charity whose money has come from purchases in your shops and small donations, then a high-profile story about how you ‘wasted’ £10m can have a major impact on your donations.

Contrast this with the position of the wealthy individual philanthropist. They are giving their own money and there is no one holding them to account other than themselves, and perhaps their families. So they can say to a project, “This could have a huge impact and I’m happy to fund you to try it out, but I don’t mind if it fails. It will be a learning experience.”

Ultimately, it’s a question of trust. It’s good to see that some philanthropists are undeterred by their position at the highest end of that risk spectrum and committed to making generous and forward-looking gifts. It’s also good to see that those who most need support are being trusted to manage how they use that money, with an inherent belief that they will do so wisely.

If you would like to discuss philanthropic giving, adapting your charity model to use direct donations or any other aspect of charities or social ventures, please call us or drop us an email.