The role of governance in enabling the pursuit of dual mission in bank-based impact investing

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ABSTRACT Impact investing, defined as direct investments into small- and medium-sized enterprises (SMEs) with intentionality to realize social impact and financial returns, simultaneously, has emerged as an attractive, alternative source of entrepreneurial finance in marginalized communities. In this paper, we focus on bank-based impact funds (BBFs), where impact investors and commercial bank partner to create different vehicles of impact investments (managed funds, grants/guarantees or co-financing BBFs) for financing SMEs. Through the theoretical lens of governance, as applied to bank-SME financing and the pursuit of dual mission in social entrepreneurship studies, we develop qualitative case studies in Ghana, uncovering how BBFs enable the pursuit of dual mission by SMEs. The findings are drawn upon to develop a theoretical framework that depicts a unique form of governance as constituting the (i) alignment of the incentives of impact investors and banks to resolve structural and dual-mission tensions in bank-SME financing; and (ii) pre-approval, control and monitoring mechanism necessary for the pursue of the dual mission of financial returns and social impacts in bank-based impact investing. The findings have implications for fund managers, SMEs and policymakers seeking to attract impact investments for private sector-driven development.