The steady growth of the capital and financial markets in CEE in recent years has necessitated significant legislative amendments, which has also had consequences for non-profit organisations. The concept of endowments in the form in which it is recognised in developed democracies has only asserted itself in a few countries in this region. Some organisations therefore prefer to create a reserve fund as a financial instrument. An endowment is an instrument that has an effect not only upon the financial administration of the organisation, but also upon its relations with members and donors. The returns obtained from this instrument must serve to fulfil the mission; otherwise, there is a danger of losing the trust of both small and large donors, or casting doubts on the integrity of the organisation's intentions.
Funds making up the endowment come from contributors, to whom the non-profit organisation has a responsibility for minimising the inherent risks of the endowment (such as loss on investment, currency devaluation, fraud, banks going bankrupt, etc.), and, needless to say, for fulfilling its mission. An endowment requires steady investment in order that it fulfil its purpose as a financial instrument, and the value of the endowment must be many times higher than the organisation's annual budget. The need for a flawless mechanism to administer it is therefore obvious, especially if we take into account the failure of similar instruments in the commercial sphere (such as the collapse of some investment funds).
Non-profit organisations in CEE, where there is a shortage of long-term capital, may mistakenly regard the basic function of an endowment as "a financial safeguard against hard times ahead". In reality, the usage of returns from endowments is very strictly defined, and these returns cannot be used to supplement the organisation's budget in the event that fundraising efforts prove unsuccessful. Funds saved by an organisation to be used in an emergency do not represent an endowment, but rather a reserve fund. As most non-profit organisations do not build stability upon the strength of their assets, but upon their programmes and the support of their constituents, it is only to be expected that many more reserve funds have been established in CEE than endowments. The accompanying table presents their differing characteristics, and may assist organisations in deciding which of the cited financial instruments is most appropriate for them.
Peter Gu�tafík is a Consultant to Partners for Democratic Change Slovakia (PDCS).
This article is excerpted from the text "Endowments in Nonprofit Organisations" which originally appeared in the Reader for Advanced Nonprofit Organisations, published by PDCS in 2000. The editors of SEAL would like to thank Peter Gu�tafík for his kind permission to reprint this excerpt.
First published in SEAL (Social Economy and Law Journal), Winter 2002-2003. See http://www.efc.be/publications/sealabstract.html .