August 15, 2003

ENDOWMENTS IN CENTRAL AND EASTERN EUROPE: APPROACH WITH CAUTION

Endowments in Central and Eastern Europe: Approach with Caution

Peter Gu�tafík

In Central and Eastern Europe (CEE), endowments began to be discussed as an instrument contributing to the permanent financial stability of the Third Sector in the second half of the 1990s. An endowment is an organisation's capital and other assets, which are invested in a targeted way; for example, in financial or capital markets. Its structure may change. Endowments are successful mainly in countries where these markets are highly developed and are regulated by solid rules. An endowment is an instrument that is appropriate for an organisation with long-term stability, a strategic financial plan, a high level of support from its members and donors, and a long-term commitment to its mission. In developed countries, these are usually large grant-making foundations.

The long-term sustainability of the Third Sector in CEE is based upon the notion that the endowments of a number of successful foundations will secure the financing of other non-profit organisations. However, it must be observed that the idea of setting aside a relatively large amount of funds in order to invest them in accordance with the "money makes more money" principle traditionally leads to distrust on the part of the public, for whom investment is merely "speculation", which does not create any "real value".

Endowments require the fulfilment of a number of conditions:
  • the organisation has been operating, or plans to operate, for many decades;
  • the organisation has funds at its disposal that are not immediately essential for, or tied up with, operation and programme activities;
  • the legal and social environment enables the organisation to invest these funds legally; and
  • the organisation is capable of coping with the risks associated with this financial instrument over the long term.


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).
E-mail: gustafik@mail.com
Web:  http://www.pdcs.sk

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 .

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