Memorandum submitted by the Community
Development Finance Association (CDFA)
THE CDFI SECTOR
— The cdfa is submitting this response
on behalf of its members (CDFIs).
— CDFIs are social enterprises which
deliver financial services, principally unsecured loans, to those
excluded from the mainstream banking system. The mission of CDFIs
is to create wealth where it doesn't exist.
— The emerging CDFI sector is having
a significant impact in providing affordable credit to those unable
to access mainstream banking facilities.
— CDFIs have financed more than 9,500
businesses and individuals, created 10,000 jobs and sustained
than 85,000 more. They combat poverty and create employment.
— In addition to the above, the sector
has leveraged £160,000,000 of other funds into the businesses
and households it serves.
— Lack of visibility over the funding
of the sector is undermining its future, shaking investor confidence
and threatening to close the industry, putting at risk all of
the work achieved to date. The sector urgently needs clarity on
the ring-fenced £11 million mentioned in paragraph 2.2-2.6
and a commitment to future funding. Many of the more mature CDFIs
are unable to satisfy their market for loans from the current
level of funding.
OTHER ISSUES
— The Financial Inclusion Task Force
has a real role to play in supporting the government's work on
financial inclusion. However, it needs to be in place for longer
and have a remit to make policy recommendations.
— £20 million of the Financial
Inclusion Fund remains unallocated. This submission suggests some
ways forward here.
— The Financial Inclusion Growth Fund's
design is too restrictive to achieve its own objectives.
— The FSA should play a key role in
support of financial inclusion.
— The cdfa is willing to give oral
evidence to the Inquiry.
1. ABOUT
THE COMMUNITY
DEVELOPMENT FINANCE
ASSOCIATION
1.1 The Community Development Finance Association
(cdfa) was founded in 2002 on the recommendation of HMT's Social
Investment Task Force. It is the trade association for community
development finance institutions (CDFIs). It has 67 members and
represents the vast majority of the UK CDFIs.
1.2 The cdfa provides training and networking
opportunities to CDFIs, as well as playing an important role in
setting standards among its membership. It is currently working
on the development of a Code of Practice, which is intended to
be binding on all members. The Code will make provision for the
manner in which individual CDFIs will deal with their investors
and borrowers and it is hoped it will become the basis for a form
of self regulation. While the drafting and operation of the Code
is a matter for the cdfa and its membership, the cdfa is able
to draw upon the expertise of the FSA in determining its content.
2. COMMUNITY
DEVELOPMENT FINANCE
INSTITUTIONS
2.1 CDFIs work to provide clients with the
appropriate tools to move into the mainstream banking system,
thereby promoting financial inclusion and providing a meaningful
alternative to home credit, or "doorstep" lenders. CDFIs
typically see their role as going beyond simply lending money
and most provide free advice and other services which are intended
to help ease the consequences of poverty.
2.2 Where it is present, the sector is having
a significant impact in providing affordable credit to those who
need it most. CDFIs have financed more than 9,500 businesses and
individuals, created 10,000 jobs and sustained 85,000 more. In
addition, the sector has leveraged £160,000,000 of other
funds into the businesses and the households it serves. With more
adequate funding, they could do much more. However, there is currently
no assured future funding and in the absence of certainty, it
is difficult for CDFIs to plan ahead and meet market needs with
confidence.
2.3 The immediate problem appears to be
caused by unexpected changes in government policy. The cdfa is
very concerned that funding that had been earmarked for the sector
could be withdrawn. When SBS staff met with the cdfa board in
February last year, they advised that the SBS would ring-fence
£11 million over the next two financial years for CDFI and
cdfa support. It now appears that this £11 million ring-fenced
fund is in jeopardy.
2.4 This situation is most worrying as there
is no other identified way of filling this potential funding gap
and investors will lose confidence in CDFIs if they feel their
investment has been put at risk, not by the purposes for which
they had generously invested money, but by a change in government
policy. This also has severe implications for CITR which has already
successfully attracted £33 million into the sector and has
the potential to raise substantially more as it grows and matures.
2.5 With no clarity about future funding,
exit strategies will need to be put in place in the very near
future. This includes giving notice to landlords, issuing redundancy
notices etc. Already, one CDFI has made four staff members redundant.
Apart from the obvious loss to the individuals concerned, the
CDFI has lost expertise and the return on the training it has
provided.
2.6 There is a real need to expand the work
that the CDFI sector is undertaking. If the sector collapses now,
doorstep lenders will lose a growing source of competition. If
it is reinstated in the future, all the current infrastructure
and expertise will have been lost and it will take years to re-establish
and recover investor confidence.
3. ACCESS
TO BANKING
SERVICES
3.1 The emerging CDFI sector is providing
access to affordable financial services to those who need it most,
people who may otherwise use expensive doorstep providers.
3.2 However, CDFIs do not just provide finance.
They exist to ensure their clients can move into the mainstream
sector and so CDFIs provide the support and inputs to ensure this
happens, including financial education and support. This is called
technical assistance. A significant amount of time is spent on
technical assistance which CDFIs believe is integral to their
work.
3.2 EXAMPLES
OF CDFI IMPACT
WEETU (Women's Employment Enterprise and Training
Unit)
WEETU is based in Norwich and runs a loan fund
with a support scheme for female micro-entrepreneurs. Jane is
one of WEETU's clients. Jane set up a small business brewing beer
in the garden shed. With help from WEETU she grew the operation
into an award winning enterprise. She then sold it and has set
up another business selling products which are made in Norfolk
by local people.
South Coast Money Line is the oldest CDFI delivering
personal finance. It target area was originally Portsmouth and
last year it expanded to cover the South Coast. Below are comments
from clients of South Coast Money Line.
— Relieved the trapped feeling of needing
money and not being able to get it elsewhere."
— "As a disabled person I am now
able to be of use to the community."
— "It helped my wife and I through
a most worrying and difficult period—we will always be grateful."
— "The loan helped me secure a
place to live in Portsmouth and start to rebuild my life ..."
— "You have enabled me to get
a flat tenancy, this has helped me stay clean from drugs—I
never thought anyone would help an ex-addict."
— "I had a loan to continue my
education—it is the most helpful thing that has ever happened
to me—I have achieved my dream."
— "Without my loan I would of
had to go into residential care, as a severely disabled person
this would of taken away my independence ..."
— "I was very nervous about the
loans that I had, but I came to South Coast Money Line and it
took all the worry off my shoulders ..."
— "You helped me find a flat at
a time when I was vulnerable and no one else would help, I will
be forever grateful."
The above testimonies indicate that CDFIs have
a positive impact on peoples' lives. They combat poverty and increase
employment prospects.
3.3 The issues that the sector currently
faces are ones which prevent it from offering its services more
widely. These include:
— Lack of scale and coverage.
— Lack of forward visibility over revenue
and capital funds.
— The need for capacity building within
CDFIs.
— The need for income to cover technical
assistance activities.
— The need for time to develop and
pilot new products.
— The need to attract capital, including
through the expansion of Community Investment Tax Relief.
4 ROLE OF
THE GOVERNMENT,
THE FSA ETC
4.1 The Financial Inclusion Task Force
The Task Force is making progress on its terms
of reference, but the issues it is examining are complex and varied.
It is half way through its two year life span and needs more time
in order to fulfil its potential. We suggest that it exists for
at least three more years and its remit is expanded to include
making formal recommendations on creating an improved public policy
environment for financial inclusion.
4.2 The Financial Inclusion Fund
There seems to be around £20 million of
the fund that is not allocated to any specific activity. In the
spirit of transparency, the cdfa urges the government to state
the activities for which these monies have been set aside. If
no purpose has been identified, then the fund would be best used
for building CDFIs so that they can be supported to deliver the
goals of the Financial Inclusion Growth Fund. Such activities
include:
— Short courses for new staff.
— Accredited training for experienced
staff (which would also help to professionalise the sector).
— Support for expansion and/or reaching
scale.
4.3 Growth Fund
While the cdfa appreciates the reasons for the
current design of the Growth Fund, it is too restrictive to achieve
its goals. Our concerns are:
— The fund is delivery focused and
does not address the capacity building issues which are needed
in advance to make delivery successful.
— The fund has ambitious targets which
it wants to achieve in less than two years. Realistically, these
targets will not be achieved. Therefore, we predict that when
the fund has ceased, it will be deemed unsuccessful. This would
be a disappointing outcome. We hope that more funds will be secured
for continuing the Growth Fund from 2008 and that current targets
will be made more realistic. We urge the Committee to look at
funding which is longer term than at present. For instance, the
ODPM's Local Enterprise Growth Initiative (LEGI) provides funds
for a 10-year period, which is a more appropriate timescale.
4.4 The Financial Services Authority
The FSA has the potential to play a key role
in promoting financial inclusion, As a guiding principle, the
FSA should be mindful of the impact on financial inclusion in
the implementation of its policies.
The CDFI sector and the cdfa have an excellent
relationship with the FSA. It has provided valuable informal support
to the sector, the nature of which indicates its sensitivity to
the size of CDFIs, the challenges they face, their mission driven
operations and the role they play in combating financial exclusion.
We hope this relationship will continue.
January 2006
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