Memorandum submitted by Community Development
Finance Institutions (CDFIs)
The cdfa is the trade association for the UK's
CDFIs (Community Development Finance Institutions). Launched in
2002 as a result of a recommendation made to the Chancellor by
the Social Investment Task Force, it now represents over 95% of
the UK's CDFIs. In 2007, it will be introducing a Code of Practice
and a performance framework to drive up standards throughout the
sector and increase stakeholder confidence in its activities.
THE CDFI SECTOR
The CDFI sector is new and emerging in the UK.
CDFIs provide finance to people who, and businesses which, cannot
access it from mainstream sources. They work to give their clients
a track record and credit history which will enable them to move
into the mainstream sector.
CDFIs finance individuals for consumption purposes,
micro businesses, SMEs, social enterprises and business based
in disadvantaged areas that have high growth potential. They tend
to specialise in one or two of these markets. Some CDFIs target
their services at communities of interest such as BME groups,
women, over 50's etc.
On 30 September 2005 (the latest date for which
figures are available), CDFIs had £181,000,000 on loan. They
had financed nearly 18,000 businesses and households. They have
created 11,000 jobs and sustained 88,000 more. They have also
levered an extra £285,000,000 into the businesses and households
they serve. They had also used CITR to raise over £38 million
of private finance.
An appropriate strategy would be to use unclaimed
financial assets to promote financial inclusion. If this were
to happen, the government would be releasing significant resources
for a long-standing (and increasing) social issue into which recent
policy has made inroads but which needs a long term approach.
Bank would be more comfortable releasing these assets if they
know that the long term benefit to them would be more customers
accessing their services. The general public which is very aware
of the problems in accessing finance could also be engaged with
the concept of unclaimed assets being used to combat financial
The Commission on Unclaimed Assets recently
proposed the creation of a Social Investment Bank (SIB). The cdfa
is in favour of this proposal if the bank is a wholesaler, not
retailer, of funds.
We know the government is keen to support the
community development finance sector. This was recently confirmed
by the Chief Secretary at the cdfa's fifth birthday celebrations
on 19 April in the House of Commons. The cdfa feels that a Social
Investment Bank would be well placed to provide the long term
support that the sector needs to grow exponentially into the future.
It is clear from the emergence of the CDFI sector
to date that one of the factors that will influence future, further
grow in scope and scale will be the availability of appropriately
designed, costed and delivered capital. Demand for non-grant (ie
invested or lent capital from a variety of sources) will continue
to grow as CDFIs increasingly turn to other forms of capital to
fund portfolio growth. In turn, this portfolio growth will enable
CDFIs to provide the individual, businesses and households they
serve to access the finance they need to prosper and tackle financial
exclusion. While grant capital hasand will continueto
be a vital component of CDFI sources of both revenue (to cover
the costs of delivery) and capital (the money used to onward lend
and invest), as the sector goes to scale CDFIs will require increasing
amounts of external capital.
The proposals for the Social Investment Bank
can support this growth by providing such capital. However, in
order to maximize this growth a number of areas in the design
of the Bank and the products it offers should be taken into consideration.
They fall into three core topics:
Understanding the SIB's customers;
Getting the product range right;
Understanding the SIB's customers
The SIBas a development bankis
envisaged as a wholesale provider of capital to financial intermediaries
and a direct investor in a variety of enterprising voluntary,
community and charitable organisations. In order to create effective
demand for wholesale capital the SIB must ensure it is available
to the full breadth of retail third sector lenders which currently
lend and invest not just in social enterprises and charities but
also micro and small businesses as well as individuals and households.
This breadth will be important in order for the SIB to be able
to fulfill both its business model (to create sufficient deal
flow) and mission imperatives (to assist those business and households
unclaimed assets are committed to).
As a direct investor, it is also important that
the SIB does not use what might be significant capital to its
unfair advantage to compete with existing retail providers that
are serving social enterprises, voluntary organisations and community
organisations. While the cdfa supports competitiveness which can
drive efficiency and customer focusthe resources available
to the SIB are in danger of creating an unfair advantage if made
available on the same basis. However, there are clear opportunities
for the SIB to provide "market making" functions within
Getting the product range right
The SIB provides an unparalleled opportunity
to transform the CDFI sector. However, this is a sector still
in its infancy with the challenges of further capacity building,
growth, development and diversification ahead of it. In order
to fly rather than flop the SIB must take the role of both investor
AND market maker. This means a variety of products with varying
expectations of risk and return will need to be included in the
suite of products and services available. This may mean mixing
a variety of smaller, grant based risk taking inputs to grow and
develop the capacity of the sector to take external capital and
then to tailor those inputs to the needs and capacity of individual
CDFIs. This might include lower cost, longer term more deeply
subordinated capital as well as the provision of guarantee funds
as well as more commercially orientated investments.
Some of the products for consideration should
include the following as well as more commercially orientated
loans and investments:
Capacity building and technical support
Grants to meet shortfalls from generated
Products to develop CDFI balance
sheets include product diversification and asset acquisition.
Long term, subordinated and/or unsecured
Equity and equity-like products structured
as bullet and balloons with elements that can share risk as well
as upside such as turnover or profitability shares.
Structuring the SIB
The SIB is a great opportunitybut there
is no doubt that in order to fund the market making opportunities
it must be able to operate at sufficient scale with adequate resources
to be able to balance the long term business model priorities
of attracting capital, providing returns AND growing the market.
Without sufficient investment up front, the SIB runs the risk
of being insufficiently resources to fulfill its long term strategy,
having to broker increasingly commercial deals and/or finding
itself competing with existing providers and duplicating effort
with resources that place in on an unfair footing. The SIB is
in the unique, but schizophrenic position of being required to
act with both head and heart and will therefore require a unique
mix of commercial and third sector approaches and knowledge.