Select Committee on Treasury Written Evidence

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 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 poverty.


  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 has—and will continue—to 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; and

    —  Structuring the SIB.

Understanding the SIB's customers

  The SIB—as a development bank—is 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 focus—the 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 this arena.

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.

    —  Grants to meet shortfalls from generated income.

    —  Products to develop CDFI balance sheets include product diversification and asset acquisition.

    —  Guarantee funds.

    —  Long term, subordinated and/or unsecured lending.

    —  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 opportunity—but 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.

May 2007

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