Written evidence from Community Development
Finance Association
Please find Written evidence to the BIS Committee
Inquiry into Local Enterprise Partnerships (LEPs) submitted by
the Community Development Finance Association (cdfa).
The cdfa is the trade association for Community Development
Finance Institutions (CDFIs) in the UK. CDFIs provide credit and
financial services to markets that are underserved by the mainstream
commercial finance sector. In the UK, CDFIs serve three main markets:
— micro, small and medium enterprises;
— social enterprises; and
— individuals who are financially excluded.
This submission highlights the need for LEPs
to sustained and consistent support to CDFIs so they can address
market failure in the provision of business finance.
The cdfa is responding on behalf of its 70 members
comprised of Community Development Finance Institutions (CDFIs).
CDFIs are non-commercial social enterprises which deliver credit
and financial service to those in greatest need. CDFIs serve three
markets: third sector/social enterprise; micro, small and medium
businesses in disadvantaged communities and financially excluded
individuals, providing credit where access to finance has been
denied by mainstream financial institutions.
Our response has been instructed via direct
consultation with our membership.
SUMMARY OF
MAIN POINTS
— To be effective, LEPs must have not only
a common goal but also an understanding of the need to utilise
proven models for delivery at the local level.
— The community finance model espoused
by the UK's Community Development Finance Institutions (CDFIs)
are recognised as a proven way of delivering business finance
to those communities which will be most affected by public spending
cuts and which LEPs are being devised to redress.
— CDFIs exist to build entrepreneurship
and lasting wealth in and among the UK's disadvantaged communities
which are underserved by mainstream financial institutions. CDFIs
require commitment to provide concerted and sustained support
in order to ensure adequate reach and scope to deliver the aims
and objectives of LEPs to rebalance the economy towards the private
sector and renewing local economies.
— By recycling money CDFIs provide much
greater returns on investment than single-use capital injections
can.
— CDFIs must be seen as a primary vehicle
to ensuring success of the LEP model.
— Microfinance is the best way to maximise
gains in entrepreneurship.
— The need for support for the Big Society
should be on every LEP's agenda with representation of social
lenders on every LEP board.
THE FUNCTIONS
OF THE
NEW LOCAL
ENTERPRISE PARTNERSHIPS
AND ENSURING
VALUE FOR
MONEY
1. LEPs must conform to a unified, cohesive
directive to avoid disjointed, imbalanced results. This is not
to say that delivery cannot or must not be at "the local
level", however defined, but that there must be an overarching
ethos and clear statement of shared goals, executed in a consistent
and systematic way. The problems faced by communities suffering
from under-investment and a lack of a strong foundation for entrepreneurship
are shared across the UK, and therefore it is sensible to devise
a model for redressing these problems using a unified and fully-supported
approach, delivered locally.
2. LEPs must be empowered to provide the
most cost-effective business support solutions, with a particular
emphasis on the prime area of market failure in business finance:
support to financially excluded, disadvantaged communities and
entrepreneurs, defined both geographically (location) and demographically
(socio-cultural).
3. Community Development Finance Institutions
(CDFIs) are the only practitioners with a proven track record
of working in this space. Their expertise and insight into successful
delivery models must be recognised and supported. Creating new
forms of such service provision will necessarily be time and resource
intensive, misdirecting the focus from providing the right kind
of support as quickly as possible onto engaging in developing
a duplicative and redundant activity. CDFIs are ready to deliver
success now.
4. Recognition and support of community
finance has not been sustained and remains inconsistent and poorly
coordinated. The time is now to develop a national programme delivered
locally to expand the scale and reach of tried-and-trusted models
for providing financial and ancillary support to businesses. A
capacity building programme is required in order to enable existing
CDFIs to expand as well as new CDFIs to establish themselves in
underserved areas.
5. LEPs need to have a strong understanding
of and commitment to microfinance (loans of under £25,000
to business with under 10 staff) if the problems that the LEP
system is being created to redress are to be corrected in a sustained
and cost-effective way. It is crucial to recognise the importance
of microfinance, particularly in light of the banks' market failure
in engaging in this type of activity.
6. It is generally recognised that banks
have retreated from the market sector served by CDFIs and will
be unlikely to return for many years. LEPs can do much to ensure
we are a sustainable presence in the future.
7. Whilst certain RDAs appreciated the value
of CDFI and microfinance to ensure entrepreneurial success in
disadvantaged communities, others did not, as evidenced by the
varying degrees of support to CDFIs between RDAs.
8. Given that there will be a diminished
capacity and scope in business support as delivered heretofore,
CDFIs would make a logical one-stop-shop approach to combining
both finance and business advice together. The quality of business
prospects is a central factor in lending and the right kind and
level of business mentoring and monitoring in the first year of
a start-up business could substantially improve the chance of
survival.
9. The role of CDFI business finance should
be seriously considered as the primary solution. CDFIs must have
a seat at the LEP table and rbe ecognised as one of the most important
civil society players in this arena, better positioned than the
charitable end of the spectrum to deliver sustained outcomes.
In addition, CDFIs have a performance framework, designed to encourage
confidence among stakeholders and investors.
10. Independent research commissioned by
BIS and OTS in March 2010 demonstrated that "... CDFIs are
generally efficient vehicles for the delivery of capital to businesses
..."[39]
and that for each £1 of public expenditure CDFIs create or
safeguard £8.57 at the local community level. This does not
take into account the role of capital recycling, that capital
is repaid and re-lent. Extrapolating from this, it is likely that
for each £1 invested into CDFIs an estimated £15 gross
value added would be delivered following a three-year lending
cycle.
THE REGIONAL
GROWTH FUND,
AND FUNDING
ARRANGEMENTS UNDER
THE LEP SYSTEM
11. CDFIs have demonstrated great efficiency
in converting public grant funding into capital that is used repeatedly,
not just once, as is the case when such funding is allocated to
a single-time use (see paragraph 10, above). In this respect,
CDFIs are perfectly placed to work directly with capital provided
by the Regional Growth Fund, ensuring that finance is delivered
to create economic growth and create jobs.
12. The trade body representing the CDFI
sector—the Community Development Finance Association (cdfa),
would serve as a natural conduit in working with the RGF directly
in order to disseminate funding to CDFIs.
13. The obvious way to deliver finance to
budding and existing small businesses is through a strong relationship
between LEPs and CDFIs such that CDFIs continue to be supported
both publicly and privately.
GOVERNMENT PROPOSALS
FOR ENSURING
CO -ORDINATION
OF ROLES
BETWEEN DIFFERENT
LEPS
14. While LEPs must be able to respond to
local needs, it is also important that they have a shared, clearly
stated remit. Coordination at an organisational level above LEPs
would be more effective than devising a system whereby LEPs must
co-ordinate amongst themselves. The need for such higher-order
coordination is borne out by the disparate results delivered regionally
under the previous system, whereby some regions enjoyed the benefits
of entrepreneurial support through a community finance model,
whilst others focused on les sustainable philanthropic approaches.
ARRANGEMENTS FOR
CO -ORDINATING
REGIONAL ECONOMIC
STRATEGY—STRUCTURE
AND ACCOUNTABILITY
OF LEPS
15. Lord Wei, the Government's Big Society
advisor, has stated that it is necessary for CDFIs to operate
at scale while also delivering tailored and sympathetic services.
To achieve the first part of this equation, CDFIs must be supported
on a consistent basis by all LEPs.
16. Care must be taken to ensure that economies
of scale are supported by localism that is not so parochial as
to have no capacity to ensure scale. Commonly shared goals and
delivery models must predominate and direct the LEP structure.
Scale and size are paramount to efficiency and success.
17. Given that the proposed LEP structure
is local, recognition that the predominant CDFI model is also
local and has proven that local delivery of business support and
finance can be made to work successfully. Care must be taken that
the definition of local is not overly small if viability is to
be maintained. There is a natural synergy between a local enterprise
finance provider and LEP. The two are, quite simply, natural partners,
particularly where the CDFI has been operating in the area for
a number of years.
18. However, many CDFIs operate at supra-regional
levels. A highly localised LEP structure will constrain these
providers in their ability to devise and deliver national or multi-regional
programmes and operate at scale.
19. There is a risk that that highly-localised
LEPs will cause fragmentation of financial service delivery programmes
which are more appropriately pitched at a larger geographic scale.
MEANS OF
PROCURING FUNDING
FROM OUTSIDE
BODIES (INCLUDING
EU FUNDING) UNDER
THE NEW
ARRANGEMENTS
20. Contacts the cdfa have had with EU and
EC and their agencies suggested that England missed out on a lot
of EU funding due to the difficulty of dealing with nine different
entities, each with their own, different agendas and approaches.
Central administration and relationship-building with European
entities is, perhaps, a preferred method of securing funding.
21. LEPs could play a lead role in managing
European funding contracts such as ERDF, where available.
13 August 2010
39 Evaluation of Community Development Finance Institutions
(CDFIs), BIS, Cabinet Office, GHK, March 2010, p 79. Back
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