If CDFIs are forced to get ruthless, social enterprise will suffer
The Guardian, by Sam Collin
I’ve worked in the social enterprise sector for 15 years and one challenge that’s always been there is doing good and doing well – the balance of delivering social and financial returns.
And I don’t think it’s getting any easier.
Take community development finance institutions (CDFIs) as an example. They are social enterprises that deliver ethical financial services to those that can’t get bank credit. There are 60 of them operating across the country and their services are in demand. The number of people turning to CDFIs has doubled in the last two years.
It’s not surprising. While banks have concentrated on sorting out their balance sheets, it’s become increasingly difficult to qualify for a bank loan.
So CDFIs have stepped up to meet the widening gap between the supply and demand for credit. And they’ve caught the attention of ministers. Financial Secretary to the Treasury, Greg Clark, has said: "Using a wider range of information, drawing on local knowledge and providing support to lenders, CDFIs are able to provide finance to viable businesses and social enterprises unable to secure lending from mainstream lenders, as well as to households in need of home improvement or personal credit."
CDFIs are in favour with the government, serving more people than ever before and delivering significant benefits for local communities and economies, so I’d expect the industry to be booming.
But according to the latest Inside Community Finance report, many CDFIs are very short of capital for making new loans. The capital provided to CDFIs to on-lend roughly halved in 2012 compared with the previous year, and capital from national government sources has declined by 87% in the last two years. While CDFIs are becoming more sustainable, they still require funding to help them deliver their services.
Like all social enterprises, CDFIs are driven by a social mission. They bring and keep wealth in local communities. Last year they created and protected 8,300 jobs and saved 18,850 people from illegal and high-cost lenders.
Banks lend to the most profitable customers. CDFIs lend to customers that are seen as less-profitable, more-risky. They lend smaller amounts, they build relationships with customers and, in most cases, also provide support and advice. This could be giving money management advice to a customer, or helping a social enterprise with its business plan.
It is these value-added services that are a core part of the CDFI’s social mission, and a core reason why they are effective at helping enterprises and families.
But the cost of operating as a CDFI is not currently recognised by many funders, including the government. Both Big Society Capital and the newly formed Business Bank are keen to improve access to finance for social enterprises and SMEs. But both will only provide capital at commercial rates.
This is adding pressure to CDFIs that want to deliver value-added services, and support harder-to-reach customers.
It has forced some CDFIs to focus on different customers – helping larger, established businesses rather than sole traders and start-ups. Some CDFIs have broadened the geographical area they serve – helping customers in more affluent areas as well as the disadvantaged areas they were initially set up to help.
Like many social sectors, I think, CDFIs are dealing with mission drift.
Steve Williams of Impetus – which supports businesses in the West Midlands – told me: "We lend between £1,000 and £50,000. The loans below £10,000 are more risky, but we make them because we want to help people, and we want to create jobs in the area. But however much we want to do them, as money becomes tight, we’re thinking ‘Why are we taking these risks, we haven’t got the money?’
"The goalposts have changed and the government wants CDFIs to operate more like banks. We’re having to be more ruthless in our decisions."
CDFIs are a major source of funding for other social enterprises. But if CDFIs are becoming more "ruthless" in their lending decisions, will this limit the range of social enterprises that can access finance to start up or grow? They’re not going to take a punt on you because they think the positive impact you’ll have on the community is worth the risk.
It’s a worrying trend. The funding environment should recognise the social part of CDFIs as well as the enterprise part. Otherwise communities, social enterprises and businesses that need finance will be abandoned.