Some CDFIs’ notion of APR is not healthy, says Big Society Capital chief
The Guardian, by Claudia Cahalane
Community Development Finance Institutions (CDFIs) need to charge higher interest rates on loans if they want to at least break even and be seen as attractive investment prospects, the chief executive of Big Society Capital (BSC) has said.
But the head of the Community Development Finance Association (CDFA) told the Guardian that it’s wrong to expect CDFIs to cover all their costs and that a loan guarantee scheme supported by banks, government, foundations and trusts should be provided instead, to allow for a small percentage (normally 5-10%) of defaulting customers.
Speaking after the CDFA’s annual event on 5 October, Nick O’Donohue, chief executive of BSC said: "At the moment, I don’t see many CDFIs even breaking even. I honestly think the notion of APR from some of these lenders is not healthy.
Social investors only want to lend to those who are at least breaking even.
"A little more interest charged over six months to CDFIs’ borrowers wouldn’t make much difference when loan sharks are charging 250% interest. There are other values CDFIs bring to customers, like unsecured credit, longer payment terms and payment holidays," he said.
CDFIs typically charge about 3-4% interest to clients, who are not able to borrow from banks. In 2011/12 they were only able to help just over a third of those that requested loans from them. Ben Hughes, the chief executive of the CDFA said private investment would be much easier to bring in if a loan guarantee scheme was in place.
Also speaking at the event, Pat Conaty, a fellow of the New Economics Foundation, suggest that BSC could also lower its lending rates to CDFIs to make their finances more manageable. BSC currently charges ‘low single figure’ interest rates to social and community finance intermediaries.
"BSC’s rates means that CDFIs have to charge, say, around 7% to make a return. But research shows that defaulting on loans increases if interest is charged at more than 5%", he said.
O’Donohue responded by saying he found it "hard to believe that going higher than 5% would increase default rates".
Also speaking in the Funding the Future morning session with O’Donohue, was Theresa Burton, founder of crowdfunding platform Buzzbank. She said she’d spoken to a number of CDFIs who are interested in crowdfunding – both in terms of sourcing investment for themselves and as a way of encouraging clients to diversify their income.
She explained: "It means CDFIs could stretch their funds further, and social enterprises and organisation could grow their community of supporters through crowdfunding. I think we’ll see pilots in this space in the next six to 12 months.
Hughes commented: "Nick O’Donohue’s suggestion penalises the people we are trying to help. It is wrong to suggest CDFIs should cover all their costs through charges and fees because, as Pat Conaty says, that would make it difficult for our customers.
"We want to encourage a collective approach to setting up a loan guarantee scheme to cover us for customers that default. This would be supported by banks, trusts and foundations and the government. Having this would mean we could leverage significant private sector investment because the risk would be managed. It’s a challenge and an opportunity," said Hughes.