Definition

Community development financial institutions (CDFIs) are specialist financial institutions whose goal is to enable the development of local communities and the growth of local employment by financing small businesses and social enterprises (nonprofit ventures that apply business skills to achieve a social objective). They are financial institutions that focus on financing local enterprise development; they combine social with economic objectives.

What are CDFIs?

The term 'community development financial institution' is a generic one, designed to cover a great variety of types of organisations that share a common goal. They include credit unions, social or community banks, community development corporations, community foundations, community reinvestment or revolving loan funds, micro-credit providers, government development departments and so on. They finance local economic development by a variety of commercial, low interest and interest free loans and grants. They obtain their finance from local people investing funds (sometimes at lower than market interest); by issuing debentures; by receiving deposits from regular banks or acting as specialist agents for banks; by receiving gifts from living donors or deceased estates, and so on.

Why We Need CDFIs

While communities are increasingly encouraged to get together and develop ideas to rebuild their local economies and provide jobs for their young people, many good ideas for new business ventures or for social enterprises come to nothing because they are unable to obtain finance. Banks and many financial institutions often make credit decisions far from the location of the loan request and are unable to assess business plans from small businesses with little savings or business collateral, or social enterprises that includes sweat equity (volunteer time) and a commitment of local community support.

World-wide Context

CDFIs are emerging world-wide in response to these factors and other changes in banking, employment, institutional and social factors. Some countries, such as the USA and the UK, actively encourage and direct investment with government and regulatory support into poorer communities to stimulate investment, employment and economic growth.

The USA is at the forefront of such government approaches with its 1977 Community Reinvestment Act that has stimulated investment in CDFIs to around $5.4 billion (USA) in 1999. In the US, in 2002, there are over 500 CDFIs including 200 Community Development Loan Funds, 50 venture capital funds, over 200 community development credit unions and approximately 30-40 community development banks.

The UK Treasury has recently supported the USA developments by introducing tax credits for community re-investment, mandatory banking disclosure of its community investments, bank ratings and various other incentives to stimulate investment in poorer communities and businesses.

In continental Europe, there are a variety of funding sources to which local social enterprises can turn and the European Union is currently undertaking research with a view to creating supportive institutional and regulatory setting for CDFIs.

In Australia

An embryonic CDFI sector is beginning to form in Australia in response to changes in financial institutional practices, technology, increasing regional isolation and the need for community investment.

Australia has a few credit unions that make loans to local business proposals; a number of emerging and growing community foundations (combining private philanthropic, government, grant and community funds); a soon to be launched community sector bank with social investment objectives (a franchise of Bendigo Bank).

In recent years, there have also been a number of government inquiries that, whilst recognising local and regional community and business finance needs, do not specifically recommend community development finance initiatives. In 1987, for instance, the Report of the National Advisory Group on Local Employment Initiatives (LEI) recommended the establishment of federally funded intermediary organisations and private investment funds to assist LEI enterprises access finance.

In 1992, while not a traditional CDFI with social and community objectives, the Commonwealth Government Pooled Development Funds (PDF) program was established to provide venture and equity capital for small and medium sized businesses. By 2000, only 96 PDFs had been registered and $ 476 million raised.

In 1999, community and business development finance problems were briefly acknowledged by the House of Representatives, Standing Committee of Economics, Finance and Public Administration. However, the Inquiry failed to address the problems.

It is time for Australia to catch-up with best practice community development initiatives now being supported in the USA, the UK and Europe, and give closer attention to the benefits that can flow from a strong set of CDFIs.

ACCORD's Role

ACCORD is documenting the above points to achieve recognition of the importance of CDFIs and initiate a debate within the wider community, government and policy areas about how to encourage their emergence in Australia.

We would welcome your input to the research. Please contact Kathryn Parker on (02)95145755 or email: kathryn.parker@uts.edu.au.