This may be the most important paper you’ll read this year—and in years to come.
Every disruptive industry eventually faces a milestone moment that can pivot it to new levels and greater impact. Today, the CDFI industry is at such a crossroads. How it pivots is up to all of us.
For more than 30 years CDFIs have helped to rebuild American communities, weathering a proof of concept period in the 1970s and 1980s and a steady growth period that started in the 1990s and continues today. But what about tomorrow?
- Are we ready for the external shifts and challenges that confront the industry?
- Can we expand our influence using new technologies?
- How can our high-impact, proven model meet the needs of a new breed of impact investors, socially minded philanthropists—including family offices, endowments, and foundations—looking to solve issues of poverty and social change through community investment?
- What is the CDFI Capacity Score™ and how could it change the CDFI investing landscape?
Using quantitative and qualitative research, CDFI Futures: An Industry at a Crossroads explores these questions and more, discussing this inflection point for community investment and its future challenges and opportunities. The groundbreaking research was motivated by a view among many practitioners and investors that the CDFI industry is at a critical time of change.
Want more data? Download OFN's longitudinal study, 20 Years of Opportunity Finance.
Thank you to the Citi Foundation who generously supported OFN’s research.
CDFI Capacity Score™
Which CDFIs are the most sustainable and effective? The answer might surprise you.
Over the period of steady growth, CDFI assets grew dramatically and CDFI financial performance was strong. However, are growth and financial performance alone enough? What if a strong, growing CDFI is increasingly disconnected from its market?
OFN has debuted a new metric in CDFI Futures which looks precisely at the question of who is delivering best on growth and efficacy.
The CDFI Capacity Score™ measures how sustainable and effective a CDFI is over time. It is based on a CDFI’s growth rate, level of financial performance, and degree of effectiveness.
An important finding from CDFI Futures is that there is no direct correlation between a CDFI’s total assets (size) and its Capacity Score. This means the CDFI industry, with its many modest sized, capable institutions, may have more deployment capacity than we recognize.
Are investors and funders missing some critical opportunities? Maybe it’s time for a fresh look.
CDFI Futures takes a long-game view of the opportunity finance industry, starting with our capitalization origins and moving through 30 years of community investing to the big question of how we will embrace new technologies and investors. We've pulled some excerpts to start your reading! Download the full report here.
Proof of Concept to Steady Growth
The proof of concept period negotiated a practical space between markets and public purpose. Defining that space was the industry’s major innovation. (Page 8)
Measuring CDFI Capacity
During the period of steady growth, how have CDFIs performed? From the perspective of total asset growth, the answer is clear. The industry expanded dramatically, based on the infusion of new capital and increased policy influence. With increased capital there was a substantial increase in social outcomes measured by housing units, jobs, business growth, community facilities, and so forth. From the perspective of financial strength, the data on nonperforming assets and charge-offs demonstrates a story not too different from that of conventional financial institutions.
We also wondered about the industry’s capacity: how sustainable and effective it was during the steady growth period. Capacity is a somewhat normative term that means something more than asset growth and financial strength—it also implies the ability to carry out mission.
We were interested in building a capacity measure precisely because growth, in and of itself, can be deceptive. A high-growth firm can have declining profits, which may eventually lead to problems. And a nonprofit can grow in absolute service terms, but decline with respect to key financial and operating metrics and, thus, its reputation among public and private funders may erode. (Page 13)
FinTech and CDFIs
Today the most talked about change in banking is FinTech, or the integration of finance and technology. FinTech refers to software-driven financial services and lending platforms whose purpose is to disrupt conventional banking and lending through more cost-efficient customer connections.
FinTech is the logical outgrowth of increasingly sophisticated uses of information and data to make loans. It also represents the latest technological disruption of conventional businesses from retail services to education. Is FinTech to banking what Amazon is to local retail or what Uber is to the taxi industry? We will find out in the next few years. (Page 27)
Chasing the Impact Investor
Yet there is a practical gulf between the impact investor movement and the CDFI industry, something recognized by everyone we interviewed. CDFI practitioners could not point to significant new CDFI capital that identified itself as affected by the new impact investor efforts. CDFI investors working in institutions that make CDFI and impact investments spoke to the cultural gap that exists between the two industries. (Page 31)
Is There a Diversification Problem?
The ability of CDFIs to take advantage of new technologies and new investor opportunities speaks to the issue of adaptability. When change appears, it is common to ask whether an industry is too dependent on a certain way of looking at their work to adapt to change. And if so, to what extent is that dependence a byproduct of how it is capitalized and who its customers are? These are important questions for the CDFI industry today. (Page 35)
A Capital Transformation Phase
The central purpose of this report is to explore the present inflection point for the CDFI industry. Our conversations defined this moment through reference to one or more of the following topics: 1) current CDFI operating challenges, 2) the changing banking environment, 3) the new impact investment practice, and 4) new CDFI successes individually, through networks, and in terms of public policy. (Page 41)
CDFI Identity and Social Reform
The importance of reflecting more deeply about the policy ramifications of CDFIs is made more important as the industry has more success. Every stage of development brings with it points of crisis, and it is likely that the crisis for CDFIs in the capital transformation stage will have to do with social identity. What do CDFIs stand for as it relates to economic policy and development questions? (Page 46)
About the Research
What are the growth obstacles and opportunities in the CDFI industry? CDFI Futures employs quantitative and qualitative research methods to answer this question.
Using OFN Member performance data—from 173 unique CDFIs and a combined 1,168 years—the report developed a CDFI Capacity Score™ that measures a CDFI’s capacity over time. And interviews with 25 opportunity finance industry practitioners and investors representing organizations of different sizes, geographies, and portfolio strategies shed light on common concerns about the industry’s future.
This data and insight, together with a review of historical sources on social reform and finance, as well as numerous reports on impact investing, CDFIs, and community investing, form the foundation of one of the most comprehensive and authoritative reports ever published about the CDFI industry's future.
The conversation is just beginning. Join us throughout the year as we explore CDFI Futures, here and on social media.
- Author Jeremy Nowak talks about his research and findings at OFN’s 2015 Annual Conference. Watch his speech and download his presentation.
- Nowak talks to OFN’s CDFI Connect about what fuels CDFIs, the changing dynamics of CDFIs and investors, and how financial services are fundamentally changing.
- Nowak shares insights into the challenges the CDFI industry faces, and the conversations that CDFI staff must have to move forward in OFN's Opportunities.
- Read the press release about the report and millennial investors.
- Refer to OFN’s longitudinal study 20 Years of Opportunity Finance, 1994-2003: An Analysis of Trends and Growth.
- Follow the conversation and add your own thoughts on social media #CDFIfutures.