The report author, Jeremy Nowak, is president of J Nowak Associates. He was also the founding CEO of Reinvestment Fund.
CDFI Connect sat down with Nowak to talk about the preliminary findings in the report and the conversation that CDFIs need to have today to pivot to new levels of investment in the future. Further excerpts from this interview are available in the March issue of OFN’s newsletter Opportunities.
Why were you interested in taking on this research project?
I was interested in taking on this project because I think the CDFI field is at a pivotal point in its growth. And I thought I could add value to the conversation going on within the field. I also thought that having been away from the field for several years, the distance would give me a good vantage point for reflection.
What is really striking is how sophisticated the debates are within the field in terms of capital access and growth, technology and public policy. I found there to be a clear recognition of both the progress the field has made and the potential choke points related to capitalization.
What are the CDFI industry’s breakthrough successes, and what do they mean for the future?
There are a variety of breakthroughs going on right now at different levels from the scale of operations, to the ability to access capital markets through conventional bond ratings, to uses of technology to access and underwrite customers. They all point to the ability to open up the CDFI model in ways that will alleviate the overreliance on government grants and bank debt.
But at the end of the day, one of the continuing breakthroughs of CDFIs is related to their ability to shift public policy at local and national levels. Capital-led institutions continue to be remarkably important policy platforms.
What could CDFIs do better?
One of the things that was striking in the data is the number of small but quite capable CDFIs in rural areas. I think there is a significant opportunity to build a better capital allocation arrangement between larger and small CDFIs in order to utilize their respective strengths. This will have significant implications for many rural and tribal groups from South Texas to Appalachia.
When looking at the world of impact investing, what is the case for creating market demand for CDFIs?
There is a strong case for CDFIs in that they have 35-years of proof of concept. They are the single most important vehicles for domestic impact investing.
But, there is a practical gulf between the impact investor movement and the CDFI industry. Many impact investment proponents are interested in equity investments rather than debt instruments, and many are more oriented toward environmental issues, more than community investment. While CDFIs have environmental portfolios, this is not their main product or narrative.
Then there is the marketing and branding issue that has to be addressed. CDFIs lack the vehicle for impact investors to actively invest in CDFIs. We need mechanisms for investors to more readily find and understand the work that CDFIs do, and then invest. And we need to tell our story in more effective and simpler ways.
Did you find any remarkable examples of FinTech currently employed by CDFIs?
Are any of these models replicable? They are happening in a variety of contexts from micro funds like Accion to CDFI banks like Sunrise Bank to equity financed FinTech companies like Oportun. The next several years will bring about more experimentation in this area and could potentially result in a new group of CDFI small business and consumer-facing leadership organizations.
In five to ten years I expect that the field will be partially reshaped by new technology platforms.
Can you explain how CDFIs fit into the landscape of social reform?
While CDFIs are linked directly to post-War on Poverty traditions of social change, they are also part of a much longer chain of grass roots credit institutions going back to 19th and early 20th century America. I think one of the interesting challenges for CDFIs is to claim that history of social reform and learn from its many triumphs and also its dead-ends. The history of social finance in the United States is probably a history that is still in need of being written.
What are some of the questions you have had since the release of the paper?
Most of the questions have focused on the CDFI Capacity Score™ on what it tells us and what it does not tell us. And there have been a significant number of questions regarding our role in social reform and how it connects to other parts of American history. The goal of this report was to open a conversation. I am hoping that it will do just that.
Thank you to the Citi Foundation who generously supported OFN’s research.