Measuring CDFI Impact: A Conversation on the Need for Independent Research
Today, there are over 1,400 Community Development Financial Institutions (CDFIs) operating across the country, managing more than $450 billion in assets. CDFIs are not-for-profit financial institutions that develop financial products specifically designed to serve low- and moderate-income people and communities. They serve individuals, families, small businesses and nonprofits by providing financing and support services, unlocking access to capital to those that are frequently not well served by mainstream financial institutions. Yet, despite the size and scope of the industry, there is limited formal research with definitive evidence on the positive impact that CDFIs have on low-income communities, nor actionable guidance for practitioners, policymakers and impact investors on how to advance the field further.
As part of the Community Finance Innovation Fund, an initiative to advance the field of community finance to positively impact low-income communities and communities of color, the Citi Foundation awarded a grant to the Center for Impact Finance at the University of New Hampshire to establish the first of its kind CDFI Research Consortium, providing support and publishing opportunities for rigorous research on CDFI impact, performance and strategies. The Consortium is guided by an advisory board of key stakeholders, including the Federal Reserve Bank system.
“The Federal Reserve Bank of New York has strong ties to the CDFI field because of its mission to foster an economy that works for everyone — especially underserved communities. CDFIs are critical tools for delivering capital to disinvested people and places as well as fostering the conditions for communities to thrive. We are enthusiastic about the CDFI Research Consortium as a platform to share insights and best practices to bolster CDFIs and publicize their work to a broader network of investors and policymakers.”
- David Erickson, Senior Vice President & Head of Outreach & Education, Federal Reserve Bank of New York.
Citi Foundation Senior Program Officer Kristen Scheyder sat down with the University of New Hampshire Center for Impact Finance Director Michael Swack for a conversation on the impact of CDFIs and the opportunities that lie ahead.
Kristen Scheyder: What are the opportunities you are most excited about when it comes to the future of CDFIs in the field of community finance?
Michael Swack: The CDFI field is growing and serving more people – that's exciting because CDFIs fill a huge capital gap. But beyond that, CDFIs can attract more capital to the field, including many more private investors – both institutional and individual investors. New tools, like secondary markets and new types of equity, will give CDFIs more opportunities to serve their communities by increasing the flow of capital. Additionally, CDFIs are increasingly financing clean energy projects and companies and have the potential to play a key role in advancing the transition to a low-carbon economy. Of course, the challenge will be to grow in size and scope while maintaining their historical commitment to underserved communities and those excluded from mainstream markets. This can be a delicate balance.
Kristen Scheyder: How can CDFIs work with other community-based organizations and each other to achieve their goals?
Michael Swack: CDFIs rely on partnerships with community-based organizations to understand local markets, identify needs and reach potential borrowers. CDFIs often work together with local leaders and community groups to design programs, products and services. State and local loan funds regularly seek to collaborate with CDFIs and vice versa to leverage capital and other resources. Likewise, CDFIs often collaborate with each other to share market information, best practices and split deals. The Consortium will help amplify information-sharing and forge new partnerships.
Kristen Scheyder: In October 2023, you announced the first round of projects in the new CDFI Research Consortium. What kinds of challenges do these projects address and what will this work contribute to the field?
Michael Swack: CDFIs are constantly trying to raise funds to lend out as well as to cover the cost of the technical assistance and training they provide. Over the past 30 years, CDFIs have been remarkably successful in making loans, getting them repaid and building their financial strength – notwithstanding the risk of lending to borrowers that can’t access capital otherwise. This is where the Consortium comes into play. We know a lot about CDFI outputs – how many loans have been made, repayment rates and leverage rates. We know less about outcomes. That is, we don’t know why and how much better off borrowers are because they got a CDFI loan. Not much funding has gone into research; CDFIs don’t have the resources. The new Consortium will support research projects that help answer questions like: What direct role does access to capital play in supporting wealth building? How does access to capital support local employment, housing, and public health needs? Insights like this will help drive more public and impact investment into CDFIs and, ultimately, the disadvantaged communities they serve.
Learn more about the Citi Foundation’s Community Finance Innovation Fund. The University of New Hampshire’s CDFI Research Consortium is now accepting submissions for its second open Request for Proposals (RFP). The deadline to apply is May 31, 2024.