CDFI Leaders Thinking Ahead and Acting Now – Reflections

This year Next Street has worked extensively with CDFI leaders to discuss the state of the industry and where it is heading. At the start of the year, I interviewed eight leaders from some of the largest organizations in community development, challenging them to answer questions on everything from how they measure impact to what types of innovation are needed to take CDFIs into the future. In September, Next Street and Deutsche Bank’s Community Development Banking Group convened eighteen CDFIs for a discussion titled Beyond the Balance Sheet. The all-day event was a step towards developing solutions and capabilities among CDFIs to more fully leverage their balance sheets by connecting them to experts from Wall Street, ratings agencies, and the FinTech industry.

Here are a few reflections on what we’ve learned through our conversations and relationships with these leaders and their organizations.

The Tides of Leadership are Turning

The next generation of CDFI leaders have arrived and they are increasingly prevalent in the industry. Of the eight leaders interviewed, only one was a founder. This is a big change from even five years ago. This new group of leaders are often experienced managers and operators, sometimes from different industries, and consequently bring different perspectives to their organizations. Without exception, all are still visionaries and strong leaders with a passion for providing access to communities and individuals that otherwise would be left behind. In that sense they don’t differ as much from the founders. However, the urgency and comfort with change is great. They are acutely aware that, as CDFIs they need to evolve if they are going to be successful in a landscape where much of their historical funding, particularly bank and government, is at risk or at a minimum changing. They are also less likely to be personally attached to the history or origins of the CDFI they lead. My hope is that this will lead to faster and more audacious change in pursuit of their visions.

CDFIs still haven’t cracked the code to their business model

Boston Community Capital (BCC) is the only CDFI interviewed that has been self-sustaining on a consistent basis – in this case the last twenty years. It took years of discipline to instill a culture of breaking even without philanthropic support that is often readily available and a drive to continuously explore new areas through which to advance its mission. The importance of self-sufficiency is not lost on the others. All leaders expressed a focus on increasing their institutions’ earned revenue. The question is will or should CDFIs ever be fully self-sustained? Several that I spoke with would argue no; many core programs that are both key drivers of their mission and part of the differentiated value proposition of a nonprofit financial institution will perpetually require subsidy from philanthropic capital.

No one wants to be a bank

No one interviewed thinks they are like a bank. They acknowledge that at the end of the day they are lenders and therefore may be risk averse. Frank Altman, CEO of Community Reinvestment Fund (CRF), said it best: “I do think that CDFIs have become more risk averse than they were earlier in the evolution of CDFIs. They’ve become more risk averse in part because they are heavily relying on bank loans and investments to capitalize their balance sheets. That being said, they still take more risks than banks. But do they take enough risk?”

There are benefits to being more like the banks. Capital Impact Partners (CIP), LISC and CRF have been able to attain ratings from S&P, which has allowed them to issue bonds that have been purchased by traditional investors who historically have not participated in the community investment markets. CDFIs should resist the pressure to become more bank like because of pressure from their current funders. The key premise behind CDFIs is that they “fill a gap” and provide both capital and services that mainstream institutions such as the banks either cannot or are not prepared to do.

Money matters, but so do people

Capital is very much a focus for these CDFI leaders. Everyone is concerned about what may happen to the New Markets Tax Credit Program, the grant budget of the CDFI Fund, and CRA legislation. Many spoke about the need to seek alternative sources of capital, including from impact investors. Most see themselves as the original impact investors, best positioned to help investors seeking both financial and social return.