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July 20, 2004
Assets in CDFIs Grew Twice as Fast as Those in Commercial US Banks
    by William Baue

A new study of community development financial institutions highlights several key distinctions between CDFIs and mainstream financial institutions.


What is the difference between community development financial institutions (CDFIs) and mainstream commercial banks? By definition, the former provide financing to economically disadvantaged individuals and communities that are underserved by the latter. This distinction seems to be making a big difference recently, as assets in CDFIs grew twice as quickly as those in commercial banks from 2000 to 2002, according to a new study.

Released today by the CDFI Data Project (CDP), the study finds that the compound annual growth rate (CAGR) for CDFI assets was 13 percent annually during that period. (CAGR is the rate of increase over a period of time that would exist if the rate of return were exactly the same each and every year.) According to the Federal Deposit Insurance Corporation (FDIC), assets in commercial banks rose only 6.5 percent over that period. Scale is another key distinction: the $10.2 billion in CDFI assets represent a mere 0.1 percent of the $8 trillion in assets in all financial institutions.

The study, entitled Providing Capital, Building Communities, Creating Impact, also finds that CDFIs seem to manage risk better than their mainstream counterparts. The net charge-off ratio for CDFIs was 0.7 percent, according to the study, which analyzed fiscal year 2002 data for 442 CDFIs (the above three-year results were available for only 284 of these CDFIs). The net charge-off ratio for all financial institutions tracked by the FDIC was 0.97 percent. The study attributes CDFI's superior risk management to a combination of factors: adequate capital and loan loss reserves; close monitoring of portfolios; and provision of technical assistance when needed.

"As economic distress increased during the recession, CDFIs responded by expanding their capacity to stimulate new high-quality jobs, quality affordable housing units, vital community facilities and basic financial services for low-income and low-wealth people," said Mark Pinsky, chair of CDP. He also serves as president and CEO of National Community Capital Association (NCCA), one of eight CDFI associations in CDP (other organizations include the Aspen Institute, the Association for Enterprise Opportunity, and the CDFI Coalition). "While other financial service providers pulled back from these markets, CDFIs stepped up."

The study does not focus exclusively on comparisons to the mainstream commercial bank market, but also contrasts CDFIs to another segment that focuses on the same market niche. Payday lenders, who entice low-income workers with quick cash in the form of short-term loans secured by the next paycheck, charge annual interest rates ranging from 450 to 880 percent, according to a July 2003 Consumers Union report cited in the study.

The study does not report the range of interest rates charged by CDFIs for providing alternatives to payday loans, though it does note that 26 percent of the CDFIs surveyed provide such alternatives, totaling more than 4,800 such transactions in FY 2002. The interest rate charged by CDFIs for all types of financing averaged 7.1 percent, based on the 119 CDFIs that reported this information.

Shifting the focus away from comparison and contrast, the study reports that in 2002, CDFIs made 268,000 transactions worth $2.6 billion in financing, including 248,000 loans to individuals worth $1.2 billion. CDFIs financed and assisted 7,800 businesses that created or maintained more than 34,000 jobs; made possible the construction or renovation of more than 34,000 units of affordable housing; and built or renovated more than 500 community facilities in distressed communities. CDFIs also provided 866,000 individuals with depository services, accumulating $2.6 billion in savings.

The study concludes with three recommendations for CDFIs: become more efficient and self-sufficient; find new approaches to capital aggregation; and determine how to better track the impact and outcomes of CDFI work. This study indicates that the CDFI industry is well on its way to fulfilling this third goal, though it admits that limited resources prevent CDFIs from collecting, analyzing, and disseminating more robust information.

 

 
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