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.
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
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.