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October 19, 2005
Scaling Community Investment: Report Addresses Growth in Community Development Finance
    by William Baue

An Aspen Institute report serves as the basis of a series of conferences at regional federal reserve banks on how to best scale up community investment.

The Federal Reserve Bank of Boston is hosting a conference on the intersection of socially responsible investing (SRI) and community investment (CI) entitled Achieving Sustainability, Scale, and Impact in Community Development Finance on November 3-4, 2005. The impetus for the conference, the second in a series of seven to be held at federal reserve banks nationwide over the next two years, is a December 2004 report issued by the Aspen Institute Economic Opportunities Program (EOP).

The report, entitled New Pathways to Scale for Community Development Finance, identifies scaling up strategies as well as risks for community development financial institutions (CDFIs) through ten case studies of organizations that expanded operations. The case studies include organizations in the CI field such as ACCIÓN, Self-Help, and the Reinvestment Fund, as well as more mainstream for-profit models, such as 7-Eleven (ticker: SE), Dell (DELL), and VISA. The focus is not on replicating exact tactics, but rather on applying lessons to the idiosyncrasies of CI.

"Private sector actors tend to talk about 'scale' as in 'economies of'--i.e., presuming a cost model in which variable costs decline as production increases," state report lead authors Kristin Moy, EOP's director, and Greg Ratliff, an Aspen Institute senior fellow. "However, for the CDFI industry, reaching scale typically refers to delivering product(s) to a large audience, delivering more products, or increasing assets or loan volumes."

"Ultimately, the notion of scale for CDFIs must include expanded volume, reach, increased efficiency resulting in sustainability, and deepened social impact," they continue.

The report notes that the current CDFI system is inadequate for reaching the scale necessary to positively impact the majority of low-income communities nationwide, as it does not include three critical components: standardization, infrastructure, and deliberate roll-out.

"The CDFI industry has many best practices but far fewer generally accepted standards, protocols, methodologies, or technology applications that allow for large-scale and deliberate roll-out," the report states.

As the researchers looked more in-depth, they realized they needed to study scaling up for CDFIs on the product, organization, and industry levels. Examining the industry level yielded the most significant findings. The researchers proposed three industry structure models. The first describes traditional corporate-customer relations. The second encapsulates smaller industry players and intermediaries interacting with customers. The third corresponds closest to CI, where the relationships with funders and regulators may currently player a more significant role than those with customers.

"The most remarkable hypothesis to come out of this industry model is that there is a disconnect between members of the CDFI industry and customers when subsidy becomes an important component of successful product delivery," the report states. "Rather than having a direct relationship as in the other two structures, it appears that the role of subsidy disrupts the customer interface focusing attention on investors/funders and the regulatory process."

"Because the target market consists of a mostly low-income population that cannot fully afford the goods and services provided, the CDFI is forced to look elsewhere to cover its operating expenses and support continued delivery of its products," it continues.

The researchers extrapolate 11 lessons from the three models (product-level, organization-level, and industry-level) for achieving scale. For example, they recommend significant investment in infrastructure and technologies as well as entering into strategic partnerships with aligned organizations.

The report ends with five conclusions, including the fact that "growth is perilous" and the exhortation to remember the mission of community investment, which is to positively impact low-income communities.

"The relationship between scale and impact is still not clearly understood," the report authors write. "On the one hand, scale may be only one way to reach impact."

"On the other hand, by concentrating primarily on scale and how to achieve it, we run the risk of losing the focus on increasing impact on underserved people and communities," they conclude.

The report is intended to serve as a point of departure for the conferences, which will consider ways the SRI and CI communities can interface in mutually beneficial ways. Leaders of these fields will speak at the Boston conference to represent their communities. SRI leaders include Domini Social Investments founding CEO Amy Domini, Social Investment Forum (SIF) President and SRI Director for Walden Asset Management Tim Smith, and Calvert CI Industry and Markets Director Elizabeth Glenshaw. CI leaders include New Hampshire Community Loan Fund (NHCLF) President Juliana Eades, Community Reinvestment Fund (CRF) President and CEO Frank Altman, and Coastal Enterprises, Inc. (CEI) President Ron Phillips.


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