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May 07, 2010
Citigroup Launches Fund to Loan $200 Million to Small Businesses in Low-Income Communities
    by Robert Kropp

The bank partners with Calvert Foundation and Opportunity Finance Network to provide Community Development Financial Institution Loan Funds with capital to lend to small businesses.


On Wednesday, Citigroup announced that it has established a $200 million Communities at Work Fund, which will provide capital to Community Development Financial Institution (CDFI) Loan Funds for small business lending in low-wealth and low-income US communities. The fund will be managed by Calvert Foundation, a nonprofit corporation whose mission is to maximize the flow of capital to disadvantaged communities in order to create a more equitable and sustainable society.

Opportunity Finance Network (OFN), a network of more than 170 CDFIs, will manage marketing and compliance.

Bob Annibale, the Global Director of Citi Microfinance and Community Development, said, “This is not philanthropy, but an investment in the CDFI sector, which is rooted in local communities and provides innovative financing for community development and economic growth.”

In 2008 alone, CDFI Loan Funds provided more than $2.2 billion in financing to small businesses. Even so, according to Mark Pinsky, President and CEO of OFN, “We’ve seen six straight quarters of increased demand for small business financing. In 2009, CDFIs were constrained because they didn’t have any money to borrow. There’s at least $600 million in demand right now for the $200 million in the Communities at Work Fund.”

“Two hundred million dollars is a lot of money, but it’s not enough money,” Pinsky continued. “We’ve done demand analyses and know that the demand for funding is much greater, so we’re already working to grow the fund beyond this.”

Shari Berenbach, President and CEO of Calvert Foundation, told SocialFunds.com, “CDFIs are well-positioned to reach markets that commercial banks are not able to get to. CDFIs tend to loan in their local communities, and they’ve been experiencing unprecedented demand for lending to small businesses.”

“There have been many months of planning since Citi approached us late last summer,” Berenbach said. “The initiative was the brainchild of Bob Annibale. He has been very active in the international microfinance field, which has become an industry that has channeled three or four billion dollars to the microfinance business sector. Having seen the success in the international field, Bob wondered if it was time for something like this to take off in the domestic environment.”

Unlike Calvert Foundation’s Community Investment Notes, which are designed for individual investors, the Communities at Work Fund is fully capitalized by Citi’s $200 million investment. Berenbach said, “For an individual who wants to do what Citi is doing, the way to do it is through our Community Investment Notes. We brought in close to $50 million last year, and plan to pass that number this year in net new sales. We’re also having very strong investor retention.”

“One of the reasons that Citi elected us to manage this fund is our track record of due diligence and supervision,” Berenbach continued. “We have excellent protocols for those functions.”

“For many years, Calvert Foundation has had a program called Community Investment Partners, which has been about making our expertise and knowledge of these markets available to others,” Berenbach said. “The program is based on the hypothesis that one of the things that constrain the flow of capital to disadvantaged communities is a lack of professional expertise and third-party services.”

Working with a large commercial bank such as Citi, however, required a different approach to fund management of Calvert Foundation, according to Berenbach.

“Calvert Foundation has always had a relatively simple loan process with our borrowers,” she said. “This Fund is a more conventional loan product. The loan documents themselves are a bit more robust. We’re adopting a series of protocols that have been negotiated with the credit risk group at Citi. There are elements of conventional lending that are being introduced.”

Asked about the opportunity to partner with OFN in the loan fund, Berenbach said, “OFN has a broader picture of where the market is and where it’s going. In the long run we hope that OFN will provide technical support to organizations that are not quite as mature, so that we can continue to grow more and better CDFIs.”

Pinsky of OFN said, “Calvert Foundation will do a great job in underwriting risk management and getting the money out quickly. At this point OFN is going to be involved with the website, outreach and marketing. We’re hoping to add capacity building so that we can extend this further.”

“Some CDFIs may need training in small business lending, or consulting services to help them figure out the right kinds of products,” Pinsky added. “They’re going to want to make sure they have the right kinds of risk controls in place.”

“There have been market opportunities that have popped up in the current economy,” he said. “Businesses that used to be served by bank financing but no longer are, and people who are unemployed and want to start businesses. Some CDFIs may have expertise in one area of the other, but not in both.”

Asked if she though Citigroup’s example might encourage other large commercial banks to take similar steps, Berenbach said, “It’s our hope and intention. The need for CDFI credit financing has been far greater than CDFIs have been able to reach. This capital will create a virtuous cycle in which more and more capacity for getting these dollars into the community is generated. We hope this fund will encourage other banks and institutional investors to follow Citi’s lead and become more involved.”

 

 
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