Pioneers Post

UK community finance leader says it’s time to capitalise

5 October 2012
photo of Ben Hughes

Direct government support has fallen in recent years and we now need to accelerate investment from public and private sectors.

In the wake of a £60m fund and a scheme where mainstream banks will refer all declined loans to community lenders, Ben Hughes calls for sustained action to capitalise the market and stimulate deal flow

This is the time for community finance and the organisations that provide it.

Rooted within their communities, our members, community development finance institutions (CDFIs), ensure that social enterprises, businesses and households can access both the credit necessary to get them going and the investment readiness services so vital to their long term success. They have a unique impact in driving economic growth whilst simultaneously stimulating community action; they also offer a viable alternative to loan sharks and payday lenders.

Community finance reaches the places that banks can’t. Our members provide a local service, they get to know the people and businesses in their area and provide support and advice as well as finance.

Community finance should be available on every high street, to every enterprise and individual that can’t get what they need from the banks.  It should be a cornerstone of the financial services industry.

But it currently doesn’t reach all the people and enterprises that need it.

To achieve the dynamic change needed, there are two key issues which I believe need to be addressed:

1. Capitalisation

This week Business Secretary Vince Cable announced a £60m fund for community finance providers. Set up by the CDFA with funds from the Regional Growth Fund, Unity Trust Bank and Co-operative Bank, this is a welcome boost for our members lending to businesses and social enterprises. But this year community finance providers reported an 88% spike in demand. The £60m accounts for only four months of CDFI lending, and does not support our members making personal and home improvement loans. 

Direct government support has fallen in recent years and we now need to accelerate investment from public and private sectors.

Whilst this is very much about new CDFI-tailored funds for on-lending, it’s also about developing more advanced guarantee schemes that cover losses through a shared risk approach – for example, through banks, government and trusts and foundations working together.

It’s about boosting tax reliefs like the Community Investment Tax Relief (CITR), an overlooked lever in stimulating private investment.

And it’s about exploring new forms of raising capital, through equity and/or crowd finance models.

2. Capturing the market

Secondly, we need to develop the market and stimulate deal flow for CDFIs. We are about to launch a landmark referral scheme with the British Bankers’ Association. The major banks will, for the first time, refer declined loan applications to a relevant CDFI. This is set to transform the  flow of applications , and awareness of CDFIs.

Many community finance customers, with brilliant ideas, strong social purpose and/or urgent but viable household needs require much support to get them ‘investment ready’. If, like me, you regard servicing these ‘financially excluded’ groups as important for a healthy society and economy, it’s an area that must have investment, from all sectors including government

If we can pull this off, CDFIs could face a rosy future. They could lead the financial services industry, as community banks with a public service duty at their heart.

They could be seen by banks and private investors as the lenders not of last resort as is so often the case now, but as the first and only choice in getting capital out to the local, grass roots level.

We can make this happen. We can put the community back into banking.

Ben Hughes is CEO of the Community Development Finance Association (CDFA). The CDFA's annual conference took place in Solihull this week.