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Smart Impact Investing Policy: The U.S. CDFI Fund
Public policies that support impact investing markets come in all shapes and sizes. The most successful policies have a clear understanding of what the problems are and tailor solutions to issues like insufficient capital supply, lack of investable products, and poor information provision that are conscious of political realities, investor reactions, and the broader policy environment. While some constraints in the impact investing market may not be alleviated by public policy interventions, there are numerous global examples where public policy has played an instrumental role in driving the growth of the market. In the U.S., one policy that has significantly strengthened our community investment market has been the Community Development Financial Institutions (CDFI) Fund.
Community investing—intentionally targeting underserved neighborhoods or regions—has a relatively lengthy history in the United States. The Community Reinvestment Act, the core of the community investment market, dates to 1977 and has mobilized significant capital from banking institutions throughout the United States by requiring banks to demonstrate that they are meeting the banking needs of the neighborhoods in which they operate (within the confines of sound banking practices)1. A supply development policy, CRA increased the availability of capital seeking investments that had positive social outcomes targeted towards low-income and minority populations.
But supply development is only useful if there are investable opportunities for that money to flow to. The establishment of the CDFI Fund in 1994 as a division of the U.S. Treasury Department has had a significant impact on the strength of community-oriented financial institutions, and in turn, the availability of capital to support community development.
Community development financial institutions (CDFIs) are banks, credit unions, loan funds, and development corporations that provide financial services to underserved markets2.
The CDFI Fund was designed explicitly to support economic revitalization and community development through support for CDFIs, who have a mission to serve low-income and minority populations in particular geographies.
The CDFI Fund supports CDFIs through:
- Official certification as a CDFI, credibly identifying for investors those institutions with missions to support community development;
- Technical assistance and financial assistance grants, building up the capacity of CDFIs to serve their target markets;
- Administration of the New Markets Tax Credit (NMTC) program, allowing CDFIs to attract private investment3.
The CDFI Fund publishes a searchable list of its certified CDFIs [.XLS] (and NMTC allocations) on its website, which makes it easier for investors interested in making investments in CDFIs—from equity to debt or simple cash allocations—to find institutions meeting their geographic or mission criteria.
Passed under President Clinton as a bipartisan initiative, the CDFI Fund has received continuous allocations for its programs from subsequent presidential administrations. As referenced previously in Adam’s post, the CDFI Fund has awarded more than $1 billion in technical and financial assistance to CDFIs since 1994, generated $45 billion of community investments since the inception of the New Markets Tax Credit program in 2000, and certified 999 CDFIs (as of June 30, 2012).
On a broad scale, the CDFI Fund was designed to channel money to underserved communities. There are other policy tactics the Clinton Administration could have pursued to strengthen community development finance, but with significant demand for finance from end users (small businesses and individuals) and a reasonable amount of capital from banks as a result of the CRA, it chose to focus on strengthening CDFI intermediaries. Appropriate analysis of goals, failures in the community investment marketplace, and targeting of solutions helped develop and institutionalize a policy that has lasted three administrations and significant financial crises.
The model of community development financial institutions has been adopted so far by the UK government, and is of potential interest to countries where there are pockets of populations being poorly served by the financial sector. There are a few key lessons for other countries looking to consider a similar policy model:
- The CDFI Fund’s three-pronged approach of certification, technical assistance, and tax credit is specifically informed by the U.S. political and economic context, and other policy avenues may be more appropriate for different contexts.
- Coordinating with existing policies allowed the CDFI Fund to build on a foundation that already existed—the Community Reinvestment Act—further strengthening the community investment market and increasing the CDFI Fund’s chances of success.
If you are interested in learning more about the CDFI Fund and designing policy for impact investing, take a look at Impact Investing: A Framework for Policy Design and Analysis, which includes a set of tools to help think through policy solutions in impact investing and a short case on the CDFI Fund in this context. Join us at the Impact Investing Policy Collaborative (IIPC) to talk through policy solutions and share best practices.
1As a starting point for more information on the history of CRA and its role in community investment, see the Federal Reserves of Boston and San Francisco’s Community Development journal Revisiting the CRA.
2To learn more about CDFIs, visit the CDFI Coalition website.
3For more on the NMTC, visit the NMTC Coalition website and Novogradac & Company’s NMTC Resource Center.
Photo credit: http://www.flickr.com/photos/adam_t4/3121511810/