What is on the other side of the CDFI coin?
Increasing the supply of capital to low and moderate income communities has been a central goal of the community development movement since its inception. From the passage of the Community Reinvestment Act in 1977, to the Low Income Housing Tax Credit in 1986, to the establishment of the CDFI fund in 1995, to the New Market Tax Credit in 2000, advocates have won significant changes in public policy that have dramatically expanded the capital available to our communities. While there can be no doubt that this has been of huge benefit to our communities, I have often wondered whether we are so focused on the "supply side" that we have neglected to support the "demand side." You see, for every community development loan or investment, there must be a qualified borrower in which to invest. CDFIs can't succeed without good borrowers.
The reality that lenders and borrowers are the two sides of the same coin became readily apparent in 2008 and 2009 when the tax credit market froze and both CDCs and CDFIs alike found themselves in a bind together, as the financial challenges of each sector negatively impacted the other. (Of course, many groups function as both a CDC and a CDFI - truly the same coin!)
So I was very pleased to read a recent article on the Living Cities Blog by John Moon called In The Works: Understanding How Investments Get Made in Low-Income Communities... Or Don't. According to Moon, Living Cities is finding "that communities need not merely dollars, but also an effective capital absorption ecosystem."
Moon continues: "What do we mean by capital absorption? Capital absorption describes the process by which capital flows to support the needs of low-income communities, either through direct investment or through financial intermediaries. Effective capital absorption requires a sufficient supply of capital moving from market, government or philanthropic sources to a set of capable borrowers. The borrowers then use the capital to strengthen a community’s vitality through the development, preservation or expansion of assets such as affordable housing, small businesses, health clinics and grocery stores. When looking at how to improve the level and quality of investments in low-income communities, the unit of analysis needs to be the capital absorption ecosystem. Traditionally, the field has focused on simply increasing capital sources, improving the capacity of particular financial intermediaries, or concentrating efforts at the project level."
Among the borrowers that are needed, of course, are high-functioning, resident led community development corporations. Yet, while CDFIs have grown tremendously since the launch of the CDFI fund, the federal government does not have any comparable system of support for CDCs - nor do most states. Many, although not all, CDCs are undercapitalized, which limits their ability to pursue a community led agenda and their ability to leverage capital investments. The result, I fear, is a capital absorption ecosystem (a.k.a. a community development ecosystem) that is growing out of balance. This imbalance - if it continues to grow - threatens to undermine both the CDFI and the CDC sectors and more importantly the communities we all seek to serve.
I believe that the Community Development Partnership Act, now under consideration by the Massachusetts Legislature, would provide CDCs with a system of support similar to the CDFI fund, thereby creating a better supply/demand balance in our "capital absortion ecosystem." MACDC is working hard to win passage of this legislation as soon as possible. We are also advocating for other changes in policy and practice that will help CDCs become stronger financially and thereby better able to leverage private and public investment. As policy makers, investors, foundations and practitioners look to increase the flow of capital to our communities, they need to strengthen both the lenders and the borrowers in order to create a healthy ecosystem that can significantly move the needle on economic opportunity and equity.