Approaches to CDFI Sustainability by Kirsten Moy and David Black, The Aspen Institute.

This report examines the factors supporting the growth and development of CDFIs despite reductions in some of their traditional funding sources. Nevertheless, the authors conclude that the need for subsidies for CDFIs will not go away. In addition, each type of CDFIs continues to face challenges in the market: competition for customers and investors for banks, restructuring for credit unions, and finding equity for loan funds. While there is consensus that sustainability requires balancing mission and market, there is no agreement on how to accomplish this balance, on the importance of self-sufficiency, on the relationship between growth and sustainability, and on the use of subsidy in sustainability strategies. Through a series of eight case studies of CDFIs that the researchers determined were strong, innovative and growing, the paper describes several approaches to obtaining this balance. The paper reaches the following conclusions about the art of attaining and maintaining sustainability: Sustainability is not a permanent state; No models can be replicated in their totality; Sustainability requires many things; Subsidy and sustainability are not polar opposites.

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Riskiness of Sector Dependence in Community Development Financial Institutions by Victoria Salin and Yanhong Jin, Texas A&M, and Wenhua Di, Federal Reserve Bank of Dallas.

This report measures the riskiness of portfolios using the Value-at-Risk (VaR) concept, and then compares the riskiness resulting from concentration in a single industry with riskiness from a diversified portfolio. Value-at-Risk is defined as the portion of the portfolio that is at risk at a given probability level based on historical performance of similar portfolios. For example, to calculate the 5 percent risk in a housing portfolio, one would look at the performance of a comparable housing portfolio over history, and sort by monthly loss (or profit level). The 5 percent risk would identify the lowest 5 percent point on the distribution. For each CDFI sector (housing, business, commercial lending), the paper uses a trend of an available measure of returns (such as REITs for housing) to estimate Value at Risk. Contrary to expectations, the paper finds that more diversified CDFI portfolios are more risky than CDFI portfolios that are more concentrated in the housing market. The paper finds that risk increases with portfolio size, but the marginal impact diminishes as size goes up. Institutions in urban and suburban areas have a greater VaR than those in rural areas, as do minority-owned or controlled institutions relative to those that are majority-owned. They find no effect from type of institution, ownership by women, or operations by a faith-based group.

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Assessing the Systemic Impacts of Community Development Loan Funds by Julia Sass Rubin, John P. Caskey, Carla Dickstein and Sean Zielenbach.

This report seeks to improve our understanding of what enables CDFIs to have systemic impacts.The authors distinguish between traditional impact measures, such as jobs created or housing units rehabilitated, and systemic impacts. Systemic impacts include impacts on conventional financial institutions, philanthropic institutions, public agencies, and public policy. Based on a series of case studies with a diverse group of CDFIs and additional interviews with industry experts. The authors find that CDFIs have an impact on mainstream financial institutions (MFIs) by reducing risk for the conventional institutions (CDFIs take subordinate debt positions), and by demonstrating the viability of particular markets. Furthermore, CDFIs educate conventional financial institutions about underwriting loans to small and medium sized non-profits. CDFIs affect philanthropic institutions by promoting program related investments and greater understanding of the market for community development lending, and they help shape foundations’ response to emerging issues (such as triple bottom line “green” initiatives). CDFIs have an impact on public agencies through increased resource allocation to target communities, and they influence public policy through advocacy for broader changes in financial services delivery, such as anti-predatory lending and payday lending legislation, and through the work of internal research centers at CDFIs. The ability of CDFIs to have systemic impacts increases with size, financial stability, social mission, organizational leadership and culture of risk-taking and innovation.

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