What is a Community Development Finance Institution (CDFI)

INCREASING THE FLOW OF CAPITAL FOR GOOD - INVESTING AND GIVING

Magazine article

Bernie Morgan, outgoing chief executive of the Community Development Finance Association (cdfa), the membership association for Community Development Finance Institutions (CDFIs), answers our quick Q&A.

 What is a Community Development Finance Institution (CDFI)?
A CDFI is a social enterprise providing finance (usually loans, sometimes equity) to individuals, businesses and social enterprises which cannot access all or part of their financial needs from mainstream sources such as banks. There are currently around 70 CDFIs operating in the UK. CDFIs routinely offer support to their borrowers which helps them manage their personal and/or business finances.

What returns does investment in a CDFI offer?
Some CDFIs offer a tax relief to investors, Community Investment Tax Relief. This is a five year investment which provides a 5% relief each year for five years. Other CDFIs may offer returns through a mutual model, or other vehicles. Mostly though, as the sector is new, the returns will be social rather than financial.

Do they or will they ever offer financial return?
As more CDFIs mature and become investment-ready they will be more able to offer financial returns. It is likely that those returns will always be lower than can be gained in traditional investment vehicles. Lower financial returns are offset by social returns such as an increase in employment, lower personal debt, stronger community groups etc.

What risks does this kind of investment carry?
As with all investments, there is a risk attached. There is a lower risk to investors who use regulated banks such as Triodos, Charity Bank and Unity Trust Bank. Investors will need to contact specific CDFIs to discuss potential risks with them. We find that some investors are prepared to take higher financial risks, especially if they want to achieve higher social returns.

What can be done to mitigate risk?
The cdfa has a performance framework, called Change Matters, which is creating industry standards for the sector. Once this is in place, investors will be able to assess a CDFIs performance and make a decision based on their own risk preferences.

What should the potential funder know about investing in CFDIs?
The cdfa is the best starting point.

www.cdfa.org.uk