Recently, the Federal Reserve’s Connecting Communities held a Virtual CDFI Symposium which hosted community development experts from across the country to speak on relevant issues facing CDFIs. The sessions are rich in content and information to share; below is a summary of each with links to more information.
Helping Entrepreneurs Write Their Own Success Stories
Accion and Opportunity Fund studied the impact of their services on small business owners across the United States and identified four important successes:
- Borrowers’ financial stability increased over time.
- Borrowers use their businesses to set up long-term financial success.
- Borrowers create quality jobs.
- Accion and Opportunity Fund’s services impact borrower success.
And three key challenges:
- Financial emergency preparation;
- Volatile cashflow; and
- Business planning.
Based on these findings, they determined changes for improved services:
- Diversify financial product offerings
- Make advising services relevant and easy to use
- Evaluate, test, and refine their approaches
A Qualitative Model for The Evaluation of Community Development Financial Institutions
For CDFI’s looking to present how they impact the social fabric of their communities, Caroline Loyas of Impact Seven and Pennsylvania State University presented a qualitative model that CDFIs can use for evaluation.
Minority-Owned Enterprises and Access to Capital from CDFIs
Victor Motta, of the Sao Paulo School of Business Administration, discussed the likelihood of minority-owned enterprises that applied for CDFI loans, and whether they are more likely to have their applications accepted.
The researchers used data from the Federal Reserve Banks’ Small Business Credit Survey from 2016 to 2019. The key takeaways include:
- Black-owned firms are more likely to apply for CDFI loans and less likely to get approved.
- Women-owned firms are more likely to apply and get approved.
- Enterprises that hold business collateral are more likely to have their loans approved.
- Smaller, younger firms are less likely to apply for CDFI loans as well as be approved.
- Riskier firms are more likely to seek credit from CDFIs.
Black-owned firms are less likely to have their loan applications approved for two reasons:
- Black-owned enterprises have higher credit risk.
- Black-owned enterprises may lack collateral guarantees necessary to receive a loan.
Just How Risky? Comparative Institutional Risks of Mission-Based Depository Institutions
Gregory Fairchild of the University of Virginia Darden School of Business analyzed the risks of mission-based depository institutions such as CDFIs and MDIs. Such institutions tend to be located in low-to-moderate income areas as well as minority neighborhoods. Based on the analysis, the presenter posits that increased investment in institutions like these could lead to higher participation of low-to-moderate income and minority populations in financial services.
Addressing the Capitalization and Financial Constraints of CDFI Microlenders
Joyce Klein of the Aspen Institute Business Ownership Initiative presented research to identify the best strategies for solving the capitalization and financial challenges faced by growth-oriented CDFIs. The study found that three main financial constraints limit growth: net assets, debt/lending equity, and operating subsidy. Two strategies explored by the lenders in the research project were securitization and institutional loan sales.
Raising Capital when The Going Gets Tough: Channels of Adjustment for Depository CDFIs
Maude Toussaint-Coumau of the Federal Reserve Bank of Chicago examined the relationship between growth in bank equity capital and the growth of different categories of assets, and identified the factors that determine equity capital for depository CDFIs as opposed to other community banks. The study drew the following conclusions:
- CDFIs grew equity capital in recent years.
- Equity capital benefits growth in size and expansion of lending.
- Adverse macroeconomic shocks such as unemployment have a negative on equity capital.
Community Development Financial Institutions and Individuals’ Credit Risk in Indian Country
Peter Grajzl of Washington and Lee University and the Federal Reserve Bank of Minneapolis found that the presence of Native CDFIs had a positive impact on individuals with the lowest initial credit scores, while there was no robust association between credit scores and the presence of non-Native CDFIs. This suggests that cultural fit plays a significant role on these outcomes. He proposed further research to collect and investigate data on actual CDFI clients and client-specific activities.