REINFORCING THE “COMMUNITY DEVELOPMENT” IN COMMUNITY DEVELOPMENT FINANCE
Some existing community finance institutions will likely build new services and approaches that enable them to tap into private impact investing capital as a new source of sustenance. Private impact investing could, however, be more than just a source of new capital to continue to do old things. Instead, it could spur the field to put investment in its appropriate place. Impact investing is a tool, not an end in itself. So is community finance. If you approach the world asking, “Where can I invest?” you will end up doing far less interesting work than if you ask, “What social challenges need addressing, and how can investing be one of the tools I use to address them?”
This may sound like mere semantics, but in our work at Nonprofit Finance Fund, this reframing has opened up great opportunities. In New York City in 2010, we set up a fund to provide working capital loans to frontline agencies such as soup kitchens and homeless shelters. They were too financially shaky to take on debt, however. If we were only looking for places to invest, we would have moved on to find other less risky borrowers, but because preserving New York’s safety net was crucial, we structured a new initiative, the Community Resilience Fund. The fund aims to support up to 100 agencies seeking to transition to a more sustainable business model. This fund would not be possible without impact investors offering millions of dollars of loans. It also requires credit enhancement from city government and substantial grant support from private donors. No one piece would work alone. The most interesting impact investing in the next few years will involve similar collaboration, as impact investors work with governments and donors to tackle challenges that cannot be addressed with any one tool.
As poor communities continue to suffer the aftershocks of the economic crisis, more essential organizations will become riskier and riskier borrowers. If we want to make a difference in these organizations, we will have to work alongside philanthropic and government support, with each part made more powerful and useful because of its complementarity. We call this approach “complete capital.” Complete capital weaves together financial capital (grants and impact investments), intellectual capital (the ideas about what we need to do and how to do it), human capital (the ability to support organizations to implement bold strategies), and social capital (which allows collaboration among people and institutions that don’t typically work together).
Complete capital approaches require those of us who seek to address fundamental social challenges in the field to reorient our work around development as the end goal, with investment as only one tool. Complete capital practitioners will need to become accustomed to working with different organizations. This sounds banal, but it will be difficult to pull off, especially as economic pressures spur an instinct to retreat into defending narrowly claimed territory for “our organization” or “our sector.” CDFIs will need to develop enhanced cultures of innovation that build on but are not constrained by our historic experiences as primarily relatively conservative lenders. We will need new approaches to mitigating risk by mobilizing impact investing capital into mezzanine finance structures. We must better understand how grants can be used not just to mitigate the risk to investors when investments fail but also to reduce the likelihood that investments will fail with timely and efficient technical assistance to investees.
Many of the easy problems that can be solved with singular, siloed approaches are already being tackled. The increasingly complex and accelerating challenges that remain will require complete capital approaches to solve them. Impact investing capital from private sources will be an important part of these solutions. But they will not work alone. It will take collaborative, creative energy and problem-solving to deepen the community development impact of community development finance.
- The Community Reinvestment Act of 1977 is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations. It was enacted by the Congress in 1977 (12 USC 2901) and is implemented by Regulation BB (12 CFR 228). The regulation was substantially revised in May 1995 and updated again in August 2005. More information is available at http://federalreserve.gov/communitydev/cra_about.htm.
- PRIs are investments that further the mission of the foundation and also earn a return. According to the IRS, “To be program-related, the investments must significantly further the foundation’s exempt activities. They must be investments that would not have been made except for their relationship to the exempt purposes.” A PRI may count as part of the 5 percent of assets that a foundation must deploy every year. More information is available at http://irs.gov/charities/foundations/article/0,,id=137793,00.html.
- Foundation Center. Aggregate Fiscal Data by Foundation Type, 2009, FCStats, available at www.foundationcenter.org/findfunders/statistics/pdf/01_found_fin_data/2009/02_09.pdf.