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July 20, 2004
Assets in CDFIs Grew Twice as Fast as Those in Commercial US Banks
by William Baue
A new study of community development financial institutions highlights several key distinctions
between CDFIs and mainstream financial institutions.
SocialFunds.com --
What is the difference between community development financial institutions (CDFIs) and mainstream
commercial banks? By definition, the former provide financing to economically disadvantaged
individuals and communities that are underserved by the latter. This distinction seems to be
making a big difference recently, as assets in CDFIs grew twice as quickly as those in commercial
banks from 2000 to 2002, according to a new study.
 Released today by the CDFI Data Project (CDP), the study finds that the
compound annual growth rate (CAGR) for CDFI assets was 13 percent annually during that period.
(CAGR is the rate of increase over a period of time that would exist if the rate of return were
exactly the same each and every year.) According to the Federal Deposit Insurance Corporation (FDIC), assets in commercial banks rose only 6.5
percent over that period. Scale is another key distinction: the $10.2 billion in CDFI assets
represent a mere 0.1 percent of the $8 trillion in assets in all financial institutions.
The study, entitled Providing Capital, Building Communities, Creating Impact, also finds
that CDFIs seem to manage risk better than their mainstream counterparts. The net charge-off ratio
for CDFIs was 0.7 percent, according to the study, which analyzed fiscal year 2002 data for 442
CDFIs (the above three-year results were available for only 284 of these CDFIs). The net
charge-off ratio for all financial institutions tracked by the FDIC was 0.97 percent. The study
attributes CDFI's superior risk management to a combination of factors: adequate capital and loan
loss reserves; close monitoring of portfolios; and provision of technical assistance when needed.
"As economic distress increased during the recession, CDFIs responded by expanding their
capacity to stimulate new high-quality jobs, quality affordable housing units, vital community
facilities and basic financial services for low-income and low-wealth people," said Mark Pinsky,
chair of CDP. He also serves as president and CEO of National Community Capital Association (NCCA), one of eight CDFI associations
in CDP (other organizations include the Aspen Institute, the Association for Enterprise Opportunity, and the CDFI Coalition). "While other financial service
providers pulled back from these markets, CDFIs stepped up."
The study does not focus
exclusively on comparisons to the mainstream commercial bank market, but also contrasts CDFIs to
another segment that focuses on the same market niche. Payday lenders, who entice low-income
workers with quick cash in the form of short-term loans secured by the next paycheck, charge annual
interest rates ranging from 450 to 880 percent, according to a July 2003 Consumers Union report
cited in the study.
The study does not report the range of interest rates charged by
CDFIs for providing alternatives to payday loans, though it does note that 26 percent of the CDFIs
surveyed provide such alternatives, totaling more than 4,800 such transactions in FY 2002. The
interest rate charged by CDFIs for all types of financing averaged 7.1 percent, based on the 119
CDFIs that reported this information.
Shifting the focus away from comparison and
contrast, the study reports that in 2002, CDFIs made 268,000 transactions worth $2.6 billion in
financing, including 248,000 loans to individuals worth $1.2 billion. CDFIs financed and assisted
7,800 businesses that created or maintained more than 34,000 jobs; made possible the construction
or renovation of more than 34,000 units of affordable housing; and built or renovated more than 500
community facilities in distressed communities. CDFIs also provided 866,000 individuals with
depository services, accumulating $2.6 billion in savings.
The study concludes with three
recommendations for CDFIs: become more efficient and self-sufficient; find new approaches to
capital aggregation; and determine how to better track the impact and outcomes of CDFI work. This
study indicates that the CDFI industry is well on its way to fulfilling this third goal, though it
admits that limited resources prevent CDFIs from collecting, analyzing, and disseminating more
robust information.
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