More than Capital: Exploring the Continuum of Community Development Projects
Effective community development financial institutions (CDFIs) spend enormous amounts of time doing two things: (1) assembling capital—both scarce debt dollars and even scarcer equity dollars; and (2) deploying those dollars in communities we care about.
But as challenging and time-consuming as raising and deploying capital can be, it’s not enough. Our goal is not only to raise and deploy capital—most banks do that. Our goal is to align capital with justice.
That means deploying the capital we raise in ways that mitigate and eventually solve our communities’ economic, health, education, environmental and social problems—that’s what successful community development projects look like. To do that, CDFIs must engage across a continuum of activities—beyond raising capital and deploying loans—that build the pipeline of community-driven “investable projects” in all of our communities.
CDFI capacity is a vital part of a mature community finance ecosystem, which also requires cooperative and collaborative infrastructure from government, philanthropy, business, nonprofits and the civic community. Within that ecosystem, CDFIs can facilitate successful community projects in multiple ways—this is the basic premise of the continuum. Put another way: While many stakeholders are responsible for the success of the entire ecosystem, CDFIs can and must lead the way.
Assembling capital for communities—on which CDFIs typically focus—is only one element along the continuum that will lead to successful projects. In fact, since every bank assembles capital to lend, I would argue that the other components of the continuum are much more important to the CDFI industry’s focus on aligning capital with justice.
Figure 1 delineates the basic continuum that I want to explore in this article.
From left to right, the continuum progresses from the strategies that CDFIs most control to the strategies that CDFIs control the least. In the middle are strategies that require strong partnerships to implement. So, for example, assembling capital is far left (lots of CDFI control), providing capacity-building training to our borrowers is in the middle (shared CDFI control), and community organizing is far right (very little CDFI control).
So, isn’t this just “capacity-building”?
Yes and no.
Yes, we need to keep doing—and significantly raising the profile of—our capacity-building work, which is at the heart of the CDFI Fund’s requirement that CDFIs provide “development services” that mitigate the challenges to accessing capital in our communities. The most common “development services” strategy that CDFIs offer is training that helps our borrowers better understand what lenders are looking for, so that they can prepare more accurate applications and qualify more successfully for capital.
No, it’s not “just” capacity-building—we also need to engage in other activities across the continuum to be successful, and CDFIs must serve as leaders and conveners of the many diverse stakeholders that it takes to nurture a healthy ecosystem. Government programs like the CDFI Fund support our most basic capacity-building efforts. Philanthropy supports additional, targeted programs with subsidies, program-related investments (PRIs), and other innovative models. Nonprofits must be willing and able to leverage those programs so they remain financially strong in order to continue providing critical services to communities. CDFIs provide the connective tissue between these players, ensuring that our programs are informed by all constituents and therefore are more effective.
Here are some thoughts on how CDFIs can intervene across the continuum:
- Raising and Deploying Debt (left side of continuum): Every CDFI knows that in addition to raising and deploying debt, how we engineer our financial products greatly increases or reduces eligibility for our capital. Of course price matters, but terms and covenants matter more to the communities we are trying to reach. This is an area in which CDFIs truly excel. But we can do more by asking ourselves tough questions, such as: How would we design/change our terms/conditions if we applied a racial equity lens to our lending programs? Would those changes help us better reach communities of color? If our community facility loans were based on actual project costs instead of appraised value, how many more “investable” projects would get done or get done faster? IFF has been lending this way for 30 years. I can’t imagine how many fewer projects we would have financed if we required appraisals to define the “value” of invaluable projects like early learning centers and health clinics.
- Organizing the Community (right side of continuum): On the other side of the continuum is the fundamental capacity of community-based organizations to organize their resources and collectively call for specific changes in their communities. But as we all know, systemic injustice has deprived many communities of the resources they need to develop this capacity. More recently, this problem has extended to suburban communities, which we tend to think of as resource-rich, but which have been caught off guard by significant demographic changes—the suburbanization of poverty. Any community that lacks this organizing capacity and infrastructure finds those to be the greatest barriers to aligning capital with justice, and they create a frustrating “chicken and egg” cycle for lenders who aren’t willing to engage across the continuum. CDFI leaders can work to help develop capacity by serving on local boards and governmental task forces and can provide valuable data. Government and philanthropy must also step up to help develop this infrastructure.
- Strengthening the Ecosystem (center of continuum): As we build capacity at both ends of the continuum, we will increase the number and diversity of “investable community projects,” but we will also strengthen the community finance ecosystem—which, in turn, helps us better serve our communities. That ecosystem and its functions are best articulated in Community Investment: Focusing on the System. Robin Hacke, David Wood and Marian Urquilla did a great service to our industry by articulating a framework for a functioning ecosystem that promotes capital absorption. That framework includes: setting strategic priorities, generating pipelines and building an enabling environment that better ensures we are aligning our capital with justice. One example of the success of this framework is the JPMorgan Chase Partnerships for Raising Opportunity in Neighborhoods (PRO Neighborhoods) program, which encourages CDFI collaborations—leading, in part, to co-lending arrangements that support deals that might not otherwise get financed.
By better delineating the continuum, CDFIs can articulate how they can lean in at each stage of the continuum to create more “investable projects”—and, ultimately, to better align capital with justice.