ByMichael C. Eggleston
Harder and Company, Accion and the Opportunity Fund
Amid the global pandemic, a previously scheduled research symposium was transitioned into an online webinar series held in May and June. The four-part series aimed to better understand community development financial institution (CDFI) activities and their implications on policy issues affecting the field.
The series was hosted by the Federal Reserve Bank of St. Louis, in partnership with the Federal Reserve banks of Atlanta, Minneapolis, Richmond and San Francisco, along with the Board of Governors of the Federal Reserve System and the CDFI Fund at the U.S. Department of the Treasury.
After inviting researchers to submit CDFI research papers in late 2019, seven papers of varying categories—including CDFI impact and evaluation, CDFIs and minority-owned firms, CDFI capitalization and CDFIs serving Native American communities—were selected to be presented at the symposium.
In this article, we highlight each webinar and the featured presentations.
The first webinar of the series highlighted CDFI impact and evaluation. It featured papers by Meredith Medlin of Accion and Caroline Loyas of Impact Seven.
Helping Entrepreneurs Write Their Own Success Stories: A Longitudinal Study of the Impact of Accion and Opportunity Fund’s Services on Small Business Borrowers Across the U.S.
Presented by Medlin.
The research details the post-loan stories of 350 Accion and Opportunity Fund borrowers and the impact of small-business lending services on their businesses, personal financial security and their overall quality of life. This mixed-methods applied research project measured the personal experiences of entrepreneurs as business owners. The findings led to CDFIs diversifying their product offerings and a partnership between LendingClub and Opportunity Fund to reach more small businesses.
Qualitative Model for the Evaluation of CDFIs
Presented by Loyas.
This research focuses on how CDFI lending affects small-business borrowers and the communities in which they work. This qualitative and applied research project developed a process for CDFIs to enhance their understanding of their outcomes and impacts.
To prove the impact and evaluation model, the author surveyed Impact Seven’s small-business customers. The survey measured the involvement of their borrowers in informal, local social networks and the extent to which their goods and services were offered by other businesses in their communities. Among small business borrowers, findings concluded that 40% were involved informal, local social networks and 53% reported that their goods and services were not offered elsewhere in their communities.
The symposium’s second webinar focused on CDFIs and minority-owned firms in featuring papers by Victor da Motta of Fundação Getulio Vargas and Greg Fairchild of the University of Virginia.
Minority-Owned Enterprises and Access to Capital from Community Development Financial Institutions
Presented by da Motta.
The research examines the CDFI loan application process and acceptance probability for minority-owned firms. Using logistic regression analysis, the research aimed to answer two questions:
Findings suggest that Black-owned enterprises are more likely to apply for CDFI loans and less likely to be approved.
Just How Risky? Comparative Institutional Risks of Minority Depository Institutions (MDIs) and CDFIs
Presented by Fairchild.
The research concentrates on the relative institutional failure risks for MDIs, community development banking institutions and non-mission depository institutions. The authors used logistic regression analysis and found that CDFIs and MDIs are less likely to fail than comparable institutions. This suggests that expanding MDIs and CDFIs is consistent with safety and soundness practices while increased investments could result in enhanced participation in financial services among people with low income.
The third webinar focused on CDFI capitalization and featured research papers by Joyce Klein of the Aspen Institute and Maude Toussaint-Comeau of the Federal Reserve Bank of Chicago.
Addressing the Capitalization and Financial Constraints of CDFI Microlenders
Presented by Klein.
This submission focused on the Aspen Institute’s initiative to explore capitalization and liquidity strategies among CDFI microlenders that can address financial challenges associated with growth. The qualitative research project studied six of the largest CDFI microlenders in the U.S. to identify strategies for solving capitalization challenges. The research identified constraints including: the need for CDFIs to raise 25 cents for every dollar of debt they take on, the increasing cost of capital and the need for CDFI microlenders to fund-raise. The research also identified two promising approaches involving securitization and institutional loan sales.
Raising Capital When the Going Gets Tough: Determinants of Capitalization Among Minority Depository CDFIs
Presented by Toussaint-Comeau
The research examines factors that determine equity capital for minority depository CDFIs, compared to non-minority CDFIs and other community banks in similar markets. Findings show that depository CDFIs have grown equity capital in recent years, which has allowed for an expansion of lending activity.
The symposium’s fourth and final webinar focused on CDFIs and Native American communities. Peter Grajzl of Washington and Lee University presented his findings.
CDFIs and Individuals’ Credit Risk in Indian Country
Presented by Grajzl.
This study assessed the effect of CDFI presence on the credit scores of people living in Indian Country. The paper specifically sought to predict the likelihood that a borrower would become 90+ days delinquent within 24 months. It also examined whether there was a difference between the presence of Native American CDFIs and non-Native CDFIs. Results concluded that people with the lowest credit scores are positively associated with the presence of CDFIs. It also found that increasing CDFI staff by one person increased credit scores by about one standard deviation.
The papers will be published in the San Francisco Fed’s Community Development Innovation Review this fall. Additionally, the Opportunity Finance Network created CDFI Connect as a research hub to allow researchers, practitioners and policymakers the opportunity to share resources and explore research collaborations.