CDFIs: Putting the Best Foot Forward

January 01, 2006
By  Linda D Fischer

If there's a story about CDFIs, it's that we can change the behavior of markets by changing the perception of risks in the market.

—Mark Pinsky, President and CEO,
National Community Capital Association

Perception is everything, even in the world of community development finance.

That's one of the messages Mark Pinsky, president and CEO of National Community Capital Association (NCCA), brought to St. Louis recently when he spoke at a conference sponsored by the Federal Reserve Bank of St. Louis. Titled Improving Access to Community Capital, the Nov. 17 event was a forum for thought-provoking discussion on the future of community development finance.

Pinsky has been taking his message across the country for some time. Those who have heard him know he is passionate about helping community development financial institutions (CDFIs) grow ... helping them come to scale, as he puts it. In fact, the industry must "grow, change or die," he says.

Although community development finance has grown tremendously in the last 30 years, from a $1 billion industry to a $14 billion industry, Pinsky would like to see it become a $40 billion industry during the next four or five years. That will only happen if the industry changes how traditional lending institutions and other investors perceive CDFIs, he says.

"In the current policy environment, our industry takes a defensive stand," he says. "We feel we have to apologize for what we do. We need to go on the offense. We need to change our language and how we talk about what we do."

The pervasive notion about community development finance is that if an organization is working with low-income people, it doesn't have money, Pinsky says. In fact, the perceived risk is much greater than the real risk, he says.

"If there's a story about CDFIs, it's that we can change the behavior of markets by changing the perception of risks in the market," Pinsky says.

NCCA, a national network of financial institutions whose goal is to finance community development projects, undertook a process in 2001 to identify changes it needed to make to remain viable in the future. "We've gone through a grueling, strategic assessment of who we are and what we do, and why and where we're going," Pinsky says.

Changes in the economy, in philanthropy, in public policy and in the industry itself mean that CDFIs must take a brutally honest look at how they operate and be willing to evolve. Banks are moving into the industry and there is a generational change with new professionals working in community development finance.

One of the ideas that came out of NCCA's planning process was to start referring to "community development finance" as "opportunity finance."

The organization even went so far as to change its name to Opportunity Finance Network, which takes effect in January 2006. The change came after research in which investors were presented with two identical investment proposals—one called a finance "opportunity" and one called a "community development" investment. Investors responded positively to the "opportunity" but not to the "community development" plan. The perceived "opportunity" interested investors, while the "community development" proposal was perceived as risky. NCCA hopes that investors come to look at community development as "American opportunities."

Other changes Pinsky promotes are:

  • modernizing community reinvestment by extending the Community Reinvestment Act;
  • leveraging existing funds;
  • making tax reform compassionate; and
  • saving America's assets by preventing predatory lenders from stripping wealth from individuals.

As Pinsky travels the country spreading his message about change and perception, he sees more discussions now about new ways of doing business and new ways of collaborating. Traditional lending institutions and alternative finance institutions are learning to trust one another and to cooperate in ways they never thought they would, he says.

"A lot of the money is being poured into affordable housing, small business and microbusiness and broadly defined community development, ranging from child care facilities to charter schools and a whole range of other things. It's an industry that's grown, and it has had successes in many ways that I don't think were imaginable 30 years ago," he says.

"We need to look at ways now to build scale in some areas and increase efficiency and productivity."

Bridges is a regular review of regional community and economic development issues. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.

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