Britain is prospering, but the benefits of this continue to be very unevenly distributed.
This is in part because the poorest communities cannot attract the sort of investment required to support the growth of business and social enterprise. Don’t get me wrong, there’s lots of public money going into these areas.
Yet, with a disproportionate amount of cash in circulation deriving from central and local government, and a large proportion of this money being spent outside the communities, mainstream business is relectant to invest. And so property values, morale and the level of hope all fall, and the vicious circle of disinvestment continues.
Experience and research, however, confirm that there is no shortage of talented entrepreneurs, even in the most hard-pressed communities. Only, they usually lack the capital and management expertise to develop their ideas and enterprises. Yet there are an increasing number of examples around the country where Community Development Finance Institutions (CDFIs) have provided capital to enable enterprises to grow, add value and create jobs. The model has been shown to work – now it’s just a question of scale.
In the UK, the origins of the CDFI sector can be traced back to the 1970s when Industrial Common Ownership Finance pioneered community loan funds and demonstrated their viability. Not much happened, though, until the mid-1990s with further innovations such as the Local Investment Fund and the Full Circle Fund. Most recently, we’ve seen a rush of new institutions emerging – Salford MoneyLine, the Portsmouth Area Regeneration Trust, London Rebuilding Society, and Social Investment Scotland, to name but a few.
Today it is estimated that UK CDFIs have approximately £300m in capital. In addition, some £50m in assets are controlled by ‘soft’ loan funds. Although the total assets of the sector have grown by 29% since 1998, the sector is still very small and its geographic coverage remains patchy. This compares to a sector in the US with capital of approximately £3.4bn, and bank lending in the UK of £1.1bn to small and micro businesses in disadvantaged areas.
The government is working to increase the capacity of the CDFI sector, and the sectors profile at a policy-making level remains high. In February 2000, the Chancellor invited Sir Ronald Cohen of Apax Partners to chair the Social Investment Taskforce, an initiatve of the UK Social Investment Forum. In October the same year, the task force made five main recommendations.
A community investment tax credit, to encourage private investment in community development through investing in CDFIs.
Community development venture funds, to offer entrepreneurs in under-invested communities the benefits of venture captial; long term equity investment, business support and the potential to grow rapidly.
Disclosure by mainstream banks of their activities in underinvested communties, to enable the effectiveness of new fiscal incentives.
Greater latitude and encourgement for charitable trusts and foundations to invest of their substance in communtiy development initiatives, rather than just giving of their surplus.
Support for CDFIs and a strengthened CDFI sector overall, include a trade assocation for CDFIs.
Each of these recommendations are now being followed through, and every one of them presents a number of ways for companies (not just banks) to refresh and/or add a new dimension to their CSR portfolio.
The most useful thing companies could do is find a way to boost take-up of the Community Investment Tax Credit when it comes on stream. Under the tax credit, which will appear in the next Financial Markets Bill, any corporate or individual making a debt or equity investment in a CDFI will be able to offset 25% of the value of their investment against their tax liabilities. CDFIs accredited by the Small Business Service will be able to attract taxincentivised investment up to a limit of £10m per CDFI.
The tax credit is a means of bringing money in to the CDFI sector by adjusting the risk-reward relationship on an investment. It rewards socially motivated investors at a stage when many CDFIs are not able to offer any return from their own operation, by providing a guaranteed return on investment in what is a new and potentially high-risk industry.
We now know that CDFIs can succeed at connecting the economically and socially disadvantaged to the mainstream. They are attractive to policy-makers because they challenge the assumption that more grants and more benefits will break the vicious cycle of underinvestment in areas of market and public sector failure. And with so many people living powerlessly, trapped in a parallel system to ours, where wealth creation can only ever be a dream, not to build on what we know actually works in areas of market and public sector failure seems criminally negligent.
In the US the CDFI sector has traditonally received a large amount of financial support (grants and investment) from the corporate sector (not just banks), in addition to that coming from individuals, churches, foundations and trusts. In the UK though, apart from a few banks experimenting around the edges, it has proved very difficult to get beyond a rather general interest in CDFIs. What the CDFI sector needs most is for the UK’s CSR professionals to apply themselves to help make a relatively minute transformation to the structures and practices that provide the affluent comfort of most, but not all. So, what now?
Make yourself aware of how these high social impact investment opportunities will enhance your portfolio of CSR activities.
Talk to your finance department about how to maximise the benefit of the Community Investment Tax Credit.
Keep up to date about developments in the sector by become a supporting member of the Community Development Finance Association.
Andrew Robinson is the Head of Community Development Banking for NatWest & The Royal Bank of Scotland. He is also the Chair of the UK Social Investment Forum.
COMMENTS