Community Finance in the UK and ART (Aston Reinvestment Trust)

Dr. Steve Walker, Chief Executive ART11Th November 2009

University of Birmingham

What are CDFIs?

Community Development Financial Institutions. Independent Organisations – Different Forms, still

a Young Sector. Provide Loan Finance where others do not to

Various Markets. West Midlands in Top 3 Regions in UK by

number. CDFA, 2001, www.cdfa.org.uk

Community Finance

US experience CDF - 25 years. Community Reinvestment Act the driver. Worldwide - Grameen Bank - microcredit.

Small is Bankable 1998 – UK. UK Public Sector Loan Schemes – research showed

lack of outreach and success. Social Investment Taskforce 2000. Phoenix Fund – DTI/DBERR 2000-2006. Regional Development Agencies 2006. (BIS) Policy switch to personal finance -DWP

SMALL IS BANKABLE 1998 -Expansion of CDFIs

Disadvantaged neighbourhoods typically have least access to capital. Those facing acute finance gaps include individuals, micro and small businesses, small housing associations and the wider voluntary sector.

Five distinct models of community finance now operate in the UK: credit unions; community loan funds; micro-finance funds; mutual guarantee societies; and social banks.

Community finance initiatives use a variety of non-conventional ways of delivering financial services which reduce risks and operational costs, and avoid recourse to above market rates. They have in general a good record on default and financial sustainability. In contrast, many public sector-led funds offering 'soft' (subsidised) loans have performed poorly.

The researchers conclude that there remains a mismatch between the scale of the problem, in terms of access to capital, and the current capacity of the solutions. Yet with adequate policy support, fee earning from investment activities and some subsidy, community finance initiatives could increase in scale and impact and become attractive partners to banks.

Markets

Micro Businesses (1-9 employees) – Micro finance (loans up to E25000) + loans up to £50000.

Small & Medium Businesses - loans up to £50000.

Social Enterprise - loans up to £250,000. Equity for small businesses. Consumer/Personal Lending.

National Examples

Charity Bank and Triodos Bank? CDFI Sector v Banks?

Cooperative and Community Finance (Formerly ICOF)

TSELF (Formerly Local Investment Fund Bridges Community Ventures (Venture

Capital targeted to disadvantaged areas)

West Midlands Examples

ART (Aston Reinvestment Trust) Black Country Reinvestment Society Coventry and Warwickshire Reinvestment Trust Impetus Street UK

Fair Finance Consortium

www.fair-finance.net

ART

JOBS

OPPORTUNITY

GROWTH

INNOVATION

ENTERPRISE

Aston Commission Report 1989

Research and development and attempts to raise funding support.

Established 1997 CDFI, Mutual Society Lends to businesses and social

enterprises in Birmingham and Solihull

Funded by individual, corporate and public sector investment

Mission

Relief of Poverty through Enterprise -

Local Jobs for Local People.

ART – Business Transformation

EFG -------- BANK

BUSINESS/ BUSINESS LINK SOCIAL / DEVELOPMENT ENTERPRISE SUPPORT

ACCOUNTANTS-Advisors

Policy Guarantee Funds ----------- ART

ART Loans

Business Loans– For existing and start up

businesses– Up to £50,000– Now £10,000 upwards– At launch until 2006 £2,000

upwards– Up to 10 year loan period– Commercial rates of

interest- 12/base– Compare Banks now post

credit crunch.

Social Enterprise Loans– For existing and start up

social enterprises– Up to £50,000– Up to 10 year loan period– Commercial rate of interest– 12/Base –compare national

providers in sector.

Lending Criteria

Refused loan by bank and other sources. Viable proposition - application

form/business plan- Social and Economic Benefits to area-

usually jobs. Evidence of desire and ability to repay Financial track record – personal and

business

Achievements

Since start up in 1997 ART has lent over

£8 million to 400 +borrowers

enabling them to create or protect

3,500 jobs in the Birmingham area.

Experimented in other areas-Energy Saving and home improvement-reverted to core activity to support enterprise.

ART Achievements

Pioneer of CDFI model in the UK – now replicated around the country. Some have used model for other purposes.

Contributes to local and national government policy relating to access to finance and support for small businesses including social enterprises.

Hosted visits by interested parties from around the world.

ART Achievements

Revolving loan fund of circa £2.5m. Current loan portfolio split:

– 90% loans to businesses– 10% loans to social enterprises

Average loan £20,000. Now covers over 90% of overheads,

excluding bad debts, from earned income.

ART-Examples of Success

KPM Turnkey

Purnells

Eagle Gold Security

Salon Express

Funding

Investment by individuals and companies – from £250 to £20,000. Industrial and provident Society –Mutual.

Public and private sector support - capital and revenue. Loans from Charitable foundations and banks. Investments qualify for Community Investment Tax

Relief.(CITR).ART is an independent organisation, aiming to be self-sustaining. It has championed the use of public sector funding for policy purposes to underwrite risk.

CDFA Latest Information.

Since 2003 CDFIs have lent £500m.Total Loans Made 2008/9 including Triodos and

Charity Bank £113million (50% up on last year)Portfolios now excluding TB and CB £98million.

(£394m) up 19% in 2008/9Business Loans-total volume £33 million

08/09.Micro =35% by value 64% by number.Tighter lending conditions.Current major future issues funding and funding!

Lessons from the early years.

SCALE RAISING AWARENESS REFERRALS PARTNERSHIPS BAD DEBTS/PRICING MICRO LENDING DIVERSIFICATION – Issues + or -

Lessons over the years

Research - cannot always believe. Finance + Support needed in disadvantaged

communities - compare US. Community Reinvestment Act- huge plus for

US. Sustainability is not everything. CDFIs have a positive impact and can make a

real difference…….NEF 2007.

Future Issues

Public Sector v Mission of CDFI Full coverage v targeted to areas of

disadvantaged. Regional Development Agencies? Future? Banks? Are they fit for purpose -Small is

bankable-is Bank right for small businesses? NEF -IOUK.

Banks appetite for the small business market?

Future Issues

Solutions for Business- CDFIs can deliver but? Policy guarantee funds-whose policy? Issues with regional funding –local authorities –

ERDF Philanthropy and social investment. CITR use. Evaluation of the sector GHK for BIS Social Investment Wholesale Bank? Community Reinvestment Act in UK or…?