CDFI Futures: An Industry at a Crossroads - Opportunity ...

CDFI Futures: An Industry at a Crossroads

March, 2016

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Foreword: Another Fork in the Road

The CDFI industry has grown, transformed, and produced at a remarkable pace for more than 20 years. In 2015, Opportunity Finance Network (OFN) commissioned two studies, one looking back at 20 years of data and the other looking forward at a set of strategic choices that will determine the next two decades. The first, 20 Years of Opportunity Finance 1994?2013: An Analysis of Trends and Growth, documented CDFI industry growth, transformation, and production. This study, CDFI Futures: An Industry at a Crossroads, starts where the first study ends and builds on it. It includes a deep dive into the data from a different perspective--looking at CDFI efficacy over 20 years using a new model that seems to offer great insights. This also prompts a set of difficult questions about CDFI business models, sources of capital, competitive environment, policy strategies, purposes, and other challenging aspects of our work. All told, it spotlights a set of forces that the CDFI industry needs to address if its future is to be as remarkable as its past. We selected Jeremy Nowak to write this paper for several reasons. He is a pioneer of the CDFI industry, a leading voice on community development and public policy issues, an advisor to a range of investors thinking outside the box about money and mission, and an expert in both public policy and financial systems. OFN wanted Jeremy to ask questions to stimulate thought, debate, and discussion about the CDFI industry's future. He has done that in ways that can catalyze responses that will move us all forward, not always in ways we might expect. We look forward to discussing the ideas in this paper with you and, together, developing a path forward. Over the coming year, OFN aims to organize a series of conversations that draw on this paper, our longitudinal study, and--most important--the work and experiences of CDFIs in practice. I invite you to be part of that discussion.

Mark Pinsky President & CEO, Opportunity Finance Network

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Acknowledgements and Authorship

Opportunity Finance Network (OFN) commissioned this report with support from Citi Foundation. Jeremy Nowak is the primary author. Ken Gross designed and carried out the factor analysis used in the report and is acknowledged as a contributing author. Ken Gross is the President of Quantitative Innovations which specializes in turning data into useful knowledge that guides public policy. Sarah Fitzgerald Brown assisted throughout the research, setting up and transcribing interviews and providing background reviews on FinTech and impact investing. OFN's staff and board provided valuable feedback during the entire process, as did participants at the 2015 OFN Annual Conference.

About the Author

Jeremy Nowak is President of J Nowak Associates, a consulting firm that specializes in social investment, public policy, and strategic planning. He was the President of the William Penn Foundation in 2011 and 2012 during which he helped develop the blueprint for their current grant making. Mr. Nowak was the founding CEO of Reinvestment Fund, that provided more than $1 billion in support of housing, small businesses, and community facilities, during his tenure. Currently he is a Nonresident Senior Fellow at the Brookings Institution and a Nonresident Scholar at the University of Pennsylvania's Institute for Urban Research. In 2012 and 2013 he was appointed to chair the Board of the Federal Reserve Bank of Philadelphia. His tenure at the Fed ran from 2008 through 2013.

Citi Foundation generously supported OFN's research.

About Citi Foundation The Citi Foundation works to promote economic progress and improve the lives of people in low-income communities around the world. We invest in efforts that increase financial inclusion, catalyze job opportunities for youth, and reimagine approaches to building economically vibrant cities. The Citi Foundation's "More than Philanthropy" approach leverages the enormous expertise of Citi and its people to fulfill our mission and drive thought leadership and innovation.

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Table of Contents

Purpose, Methods, and Findings ........ ....... .................................................................6 From Proof of Concept to Steady Growth ...................................................................8 Measuring CDFI Capacity ..........................................................................................13 The Disassembly of Product and Place ....................................................................20 FinTech and CDFIs .....................................................................................................27 Chasing the Impact Investor Brand ..........................................................................31 Is There a Diversification Problem?..........................................................................35 A Capital Transformation Phase ...............................................................................41 CDFI Identity and Social Reform ...............................................................................46 Conclusion .................................................................................................................52 Appendix A. List of Interviews ..................................................................................53 Appendix B. Bibliography..........................................................................................54 Appendix C. Factor Analysis.....................................................................................57

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