Community Development Finance Association Research Report FFF IIINNNAAANNNCCCEEE MIND THE ^^^ GAP EVIDENCING DEMAND FOR COMMUNITY FINANCE Dr Nick Henry & Philip Craig, ICF GHK FULL REPORT January 2013 Supported by Community Development Finance Association Research Report Mind the Finance Gap Evidencing demand for community finance Dr Nick Henry & Philip Craig ICF GFH FULL REPORT January 2013 © CDFA 2013 This report and the summary report are available on our website at: www.cdfa.org.uk/mindthefinancegap Any enquiries regarding this report, contact: Ian Best, Policy & Research Manager, CDFA [email protected] Views expressed in this report are not necessarily those of the Community Development Finance Association or RBS Group. Research and report by ICF GHK, conducted on behalf of the CDFA and made possible though the support of RBS Group. The Community Development Finance Association represents non- profit social enterprises known as Community Development Finance Institutions (CDFIs). CDFIs provide loans to those unable to access finance from mainstream financial institutions such as banks. CDFA’s mission is to support the development of a thriving and sustainable CDFI sector that provides finance for disadvantaged and underserved communities and, as a consequence, contribute to the increasing prosperity of these communities. www.cdfa.org.uk In 2012, GHK Consulting became ICF GHK, a wholly owned subsidiary of ICF International. A multi-disciplinary public policy research and evaluation consultancy of around two hundred staff, we are one of Europe’s leading providers of impact assessments and ex ante, mid- term, final and ex post evaluation services to central Government departments, the European Commission and national, local and civil society organisations. Research and analytical services are offered across the full range of economic, social and environmental policy fields. www.ghkint.com The Royal Bank of Scotland Group supports businesses of all shapes and sizes, in every sector of the economy. We’re committed to promoting economic growth and to fostering the right conditions for people’s business ideas to flourish. In addition, we focus efforts on three groups that we believe, with further support, could play a stronger role in the entrepreneurial economy: young people, women and social entrepreneurs. We call this RBS Inspiring Enterprise. Through Inspiring Social Enterprise we will support 2,500 social enterprises, working in partnership with the sector to improve access to expertise, markets and finance by the end of 2015. www.rbs.com/inspiringenterprise Acknowledgements The CDFA wish to thank RBS Group, as part of RBS Inspiring Enterprise, for funding this research. Mind the Finance Gap Contents Foreword ........................................................................................................................................ 7 Executive summary ......................................................................................................................... 8 1 Introducing community finance ................................................................................... 9 1.1 What is community finance? ................................................................................................................. 9 1.2 The community finance ecosystem........................................................................................................ 9 1.3 The Evidence Review: aims, method and report structure .................................................................. 12 2 Community finance for businesses ............................................................................ 13 2.1 The underserved market of business lending: start-ups, micros, SMEs and disadvantaged communities, and access to finance .................................................................................................... 13 2.2 Market failures in SME access to finance ............................................................................................. 15 2.3 CDFIS as intermediaries: bringing demand and supply together ......................................................... 16 2.4 Other enterprise lenders and sources of external finance .................................................................. 22 2.5 Investors ............................................................................................................................................... 28 2.6 Market developments .......................................................................................................................... 30 2.7 Community Finance and Enterprise Lending: Demand, Supply, and Barriers ...................................... 33 3 Community finance for civil society ........................................................................... 34 3.1 The underserved market of civil society: social entrepreneurship, social ventures, the voluntary and community sector, and access to investment ............................................................................... 34 3.2 Market failures in Civil Society access to finance ................................................................................. 35 3.3 CDFIs as intermediaries: bringing demand and supply together ......................................................... 37 3.4 Other civil society lenders and sources of external finance ................................................................. 39 3.5 Investors ............................................................................................................................................... 44 3.6 Market developments .......................................................................................................................... 45 3.7 Community Finance and Civil Society: Demand, Supply and Barriers .................................................. 47 4 Community finance for individuals ............................................................................ 48 4.1 The underserved market of personal lending: financial exclusion and lack of access to affordable credit .................................................................................................................................................... 48 4.2 Specific market failures ........................................................................................................................ 48 4.3 Credit Unions and CDFIs as intermediaries: bringing demand and supply together ........................... 49 4.4 Alternative funding paths: the high-cost credit market ....................................................................... 52 4.5 Investors ............................................................................................................................................... 54 4.6 Market developments .......................................................................................................................... 55 4.7 Community Finance and Personal Lending: Demand, Supply and Barriers ......................................... 56 5 Community finance for homeowners ........................................................................ 57 5.1 The underserved market of homeowner finance: meeting the cost of maintaining, repairing and adapting homes to changing circumstances ........................................................................................ 57 5.2 Specific market failures ........................................................................................................................ 58 5.3 CDFIs as intermediaries: bringing demand and supply together ......................................................... 58 5.4 Alternative funding paths driving market development ...................................................................... 59 5.5 Investors ............................................................................................................................................... 61 5.6 Market developments .......................................................................................................................... 61 5.7 Community Finance and Homeowners: Demand, Supply and Barriers ............................................... 62 6 Key Findings ............................................................................................................... 64 6.1 The supply of community finance ........................................................................................................ 64 6.2 Demand for community finance .......................................................................................................... 64 6.3 Opportunities and challenges .............................................................................................................. 64 6.4 Summary conclusion ............................................................................................................................ 65 Annex 1 Bibliography 67 Annex 2 CDFI funding (2010-2011) 69 Annex 3 Recent national access to finance schemes 72 Annex 4 Access to finance schemes and applicability to social enterprises 73 Table of Tables Table 2.1 Economic impact of CDFI enterprise lending ................................................................................. 20 Table 2.2 Cross section of crowdfunding platforms ....................................................................................... 26 Table 2.3 Summary of the leading equity-based crowdfunding platforms ...................................................