Community development finance institutions: evidence from overseas and Australia

From the executive summary of this report... This paper describes a case of Australian exceptionalism; a case with tragic consequences. Australia has failed to follow most other developed countries and develop a set of specialised financial institutions that are needed for the successful regeneration of disadvantaged communities. For more than thirty years developed countries have had to respond to continuing high levels of unemployment, and growing levels of long-term unemployment. Increasingly, this long-term unemployment is geographically concentrated, in certain parts of large cities and in certain rural areas. It has led to the multifaceted problem that the European nations have labeled social exclusion. This challenge of continuing joblessness and its consequent social exclusion has generated many policy responses, and led to the emergence of many new institutions. Community Development Financial Institutions or CDFIs constitute one such new institution. The term CDFI is a generic one, covering a wide range of organisations. What these organisations have in common is that they raise finance and invest it in local community-owned or small business enterprises. They also provide business training and support as an accompaniment of their investing. They are grounded in their local communities. They raise their finance in the form of grants and loans and they invest via grants and loans. CDFIs emerged first in the United States as part of recognition that community development had a central economic dimension and that frequently what constrained community economic development was the absence of funds for investment in new projects. By their very nature, projects designed to generate employment and build resources in deprived communities were not viable by conventional banking criteria. What emerged were a variety of institutions that understood this challenging environment and could provide the support and judge the risks to ensure a high success rate and rebuild damaged communities. Whilst these new institutions have emerged independently of government, they have benefited from various forms of government support, in the form of supportive regulatory arrangements and tax incentives for investors in CDFIs. This paper describes the emergence of CDFIs, the various forms they have taken and the kinds of government support they have received in the United States, Canada, the United Kingdom and continental European countries. It then turns to Australia where it notes the absence of any equivalent discourse. It identifies a number of proto-CDFI organisations, but with one, highly specialised exception, these are underdeveloped. It reviews a range of government and parliamentary reports over the past twenty years and finds that several proposed policies that would have encouraged the emergence of CDFIs in Australia. These were ignored. Other high profile inquiries, surprisingly, stopped short of investigating the finance needs of entrepreneurs, both small business and local social enterprise, in disadvantaged communities. This leaves Australia as a significant exception among developed western countries. The paper concludes with an exploration for this exceptionalism, finding reasons on both the supply and the demand side. It concludes that circumstances on both the demand and supply side are now more favourable than they have ever been for the development of CDFIs in Australia. It makes several suggestions for initiatives that can carry forward the task of institutional development: trials, networking research and, later, a government enquiry to generate better policy settings