Thought Leaders of the Emerging Regenerative Economy
Thought Leaders of the Emerging Regenerative Economy
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National Community Investment Fund (NCIF), a certified Community Development Financial Institution (CDFI), was established in 1996 as a nonprofit entity “to invest capital in and enable knowledge transfer to Community Development Banking Institutions (CDBI) around the country.” CDBIs are depository financial institutions that operated in low- and moderate-income areas and have as their mission to generate economic and community development impact. NCIF currently has approximately $150 million in assets under management including $128 million of New Market Tax Credits. It has invested over $24 million in capital in 45 US CDBIs. Seventy-three percent of these institutions are either minority- or woman-owned or managed, and 19 percent are located in rural areas. NCIF has also provided seed capital to six de novo banks.
NCIF’s Chief Fund Advisor Saurabh Narain came to community development finance via a rather circuitous route. As the Head of Bank of America’s Derivatives Marketing for non-Japan Asia in the late 1990s, he reports, he was “sitting right in the middle” of the 1997-98 Asian Financial Crisis. “That experience made me realize that we needed to spend more time building institutions, nurturing skills in local communities, providing sustainable finance, and generally leveling the playing field in developing economies,” says Narain.
Narain continues to view attracting capital to community development banks as a critical need, given the profound economic challenges low-income communities have lately experienced. Indeed, he sees many parallels between the current financial crisis and the Asian Crisis of the late 1990s: “Many of the underserved communities in the States have been set back 10 or 12 years by this financial crisis in much the same way as similar communities in Asia were in the late 1990s, and it was through no fault of their own. Most of the people in these communities did the right thing. They were working hard just to make a living but got very badly hurt nonetheless.”
In 2007, Narain and his colleagues developed a metric system that would allow potential “double bottom line” investors and other stakeholders to identify those banks and thrifts that were truly dedicated to these underserved communities. At the time there were over 8500 banks and thrifts operating in the country but only 55 officially certified by the US Treasury as Community Development Financial Institutions (CDFIs). It was NCIF’s contention that there were many more community development banking institutions quietly going about the business of serving low- and moderate-income communities than that number represented. The goal of the new social metric system would be to shine a light on this broader group. The new metrics would also provide, for the first time, a quantitative measure of the social performance of the US bank and thrift industry as a whole.
The NCIF Social Performance MetricsSM that emerged from this research was the first and is still the only database that provides both basic financial information as well as social performance metrics on all the country’s banks and thrifts. Based on publicly available date, the Metrics provide two core social performance measurements: a Development Lending Intensity (DLI), which is the percent of total loans extended by an institution to low- and moderate-income (LMI) communities, and a Development Deposit Intensity (DDI) which is the percent of branches located in LMIi communities.
In addition to this free, public, searchable database, NCIF also produces customized reports based on the Social Performance MetricsSM and the Model CDBI Framework that enable complementary, qualitative analysis of an institution over time and against peer groups. Narain reports NCIF is also currently composing a 15-year retrospective on CDFI banks in an effort to increase the profile of these institutions as an investible asset class. “The key message NCIF wants to get out about CDFI banks,” says Narain, “is that they are anchor institutions in the communities they serve. They are working in tough markets providing credit and savings products and counseling and they are entering into partnerships for holistic development. It is much more than lending. Very often people forget this because these are small, low-key institutions and people don’t know the nonlending kind of work these banks do. This is why it is critical to support this sector since without them, LMI communities and individuals living in them are exposed to the risk of regressing to irresponsible alternative financial service providers like check cashers and payday lenders who provide these services at a much higher cost.”
“That experience (97-98 Asian Crisis) made me realize that we needed to spend more time building institutions, nurturing skills in local communities, providing sustainable finance, and generally leveling the playing field in developing economies”
NCIF is working with CDFI bank CEOs as well as with SRI and mainstream investors to help standardize their social performance measurement data and information needs and to create simple reports that meet the financial and social needs of all stakeholders. It is also collaborating with other groups in the “impact investing” space including the Global Impact Investing Network. Narain is a member of the Office of Thrift Supervision’s Minority Depository Institutions Advisory Council that commissioned a report to help minority thrifts express their social performance in a more standard way and to provide information about their social impacts in ways that are not now publicly available.NCIF hopes that its Social Performance MetricsSM will help identify perhaps another 500 banks that are operating in poor areas that should be certified CDFIs. “Our goal is to encourage more banks to want to become certified,” Narain reports. “Many have not sought certification either because they are unaware of it or are not aware of the benefits of certification. In the old days the incentive to be certified was mixed but today under the leadership of Donna Gambrell, Director of the Department of the Treasury’s CDFI Fund, the benefits are much greater. Additionally, the Obama Administration and the Treasury recognized the significant work being done by the CDFI depositories and hence when they started the TARP Capital Purchase Program they waived the warrants for the industry, and indeed, started a special Community Development Capital Initiative in 2010 to help better capitalize the industry.
Narain also notes that the NCIF works with CDFI banks in an advisory capacity to help them refine their business models to attract more capital. “In the past we in the industry relied heavily on Community Reinvestment Act capital,” he says. “But if we want serious capital then we have to become more efficient and create more quantifiable returns, including the social ones. We hope to create a virtuous circle where investors begin following the information provided by the Social MetricsSM service which in turn incents the banks to provide some of the information that is not now publicly available.”
Although some merger activity in the CDFI bank industry is inevitable, Narain warns of a downside to this trend. “As banks become larger they lose touch with their local communities. That is why we need to encourage mergers within the CDFI community in order to retain mission control.” An alternative to merger is rationalization of back office functions. “Can we work together a bit better, does every bank need its own compliance officer and technology platform?” Narain asks. “If we want to stay relevant to the local communities we have to look at a franchise model with perhaps a big back office backing up several smaller banks. These are challenging times and we have to find creative ways to address them.”—Susan Arterian Chang is Director of Capital Institute’s Field Guide to Investing in a Regenerative Economy project.