For decades, when community development financial institutions (CDFIs) have been asked what they need to grow, the response has been the same: “More net assets.” But while the need for net assets to support CDFI growth remains (and will not go away because of the scale of the challenge), the industry now has new capitalization tools to bring to bear to reduce this pressure. Many of the investors who support the CDFI industry – most particularly financial institutions – have advocated for the development of secondary markets as a means to scale CDFI lending. But adopting new tools – in this case, loan sales – requires a shift in the attitudes and behaviors of both CDFIs and, importantly, the funders and investors who play a powerful role in their choices.
This brief addresses a set of critical questions that will arise as the industry puts this powerful growth strategy to work, focusing on how CDFI funders and investors should reconsider how they interpret key financial metrics related to portfolio quality, capital deployment, and earned income for CDFIs that are selling loans. For example, to more accurately assess the lending activity of CDFIs that are selling loans, we recommend that funders request and evaluate total assets under management rather than simply looking at outstanding loans held on the balance sheet or total deployment ratio.
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The Business Ownership Initiative works to build understanding and strengthen the role of business ownership as an economic opportunity strategy. BOI is an initiative of the Economic Opportunities Program.
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