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CDFIs have succeeded but also face difficulties report says
WASHINGTON (4/27/12)--Community Development Financial Institutions (CDFIs) "have succeeded in lending to and investing in individuals and communities not served by conventional financial institutions, while maintaining loan performance standards generally equivalent to those of the conventional financial sector," but have also experienced some difficulties while doing so, the CDFI Fund said in a recent report.

The "CDFI Industry Analysis: Summary Report" was developed by the University of New Hampshire Carsey Institute's Center on Social Innovation and Finance, and examines the performance of 612 CDFIs between 2005 and 2010. The report examined 197 credit unions as part of the study. The study focused on capitalization, liquidity, portfolio health and risk-management issues faced by CDFIs, and how those institutions were impacted by the recent recession.

The Treasury's CDFI Fund helps locally based financial institutions offer small business, consumer and home loans in communities and populations that lack access to affordable credit.

The report found that CDFI credit unions "have been experiencing greater risk in their loan portfolios than traditional credit unions," with more than double the rate of delinquent loans as a percentage of total assets as the overall credit union industry. However, most of the CDFI credit unions examined had excellent portfolio quality, the report said.

CDFI Fund credit unions also recorded higher operating expense ratios, declining earnings, and rising delinquency rates, and had higher delinquency rates than the credit union industry as a whole, according to the report. Net income, returns on assets, and net interest margins also declined.

While the costs of working with underserved communities can be "somewhat higher," CDFI credit unions and other CDFIs "have learned to effectively manage the 'risk' that discourages conventional financial institutions from serving low- and moderate-income individuals and communities," the report said. Some of the risks and costs could be mitigated through certain operating procedure changes, according to the report.

Those changes include:

  • Creating networks, building infrastructure and improving the scale of operations;
  • Promoting the availability of longer-term capital;
  • Promoting streamlined access to industry data;
  • Promoting greater innovation and strengthening knowledge of best industry practices; and
  • Enhancing staff education and training efforts.
For the full CDFI Fund report, use the resource link.
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