by Loh Sze Leung, Molly Scott, and Marcus Lam

For full report click here.

The Community Development Financial Institutions Fund (the Fund) has been instrumental in the expansion and development of the community development finance industry. The Fund is praised by practitioners for its ability to focus national attention on the issue of access to capital and its ability to generate public and private support for the sector. Prior to the Fund’s creation in 1994, there were half as many CDFIs as there are today managing one-third the assets.

Yet, lack of information on the impact of the agency’s programs impedes the ability of the Fund to generate and sustain political and hence financial support. In addition, it prevents the Fund from using this information to evaluate and improve existing programs. The need to report the agency’s impact is critical to helping decision makers and the general public see the difference it has made in the community.

Several policy tensions make it difficult to measure CDFI performance. Financial covenants can be tailored to meet individual circumstances or standardized across the industry. In terms of impact, the Fund must sometimes choose to favor either meaningfulness or measurability. At the same time, the Fund must strike a balance between gathering and using data to comply with current political demands and building its long term institutional capacity. Lastly, the Fund must meet a double bottom line of securing its investments in CDFIs and making sure that awardees are fulfilling their mission to serve low-income communities.

Recommendations

In this report, we look at different strategies that the Fund may use to accomplish three goals: improving measures of financial soundness; enhancing impact assessment; and perfecting reporting mechanisms. We evaluate competing strategies using the criteria of political feasibility, substantive meaning, administrative feasibility, and cost-effectiveness. We suggest that the Fund take the following actions.

1) Add additional financial measures to the four financial covenants currently used (Alternative two).

This recommendation will give the Fund a better picture of each awardee's financial health. It will help the Fund evaluate its progress toward building capacity in the community development finance industry and creating greater access to capital.

2) Focus on fine-tuning and expanding activity and output measures to serve as proxies for impact (Alternative two).

This recommendation will enable the Fund to gather more meaningful and more measurable information on its impact on CDFIs and the communities they serve. In this way, the Fund can better measure its direct impact and report it to political stakeholders. In addition, this information has the potential to help the Fund improve its programs and build institutional capacity.

3) Contract to a third party research organization to conduct either in-depth case studies of specific CDFIs, longitudinal studies for a specific region, or scientific experiments with a control group (Alternative three).

This recommendation will allow the Fund to: a) tell a better story; b) approximate causality; and c) describe more community level impact of CDFI Fund dollars.

4) Continue to require CDFIs to submit several different reports for financial soundness and performance measures.

We find that the Fund's current reporting mechanisms for financial soundness and performance goals and measures are the best approach under prevailing conditions.

5) Make greater use of all reports. Input information into a comprehensive database. Use narratives to illustrate accomplishments and build political and external support for the agency.

Gathering information is meaningless without effective data management. The Fund has in its financial and annual reports a tremendous source of information that is underutilized. If properly stored and used, this data will add to the Fund's knowledge about its awardees' activities and its own impact. We are confident that these recommendations will improve the Fund's measures, increase knowledge, and build capacity.