Community Development Finance Institutions Needed to Address Financial Exclusion - Australian Report

A new report explores the nature of financial exclusion in Australia and argues that the development of specific and independent Community Development Finance Institutions (CDFIs) could make a significant contribution to addressing this exclusion particularly in the Third Sector.

The report on the possibilities for CDFIs is part of a Foresters Community Finance Occasional Paper written by Ingrid Burkett and Belinda Drew.

The report argues that financial exclusion in Australia extends to Not for Profit organisations, social enterprises and micro enterprises.

Whilst many Community Service Organisations and some of the mainstream financial institutions have, in recent years, made attempts to address financial exclusion (particularly as it relates to individuals), these initiatives have been relatively small scale and have lacked the impact needed to make significant in roads to addressing exclusion across the country.

The report says that new approaches are needed which can build on current responses to develop innovative solutions to the issues involved in financial exclusion.

The researchers argue that Community Development Finance Institutions harness such new approaches. They are described as independent organisations focussed on the use of financial mechanisms to develop and service people, organisations and communities who have been excluded from or underserved by mainstream financial institutions.

Though there are a handful of such organisations operating in Australia, the report says the sector is very much underdeveloped – particularly compared to other ‘developed’ economies such as the United Kingdom and the United States.

It says some efforts have been made to provide specific banking services to Not for Profit organisations in Australia (such as Bendigo Bank’s Community Sector Bank and MECU), but this has primarily focused on offering low-cost deposit taking accounts and tailor made banking services. Very little attention has been paid to the capital needs of this sector and lending or investment into the Not for Profit sector, particularly when it comes to small to medium sized organisations.

The report says these groups often experience issues such as lack of capital other than philanthropic and grant funding, lack of access to fair and adequate sources of investment and loan capital, inability to raise start-up capital for social innovations, and the inability to access loans and investment which would assist them to build wealth through assets and thereby gradually reduce total dependence on external grant funding.

The report says third sector organisations required special terms and conditions on some banking products and services that differentiated costs and benefits from those affordable and appropriate to ‘for-profit’ businesses and corporations.

In addition, it says the Community Sector Bank was launched by Bendigo Bank with the express mission to serve this sector with a full range of banking products and services. Numbers of other financial institutions are following this lead and developing this previously rather ignored market.

In relation to the provision of accounts and transaction services to the Not for Profitr sector these initiatives have been very successful both for the non-profit organisations and for the banks / credit unions involved.

However, the report says it has not been successful in opening up much needed access to capital and investment in the Third sector. Access to credit, working capital, growth capital and capital for asset building in the third sector is still difficult, especially for small to medium sized organisations which have no independent income or assets with which they can secure loans.

At present, it says assisting third sector organisations to meet revenue shortfalls has centred on introduction of new sources of funding (eg. corporate philanthropy) and improving organisation’s capacities to access funding (eg. through the provision of grant writing training).

It is still somewhat ideologically and sometimes legally difficult for organisations to engage in exploration of financial sustainability that goes beyond funding, philanthropy and fundraising options. The capacity of Not for Profit organisations to earn income has been challenged in relation to taxation and charitable status regulations (though it is currently thought that earned income is acceptable so long as it is utilised to further the social objective of the organisation).

Further, there has been little research or experimentation in relation to role of capital
and investment in the Third sector (with the work of Foresters being a rare exception).

CDFIs utilise financial tools and mechanisms to promote investment, economic development and social infrastructure in underinvested communities. In particular,
CDFIs promote lending and investment in areas and regions that are underserved by mainstream financial institutions.

They are a means through which individuals, micro-enterprises, community organisations and social businesses can access loans, financial services and training in order to promote growth, renewal or sustainability.

CDFIs focus primarily on addressing the market failures that underpin financial exclusion.

The report concludes that is the need for responsible, fair and sustainable financial services – particularly for those parts of society who are underserved by or excluded from the mainstream financial institutions.

It says whilst some focus has, over recent years, been given to individuals who experience financial exclusion, Australia remains a long way behind other developed economies such as the United Kingdom and the United States in tackling the depth and breadth of financial exclusion.

The development of a strong and independent Community Development Finance Sector in Australia could go a long way to beginning this task.

The full report can be downloaded at: http://www.foresters.org.au/site/DefaultSite/filesystem/documents/PossibiltiesforCommunityDevelopmentFinanceInstituionsinAustralia.pdf