Mark Hall, place-based impact investing specialist at the Impact Investing Institute, analyses a landmark move that sets a precedent for other mainstream banks to follow.
Many advocates for impact investing describe Community Development Finance Institution (CDFIs) as one of the hidden superpowers of the finance system in the UK. Deeply rooted in local communities, these non-profit lenders have been quietly unlocking the potential of thousands of small businesses that have been unable to access mainstream finance.
A lack of investment at scale into CDFIs has been holding the sector back from reaching its full potential and supporting more small enterprises across the UK.
Lloyds Bank has now taken a significant step to change this by becoming the first mainstream bank in the UK to invest in CDFIs through the launch of the £62m Community Investment Enterprise Facility (CIEF).
The fund aims to support around 800 small businesses and 10,500 jobs in some of the most economically disadvantaged areas of England and Wales. This landmark investment not only underscores a commitment to social impact but also sets a precedent for other mainstream banks to follow suit.
CDFI lending
CDFIs operate as non-profit organisations with a mission to provide financial services to businesses and individuals overlooked by banks and other mainstream lenders. By cultivating robust relationships with enterprises and communities, CDFIs facilitate access to finance for small businesses and support them to use it effectively to grow.
Over the past five years, CDFIs have lent over £1bn to small enterprises, aiding economic growth and fostering development in underserved parts of the UK. Half of their lending is directed to the most deprived regions, while CDFIs also champion diversity by supporting a significant portion of female-led (34%) and ethnically diverse-led (15%) enterprises.
Despite these accomplishments, the UK CDFI sector has yet to fully realise its potential, with an estimated 50,000 small businesses that have been declined or discouraged from mainstream lenders, likely to be deemed creditworthy by CDFIs.
In stark contrast, CDFI Loan Funds in the US lent approximately $11.5bn to enterprises in 2022. A key obstacle to scaling CDFI lending in the UK has been the lack of substantial investment, particularly from mainstream banks who have moved away from the traditional relationship-based retail banking model.
Bringing impact to the mainstream
This investment from Lloyds marks a pivotal moment, aligning with our mission at the Impact Investing Institute, to bridge the gap between mainstream finance and impactful opportunities in the real economy that deliver risk-adjusted returns for investors.
Working in partnership with a coalition of organisations including Responsible Finance – the membership body for UK CDFIs – and Big Society Capital – the junior investor in CIEF –, the Impact Investing Institute has been instrumental in engaging mainstream investors in the sector.
Through the Institute’s place-based impact investing programme, which focuses on directing more impact capital to underinvested places across the UK, CDFIs have been brought to the attention of high-street banks and other impact focussed investors.
We have partnered with Responsible Finance to implement a capacity-building program for their members, preparing CDFIs to take on increased investment and grow, setting them up for a sustainable future. We are also working on the design of other financing vehicles that could unlock more private capital for CDFIs.
Paradigm shift
Lloyd’s Bank’s injection of commercial capital into the CDFI sector presents an opportunity for a paradigm shift. With adequate support, CDFIs can build on their impressive track-record and evolve into confident and well-capitalised lenders, complementing mainstream banking services and effectively channelling funds to small and medium sized business that need it the most.
Increasing flows of scale capital to the CDFI sector will be contingent on a supportive policy environment in the UK, particularly through effective tax reliefs and guarantees.
For example, amendments to Community Investment Tax Relief (CITR) could unlock further scale investment from institutional investors and an extension to the Recovery Loan Scheme (RLS), which provides an essential loan guarantee would encourage longer term planning for investors, lenders and small businesses.
My hope is that Lloyd’s decision to support the sector signifies a landmark moment, paving the way for further involvement from other mainstream banks and fostering inclusive economic growth at the grassroots level.
Mark Hall is programme manager, place-based impact investing at the Impact Investing institute.
