CDFIs must be 'lenders of first resort' argues new report

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Community lenders should be a first port of call for small businesses seeking finance, according to a new report published this week by the think tank ResPublica.

Markets for the Many: How civic finance can open up markets and widen access also says banks should play a greater role in financing SMEs and supporting communities.

The report lists ten recommendations to help the finance sector “perform its societal role and adopt its civic duty”. 

These also include allowing building societies to take over high street banks, releasing additional capital for mutual societies and helping to establish networks of mutual societies.

Community Development Finance Institutions (CDFIs), says the report, should be lenders of first resort for SMEs. Under current arrangements SMEs can only apply to CDFIs if they have already been refused by a high street bank. The report says that removing this barrier could increase the chances of survival for small businesses, as CDFIs are much better placed to provide credit.

The report also calls on the three main political parties to commit to introducing a Community Reinvestment Act in 2015 to streamline the social investment process. It says that a CRA was introduced in the US in 1977, which required all banks to reinvest in their local economies, and that it produced $68.5 billion of private investment between 1996-2009.

Adam Wildman, research manager at ResPublica and co-author of the report, said that community finance could easily become the “backbone of our economic renaissance”.

“With the economy finally turning the corner, the conditions now exist for our SMEs to thrive and expand,” he said. “But what is currently lacking is the credit our small businesses desperately need to do so. If the government were to truly support community finance by introducing the right support mechanisms, we could well witness a new wave of entrepreneurship and generate widespread prosperity.”

Peter Kelly, director at Unity Trust Bank, the leading bank for CDFIs, said that banks played a vital role in promoting enterprise and creating jobs, “yet the opportunity exists for so much more to be achieved”.

“The status quo needs to change and Community Reinvestment Act-type legislation would create the constructive dialogue and practical action that has been missing for far too long,” he said.