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CDFI Theory

The theoretical framework for CDFIs was originally articulated by Daniels and Litvak (1979): the idea of market failure in private markets for capital or credit (see Figure 9.1). Levere, Schweke, and Woo (2006) modified this framework, offering a simpler market-failure-based typology focusing on two barriers in accessing capital: (1) misallocation: despite competitive rates of return, capital is not flowing to certain areas; (2) social/public benefits: although the capital market is operating efficiently, private yield is not high enough to justify the risk, since externalities are not excluded.

CDFIs adopted the market-failure framework, seeing it as logical in explaining their work. The market-failure framework is primarily transaction based. The goal is ensuring individuals have the opportunity to obtain credit and, by default, that access is equitably distributed. Not surprisingly, the CRA[1] embodies the principals of the market-failure framework as a piece of legislation designed to ensure fair and equal access to credit for all communities and individuals. Logically, success criteria of transaction-based community finance are defined as equal distribution in access to credit both spatially and racially. An individual's location and demographics are the criteria for the loan, and the individual is the level of measurement.

There is, however, an inherent tension between the goal of CDFIs to provide access to credit and the often unstated mission of CDFIs to provide community development, particularly alleviating poverty (Dymski 2005), a mission that does not fit well in the market-failure framework. Most of the literature has focused on the credit provided by, or transactional elements of, CDFIs, with less focus and understanding on the poverty alleviating, or transformational elements, of CDFIs (Stevens 2006). The market-failure framework may be missing an important element.

Transformational Assets

The assets framework, articulated originally by Michael Sherraden (1991), argued that we should both look at and attempt to address poverty from a wealth- or assets-based perspective, including (1) financial assets – the money available to a family, whether in the form of savings, stocks or other investments, or physical assets such as a house; (2) human capital – knowledge and skills both formal and informal; (3) social capital – social networks both among community members and organizations and between different communities. Assets are not seen as existing in isolation from income but instead complement and add to flows and holding pools of wealth.

A key principle is that holding assets produces an “asset effect” of increased individual and community empowerment (Bynner and Paxton 2001; Shapiro and Wolff 2001; Sherraden 1991), or “transformation." Policy implications from the asset framework include individual development accounts (IDAs) and children's savings accounts.[2] Most research and policy proposals have focused on personal/ individual assets or microlevel assets. A small but influential group has focused on community-level assets-based development. Their intent is to look at community assets rather than community deficits. This body of work focuses less on the individual transformation than on the community transformation. Building on this track, recent academic work from the United Kingdom has incorporated public and common assets (Paxton, White, and Maxwell 2006) into the discussion. Public assets are those held by government. Common assets are those held for society and humanity (Bollier 2006).

CDFIs have applied the assets framework to their work in limited ways, such as by offering IDAs and enabling homeownership, with some individual CDFIs measuring and promoting other forms of asset ownership, such as employee stock ownership, and the Sustainable Jobs Fund. Through the case study of CEI, I argue that the real value of the assets framework is in refocusing CDFI missions, program design, and measurement around individual and community transformation to build not only financial assets but also human and social forms of assets.

  • [1] CRA provides a framework for pushing banks to make loans in all communities discontinue redlining, whereby certain communities were excluded from bank lending.
  • [2] IDAs are accounts in which a dollar saved by an eligible low-income person is matched. Children's savings accounts are an innovative policy in Britain, where each child bom is provided with a pot of money that can be deposited into an account and matched by others. Low-income families receive double the initial grant with an additional top-up later in the child's life.
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