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Hands up if you know what a CDFI is.

I confess that I didn’t until recently. Community Development Finance Institutions may not have the snappiest name but they perform a very important function, providing responsible finance to people and businesses that banks and building societies won’t lend money to. What distinguishes CDFIs are a personal touch with customers, a robust attitude to risk, and a determination to make responsible loans available for all which make them a very ’social’ kind of business.

I caught up with Katy Ford who runs Foundation East, a CDFI which covers the East of England. She tells me why they have loan sharks in their sights, and dispenses some common-sense advice for bank managers.

Why are CDFIs so important?

Katy: They fill a gap between mainstream and non-mainstream financial services; the average person on the street can get a bank account and credit if they have a history that can be evaluated by the bank – but many have either no credit history or a poor one – like bad loans & credit card debt. These people are refused by the banks and often forced into the arms of unscrupulous lenders, mostly with disastrous consequences. Something has to be done to change that, otherwise the chasm between haves and have-nots simply widens. That’s why CDFIs are so important.

Foundation East is a local lender and a mutual society that lends to both people and businesses based on what they can realistically afford to pay back. That can sometimes involve not just a frank look at the business’s cashflow but also the personal cashflows and expenditures of the people who run it, recognizing that they also have to manage themselves financially.

Do you have high default rates on your loans?

Katy: We do, but that’s the risk you take. Foundation East’s portfolio at risk is in the region of 25% - versus 13% in a typical bank. As you can imagine, we’ve had lots of activity in the last eighteen months as ‘lenders of last resort’, which has meant that some 30% of our debt has had to be written off. We are at the risky end of the risk business; we manage that risk and we make provision for it. That means our costs are high and will be so in the future.

How do you know Foundation East is making a positive difference?

Katy: We’ve been lending since 2004, since when we’ve enabled 192 jobs to be created, 183 to be saved and 75 new businesses to be started up. Our core activity is business lending to people who have effectively been redlined by the banks. Not all those businesses are still around – some of them failed - but we did enable people to start a business who otherwise would never have had the opportunity, and that’s important. We generate opportunity and aspiration where none exists; money does sometimes get written off, but lives have been improved and self-esteem boosted. You can’t quantify that positive aspect, but it’s definitely there.

We also lent almost £71,000 in personal loans last year to people who might have otherwise have gone to a loan shark, so there’s another positive outcome.

What do you do differently to banks?

Katy: We offer an intensive support programme to our loan clients. Each region has Loans Officers who work really hard to build old-style bank manager relationships with clients: it’s all about open, honest and transparent communication. They are on first name terms, and they have a proper understanding of their clients’ circumstances - that approach allows for true flexibility when they’re repaying money. We will pursue individuals who decide not to pay, sometimes to the fullest extent provided by the law, but we are always prepared to listen and negotiate.

Do CDFIs get to influence mainstream bank policies?

Katy: We don’t actively influence them, but we do work closely with them – after all they provide us with many of our client leads. Some regional bank managers do try to embrace a more personal approach to banking and are more customer-focussed than others, possibly as a result of doing business with us. It’s important to remember that CDFIs like Foundation East are not competition to banks; we’re an ‘add-on’ not an ‘instead-of’. If banks refer their “can’t do’s” to a responsible person who can, like a CDFI, the loan sharks don’t get fed, and that’s a good thing.

What advice would you give to the banking sector?

Katy: Get to know your customers – and their businesses – better, and look hard to see the people and not just the numbers.

What could Foundation East be doing better as a company?

Katy: Talking more about what we do as a company and as a group (CDFIs); we don’t do this enough. CDFIs need to be more transparent about our operating practices - and acknowledge where they can go wrong - so we can improve them. We do have higher loan default rates than banks, but that’s for a good reason; we take a punt on people when the bank’s ‘computer says no’.

Many thanks to Katy for her time and views. Do you run a social business? Get in touch (tom at clearlyso dot com) if you’d like to be featured in our Social Business Spotlight.

Tom Mansel-Pleydell

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