By Daniel Hunter
Investment by individuals in financial institutions that specifically support community and charity projects jumped 12% from £25.9m in 2009-10 to £28.9m in 2010-11 (latest available figures), according to research by Wilkins Kennedy LLP, the Top-20 accountancy firm.
These financial institutions — Community Development Financial Institutions (CDFIs) — are a new breed of lenders, specialising in financing those who have been turned down for loans by banks — often charities, community projects, or small local businesses.
Community Development Financial Institutions are typically not-for-profit and can provide financing for start-up or working capital, bridging loans, loans for new equipment, or back-to-work loans for those re-entering the workforce after long periods of illness or unemployment. They are partially funded by those looking to invest in local projects.
Wilkins Kennedy adds that investments in CDFIs have grown by 33% over the past two years, up from just £21.8m in 2008-9.
John Howard, Partner and Head of Not-for-Profit at Wilkins Kennedy, comments: “Community Development Financial Institutions are filling the hole in the lending market left behind by the collapse in traditional bank lending for local projects. They play a valuable role in connecting individuals with money to invest and vital community projects in need of financial support.”
“CDFIs help individuals satisfy their demand for community and charity investment. Some investments are about more than making pure profit. Giving something back to their community and building a better place to do business matter for a lot of individual investors. CDFIs are an easy — and tax efficient — way for individuals to get their funds to the right projects.”
Investments in CDFIs allow investors to claim 5% of their investment against their tax bill. This tax relief is known as Community Investment Tax Relief (CITR). Wilkins Kennedy says that an increase in the amount of this tax relief could help boost Community Development Financial Institutions.
John Howard says: “£30m of investment is a great start, but there’s a lot of potential for further investments in CDFIs. The Government could encourage this by offering a more generous relief.”
“People might be keen to lend to worthy projects, but they do need to maintain an eye on their own bottom line too. Investments in Community Development Financial Institutions offer tax incentives, but these could be more generous.”
John Howard adds: “Compared to the incentives offered on the Enterprise Investment Scheme (EIS) or charitable donations, the 5% Community Investment Tax Relief is a very small amount. It’s a very cheap scheme for the Government in terms of the cost of the lost tax revenue, so an increase in the relief wouldn’t break the bank.”
“With bank lending for community projects having fallen steadily, it’s even more important that the Government finds ways to help individuals invest in those that are trying to fill the gap left by the banks.”
In 2010-11, the scheme only cost the Government £1.4m, up from just £1.1m in 2007-08.
Examples of CDFI investment projects include:
- Big Issue Invest — Part of the Big Issue Group, it provides loans of between £50,000 and £500,000 to social enterprises looking to create ‘social and environmental transformation’
- London Rebuilding — This CDFI provides micro-loans for businesses, credit and training for migrant communities, and home improvement services for low income home-owners
- The Aston Reinvestment Trust — A leading Birmingham-based CDFI specialising in finance for small businesses and social enterprises. £8m of loans have been made over the last decade
John Howard adds: “The amount invested in CDFIs has accelerated as more and more individual investors look for new places to put their funds. This acceleration could be turbo-charged with added government support.”
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