Ben Hughes has become the chief executive of the Community Development Finance Association at a challenging time for its membership of social lending organisations.
The CDFA's membership comprises community development finance institutions, from the very small to large organisations such as Charity Bank and Triodos. They lend to businesses, individuals and third sector organisations that would not usually be able to access credit on the high street. With increasing numbers of individuals and organisations struggling to get money from traditional banks, the need for its members' services continues to grow.
CDFIs themselves have grown quickly in recent years - last year they lent £177m, almost three times as much as in 2004, of which £146m went to social enterprises and charities, £23m to small businesses and £8.3m to individuals.
Hughes, given the top job at the CDFA in January after six months in the role on an interim basis, spent 11 years as chief executive of the community regeneration body Bassac before it merged with the Development Trusts Association to become Locality. He believes that community development finance institutions try to solve the same problems of social inequality he faced in his previous job.
He says CDFIs could increase their lending many times over without meeting communities' needs. But finding cash to lend remains a problem.
"We estimate we lend at a loss of 20 to 25 per cent," says Hughes. "If you're lending where it's really needed, you're not investing properly if you make a return."
CDFIs, says Hughes, "focus on the client, not the debt". They support individuals and organisations to become investment-ready and "offer a blended social and financial return".
Historically, much of the missing 20 to 25 per cent has come from government. CDFIs were supported in the last decade by the former Department of Trade and Industry's Phoenix Fund, which backed entrepreneurship in disadvantaged areas. More recently, the CDFA has received £60m from the government's Regional Growth Fund.
Last month, the CDFA set out a manifesto for change, which asks for community finance to be better supported by the government and the financial system. "There needs to be a specific focus on community finance," says Hughes. A goal is a simplification of community investment tax relief, which was introduced 10 years ago to encourage individuals and businesses to invest in CDFIs and entitles them to reclaim 25 per cent of their investment in tax over five years.
"Community investment tax relief is very important," says Hughes. "We're asking for an extension beyond its current application from the Treasury."
He is also campaigning for a rule to force banks to disclose where they invest. "We think just identifying the areas banks aren't lending will encourage them to do more," he says. Hughes says banks are becoming more interested in partnering with CDFIs, partly because it fits their corporate social responsibility agenda, but also because CDFIs can increase financial literacy in deprived communities. He hopes to develop a scheme in which banks will refer unsuccessful loan applicants to CDFIs, because he says another key need for his sector is more awareness among potential customers.
When it comes to raising capital, Hughes says, his members disagree on tactics. "Some CDFIs say they must get funders to pay for their lending infrastructure," he says. "Others say the future must be independent of grant support."
A few have begun to invest some of their money at a profit in the hope it will allow them to lend the rest sustainably, he says. Others are looking to grow. "If you get to a large enough scale, this lending is sustainable," Hughes says. "But it's difficult to get there."
Hughes hopes his sector can develop other sources of finance, possibly through a microfinance model involving many individual investors, or maybe through a bond structure pioneered by the social lender Allia, whereby investors buy bonds, their money is lent on to housing associations and the profit is used to fund CDFIs.
Hughes is sceptical about the difference Big Society Capital, the £600m social wholesaler set up with money from dormant bank accounts, will make to CDFIs. "The problem is that BSC expects to make a return," he says. "In areas of real deprivation there's not enough money there for the capital to flow down."
Despite all the difficulties, Hughes believes the near future could be a time of great promise for CDFIs. "We've got to step up," he says. "The sector has to become more mature, more professional, and convince investors that this is a place to put their money."
1999: Chief executive, Bassac
1990: Founding director, Blackfriars Advice Centre
1986: Welfare rights adviser and manager, Citizens Advice
1983: Campaigns assistant, Friends of the Earth