Collaborations by Design: CDFIs, Capital Absorption, and the Creation of Community Investment Systems

by Erin Shackelford
Initiative for
Responsible Investment
HKS

Rebuilding disinvested communities takes more than money. Rather, as research done by the Initiative for Responsible Investment (IRI) at the Harvard Kennedy School has shown, places that have been starved of resources for extended periods of time often lack the policies, practices, or relationships they need to effectively leverage existing or new resources.

IRI's capital absorption framework not only recognizes that there is a complex system that governs how resources flow into communities, it also provides a way to think beyond individual transactions to identify changes at a system level so that investment is used more effectively to achieve community goals. Potential system-level interventions can include bringing new partners to the table, identifying new resources that can be provided by existing partners, creating different ways of doing business, and changing the policies and relationships that determine the allocation of money and other resources.

Many of these approaches are central to strategies used in collaborative initiatives carried out by Community Development Financial Institutions (CDFIs) that have been funded by JPMorgan Chase & Co.'s PRO Neighborhoods program. The growing collaboration among CDFIs—which can be banks, credit unions, or other financial institutions that have a primary mission to provide access to financial services in low-income communities—have included the development of joint products and services, efforts to share risk and expertise, jointly developed new technologies, and the development of larger scale projects which could attract additional investors.

A new case study, which uses this "capital absorption" framework to examine many of the collaborative efforts funded by the PRO Neighborhoods initiative, finds that the funding spurred three types of collaborations that together increased the CDFIs' ability to respond more effectively to key needs and concerns. In particular, the grants helped:

1. Spur internal institutional change within CDFIs: Within institutions, flexible support to enter into new areas of lending, as provided by the PRO Neighborhoods grants, is tied to the ability to devote resources to strategic development and organizational learning. These are scarce resources for CDFIs, which, by necessity, tend to have a transactional focus. These resources can prove crucial for CDFIs seeking to expand their geographic and/or sectoral range, and those hoping to deepen engagement with the communities they serve.
   
2. Foster collaboration among CDFIs: PRO Neighborhoods awards enabled CDFIs to share best practices, support collaborators with challenges, and closely observe (and learn from) each other's practices. The structured collaborations and regular exchanges that came with project execution shed light on new practices and built relationships that are likely to endure well beyond the grant cycle. These connections are critically important because finding the time and space to learn from peer institutions is a crucial aspect of organizational development.
   
3. Expand CDFIs' connections with broader "Community Investment Systems": The benefits of collaboration came not just from the interchange among and between CDFIs, but also through the CDFIs' engagement with the larger "community investment systems" in the neighborhoods served by the various CDFIs. This occurred because the focus on innovation and collaboration led CDFI practitioners to engage with a variety of key actors in the broader ecosystem, including leaders of community advocacy groups, elected and appointed officials, representatives of local trade associations, and representatives of firms that provide collateral and financial services.

These conclusions suggest two key lessons for funders who want to effectively structure grant programs aimed at encouraging collaboration. These are:

1. Collaboration takes a big incentive. Creating the time and space to establish an ongoing collaboration is challenging for organizations where time, staffing, and funding are constrained. The significant funding provided by the PRO Neighborhoods program offered a critical incentive for CDFIs to establish ongoing collaborations.
   
2. Collaboration can take many forms, shaped by different systemic challenges. From a nationwide, spoke-and-wheel collaboration focused on addressing food deserts, to the collaboration of place-based actors to support the specific needs of their community, PRO Neighborhoods collaboratives are unique and varied in scope, shape, and sector. The funder's flexibility gave leaders of the CDFI collaboratives the time and space they needed to understand, identify, and address the different systemic challenges that existed in their unique sectors and places.

The capital absorption framework points to the importance of considering not just the transactions in question, but the broader system of community investment in which CDFIs operate. Funders and other actors in the community investment system can benefit from the observation and lessons that emerge as CDFIs collaboratively develop innovative practices to help revitalized disinvested communities.