The answer lives in this podcast
What policy tools could unlock CDFI investment at scale?
The Dormant Assets Fund represents a critical source of catalytic capital that can unlock private investment from mainstream lenders and other sources, according to NatWest. First loss funding structures and other risk-mitigating financial mechanisms are essential to scaling CDFI investment over the next few years, supported by active collaboration across the sector.
Community Development Finance Institutions (CDFIs) fill a vital gap in the financial services ecosystem for borrowers who cannot access mainstream banking. Yet their growth depends on robust investment mechanisms that address the fundamental risk concerns holding back capital deployment.
Catalytic capital and de-risking mechanisms as cornerstones
Stuart Foster, Managing Director of Financial Institutions at NatWest, highlighted the Dormant Assets Fund as a potential catalyst for unlocking private capital from mainstream banks and other institutional lenders. However, he was clear that this tool alone is not a complete solution to the sector's funding challenges.
First loss funding structures emerged as fundamental to the sector's near-term growth. As discussed in The Responsible Finance Podcast, these mechanisms work by absorbing losses before other investors bear risk, thereby de-risking investments and making them attractive to lenders who might otherwise remain on the sidelines.
Collaboration across the financial ecosystem
NatWest emphasized that policy tools alone cannot move the needle. The bank underlined the importance of active collaboration between several key players: Fair by Design, Responsible Finance, CDFIs themselves, and the Financial Conduct Authority (FCA).
This multi-stakeholder approach, detailed in this episode of The Responsible Finance Podcast, reflects a recognition that scaling investment requires coordinated effort across policy, capacity building, and institutional commitment. NatWest's 30-year history with the UK community finance sector underpins its credibility in calling for this kind of coordinated action.
"CDFIs provide a terrific part of the overall ecosystem of financial services — for those who are not able to borrow from the mainstream banks, CDFIs do a brilliant job filling that gap."
Brian Holland — Director, Customer Vulnerability, Retail Controls and Remediation at NatWest Group. With 14 years at NatWest, Holland leads the bank's approach to vulnerable customers, overseeing consumer duty, retail bank risk and controls, and remediation activities. Stuart Foster, Managing Director of Financial Institutions, brought 24 years of experience at NatWest and co-authored NatWest's foreword to Responsible Finance's 2023 impact report, published at a May 2024 event hosted by NatWest.
See also
What is NatWest's 'Know My Credit Score' initiative and how does it relate to the CDFI ecosystem?
Know My Credit Score is a NatWest service that gives customers free access to their credit score and tips on how to improve it; it has been accessed 83 million times over 12 months by NatWest's 17 million customers.
How does NatWest refer customers and social enterprises to CDFIs when it cannot serve them directly?
NatWest does not have a formal referral system but signposts customers to established portals that share information about Responsible Finance members.
What capacity building support did NatWest provide to CDFIs alongside the Hardship Grant funding?
Half of NatWest's grant funding was directed at helping CDFIs build their own capacity and increase overall access to affordable credit. The six CDFIs each received support to strengthen their operations and expand their reach.
Key takeaways
- The Dormant Assets Fund is a promising but not standalone tool for unlocking mainstream capital into CDFIs.
- First loss funding and other risk-mitigating financial structures are essential to attracting institutional investment over the next few years.
- Scaling CDFI investment requires coordinated collaboration between policy makers, regulators (FCA), capacity builders (Fair by Design, Responsible Finance), and CDFIs themselves.
- NatWest's 30-year track record with the community finance sector positions it as a credible advocate for policy and funding innovation.