What CDFIs Should Expect in a Recession - Part 2

This is the second in a three-part series that will consider the likely impacts of a recession on the CDFI industry. Part 1 focused on the negative impacts. Part 2 focuses on the positive impacts. Part 3 will provide suggestions for how CDFIs can position themselves to thrive—recession or no recession.

The prospects of a recession are unsettling to us all in the impact finance space—a recession means people losing their jobs, entrepreneurs closing their doors, and opportunities for homeownership vanishing. It makes the work we do and the mission we strive for even harder to accomplish. It also amplifies the importance of CDFIs and other impact lenders and investors. As markets retrench in the face of inflation and economic contraction, the impact finance ecosystem must work hard to find innovative ways to blunt the impacts of economic turmoil on the most vulnerable residents in our communities.
With that in mind, this post considers the potential opportunities within a recession that can help us all propel our mission forward no matter the economic headwinds.

Part 2: Favorable Impacts

Higher Credit Loan Requests
As conventional lenders tighten their lending parameters, impact lenders will start to see applications coming in from businesses who were bankable just a few weeks or months prior. This offers the immediate and mid-range benefits of adding very high credit quality loans to the portfolio. Impact lenders can leverage this in two ways—most conservatively, to offset a potential influx of delinquencies and losses in their existing portfolios as economic conditions worsen, or, perhaps more bravely in service to mission, to justify new, higher-risk lending to traditional CDFI borrowers as they face the recession. Leaning into riskier loans during a recession is a high-risk, high-impact strategy, but CDFIs may be able to do so prudently if they are closing higher credit quality loans at the same time.

Experienced Lenders on the Job Hunt
The impact finance industry has not been immune from the macroeconomic trend of staff departures and staffing shortages. Nearly all of our clients at High Impact—and our firm too, for that matter—have experienced higher than normal staff turnover in the last two years. Hiring new staff has been difficult given the number of institutions with competing offers and the friction caused by individuals changing industries or stepping back from the workforce. In a recession, as banks cut back lending activity, we can expect to see layoffs and slower hiring trends among traditional financial institutions. CDFIs who are ready for this will be able to hire and train finance professionals who are newly on the job market and want their next job to have a real impact in their communities. This could be the influx of qualified personnel that the industry has been looking for. At High Impact, we’ve had several good experiences hiring staff from traditional financing institutions. Once they get past the initial culture shock—“there’s no collateral at all?” and “you want me to honestly tell you what I think about our workplace?”—their skills are highly transferrable, and the different perspective can be a major benefit, particularly if other staff come from more of a grassroots community development background.

Continued Spotlight on the Importance of Impact Finance
The visibility of the Black Lives Matter movement in the wake of George Floyd’s murder and the unprecedented economic shutdown caused by the pandemic have put CDFIs and impact finance into the spotlight like never before. The capital inflows from both government and private resources that followed have positioned the industry to not just be resilient during a recession, but to continue growth and increase impact. If the industry can use this newfound spotlight to demonstrate how to drive just capital allocation even during a recession, impact lenders have the opportunity to cement their place in the consciousness of Americans as the economic first responders that they are. The long-term benefit that could come from that could be industry-changing.
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What’s Next
With the most likely negative and positive impacts of the recession behind us, the final post in this series will present proactive steps CDFIs and others in the industry can take to ensure that we are all ready to react strategically and proactively when a recession hits.