Community Development Financial Institutions (CDFIs) provide affordable and non-predatory financial services to underserved and disadvantaged individuals, businesses, and communities1 that have often been ignored by mainstream lenders2. CDFIs encompass a variety of different financial institutions, such as credit unions, banks, loan funds, or venture capital funds1. The services offered vary by type of institution and can include individual depository services (i.e., checking accounts, mortgages and consumer loans, and individual development accounts), small business and microenterprise loans to new and growing businesses, and funding for infrastructure projects such as affordable housing and community facilities1, 3, 4, 5. Many CDFIs also provide technical assistance, financial education, and business development services. CDFIs can act as an intermediary between businesses, governments, residents, and community-based organizations. CDFIs may be non-profit or for-profit and may partner with or receive funding from other financial institutions, federal and state governments, philanthropic organizations, and social investment funds1. The US Department of the Treasury’s CDFI Fund provides equity grants to individual CDFIs that use the financing to meet their community’s needs3.
Expected Beneficial Outcomes (Rated)
- Increased business growth
- Increased community wealth
- Increased economic development
- Expanded economic opportunity for marginalized populations
Other Potential Beneficial Outcomes
- Decreased predatory lending
- Increased access to financial services
- Increased financial stability
Evidence of Effectiveness
Community Development Financial Institutions (CDFIs) are a suggested strategy to increase business growth, community wealth, economic development, and economic revitalization in distressed communities6, 7. Experts suggest CDFIs can expand economic opportunity for marginalized populations that have been left behind by mainstream lenders and financial service providers3, especially in neighborhoods of color8. However, additional evidence is needed to confirm effects9.
CDFI loans appear to be successfully reaching the people they intend to help: those living in areas with high poverty or unemployment and members of underserved groups such as individuals with low incomes, minorities, tribal organizations, and the unbanked10. Most CDFI funding goes to communities that are distressed and underserved; however, lending is unevenly distributed across the country, and substantial needs remain in rural areas2.
CDFIs can help reduce the racial wealth divide by providing financial services to people of color to enable them to build wealth and assets through homeownership and small business ventures. CDFIs can also support community wealth building with efforts to develop community properties, infrastructure, services and programs, and to invest in housing and community development opportunities in distressed communities7.
Black and Hispanic-owned businesses and those located in distressed communities are more likely to apply for funding from CDFIs11. Black-owned businesses in rural areas, however, were significantly less likely to apply at a CDFI than those in urban areas11. Studies suggest black-owned businesses may be less likely to be funded, perhaps due to a lack of business assets which could be used as collateral11.
Available evidence suggests community development credit unions offer an alternative to predatory lending, such as payday loans12, 13. Community development venture capital investments are more likely to be in rural areas than traditional venture capital and are more likely to happen at earlier points in the development of a business and in non-typical industries14. Community development venture capital may be less likely to result in significant profit but may attract traditional venture capital to underserved areas14. Experts suggest the effect of CDFIs on neighborhood revitalization, economic development, and business growth may be constrained by the relatively small amounts of funding available9 and the limitations of available data to detect effects10.
A Los Angeles-based study suggests CDFI staff with direct community experience, particularly those that share a language and cultural background with clients, may be able to gather additional valuable information during the lending process, build stronger relationships with clients, and may allow a CDFI to take on greater risks5. Surveys of CDFI leaders suggest CDFIs’ roles vary based on what community needs they are addressing. CDFIs can function as alternatives to mainstream financial institutions or work to draw mainstream lenders into the area. Other CDFIs may offer a new product or previously unavailable service to meet community needs; serve as economic development catalysts; or act as a bridge between public and private sectors, community developers, and philanthropic organizations15.
CDFIs require financial capital and sufficient equity to support their loans, operations, and expansion activities, but CDFIs do not always have adequate funding. For example, for CDFI microlenders (who make loans under $50,000) a lack of assets can prevent service expansion; the small business loans they offer do not always cover the full costs of providing loans, which means they must locate additional grants and financing11. To increase their available equity, experts suggest strategies such as selling loans, coinvesting with other organizations, and finding new investors, including those who may be interested in social and environmental benefits as well as investment returns. To attract such investors, CDFIs need to effectively communicate what the CDFI is doing, the size and structure of their offerings, and understand the impact measures that investors are interested in16. Analysis indicates that CDFI loan funds, banks, and credit unions with larger assets are much more likely to have high self-sufficiency ratios (i.e. they are more likely to be able to produce sufficient revenue to cover costs without reducing their equity value) than smaller CDFIs17.
Experts recommend significantly increasing the budget for CDFI Fund grant programs, to $1 billion annually3. Experts also suggest adding more support and investment for community development capacity and partnership building with state, local, and philanthropic partners2.
Impact on Disparities
As of 2019, there were more than 1,000 certified Community Development Financial Institutions (CDFIs) across all 50 states, Washington, DC, and other US territories4 that provided $168 billion in financing3. In fiscal year 2018, registered CDFIs provided 28,000 loans or investments to almost 15,000 small business, over 200,000 consumer loans, around 19,000 home improvement or purchase loans, financed over 33,000 affordable housing units, and provided financial literacy training to 343,471 individuals; nearly 30% of CDFIs receiving grants served rural markets4.
The US Department of the Treasury certifies all CDFIs that receive grants from the CDFI Fund1. To qualify for these equity grants, private legal financing organizations must primarily be working to promote community development in at least one specific market experiencing certain levels of poverty, unemployment, or population loss. Grantees must also offer development services (e.g., trainings in financial literacy, microenterprise management and development, etc.) along with financing activities9.
Native CDFI loan funds have grown over time18 and have the potential to make more loans within their communities if they had more funding19. The CDFI Fund’s Native Initiatives program provides funding, technical assistance, and training for Native CDFIs20. Native CDFIs can also partner with traditional lenders in addition to receiving CDFI funding21.
The focus of CDFIs can widely vary. For example, the Denver Regional Transit-Oriented Development Fund provides flexible financing to affordable housing and community developers to maintain or create affordable housing near public transit in the seven-county metro area22. CDFIs may partner with community land trusts to increase affordable housing in communities23 and have a history of partnering with community health centers24. CDFIs can partner with health practitioners and other community groups on community health improvement efforts, such as violence prevention and financial education, as well as traditional financing. Examples include a Coatesville, PA-based center that features health services, senior housing, and a children’s library; adding additional affordable housing, health services, a vegetable garden, and social connectedness programs to a St. Paul, MN rental housing complex; and in New York City, supporting development of a public school with a rooftop garden as well as an adjoining community center25.
Early CDFIs developed in response to community needs, after banks’ redlining practices and economic shifts resulted in disinvestment in those communities7. CDFIs have been around for decades: Chicago’s South Shore Bank was founded in 1973 and is considered the first community development bank, with community development loan funds and community development credit unions starting in 1979 and 198026.
CDFI Friendly America - Community Development Financial Institutes (CDFI) Friendly America.
Native CDFI Network - Native Community Development Financial Institution (CDFI) Network. Strengthening native communities.
Oweesta - Oweesta Corporation. Native Community Development Financial Institution (CDFI) Intermediate.
Urban-Theodos 2017a - Theodos B, Seidman E, Edmonds L, Hangen E. State and local policy: A critical concern for CDFIs. Washington, DC: Urban Institute; 2017.
Urban-Theodos 2017b - Theodos B, Seidman E. From compliance to learning: Helping community development financial institutions better determine and demonstrate their results. Washington, DC: Urban Institute; 2017.
US Treasury-CDFI Fund - US Department of the Treasury (US Treasury). Community Development Financial Institutions Fund (CDFI).
* Journal subscription may be required for access.
1 Urban-Dev 2016 - Dev J. The unsung financial institutions that fund inclusive community development. Urban Wire: Finance. Washington, DC: Urban Institute. 2016.
2 Urban-Theodos 2017c - Theodos B, Hangen E. Expanding community development financial institutions: Growing capacity across the US. Washington, DC: Urban Institute; 2017.
3 Urban-Theodos 2020 - Theodos B, Ferguson T, Hacke R, Mensah L, Meixell B. A new agenda for community development finance. Washington, DC: Urban Institute; 2020.
4 CDFI Coalition 2019 - CDFI Coalition. Community development financial institutions. Washington, DC: CDFI Coalition; 2019.
5 Patraporn 2015* - Patraporn RV. Complex transactions: Community development financial institutions lending to ethnic entrepreneurs in Los Angeles. Community Development. 2015;46(5):479-498.
6 US Treasury-CDFI Fund - US Department of the Treasury (US Treasury). Community Development Financial Institutions Fund (CDFI).
7 Dubb 2016 - Dubb S. Community wealth building forms: What they are and how to use them at the local level. Academy of Management Perspectives. 2016;30(2):141-152.
8 Urban-Neal 2020 - Neal M. To significantly increase access to capital for communities of color, we need to support black banks and all CDFIs. Urban Wire: Housing and Housing Finance. Washington, DC: Urban Institute. 2020.
9 Harger 2019* - Harger KR, Ross A, Stephens HM. What matters the most for economic development? Evidence from the Community Development Financial Institutions Fund. Papers in Regional Science. 2019;98(2):883-904.
10 Carsey-Swack 2014 - Swack M, Hangen E, Northrup J. CDFIs stepping into the breach: An impact evaluation. Durham, NH: The Carsey School of Public Policy, University of New Hampshire and Office of Financial Strategies and Research, and Community Development Financial Institutions Fund, US Department of the Treasury; 2014.
11 FRB-Galloway 2020 - Galloway I, Sanchez-Moyano R. Understanding community development financial institutions and their impact in low- and moderate-income neighborhoods. Federal Reserve Bank of San Francisco, Community Development Innovation Review. 2021;15(1).
12 Nembhard 2013* - Nembhard JG. Community development credit unions: Securing and protecting assets in Black communities. The Review of Black Political Economy. 2013;40(4):459-490.
13 Woodstock-Williams 2007 - Williams M. Cooperative credit: How community development credit unions are meeting the need for affordable, short-term credit. Chicago: Woodstock Institute; 2007.
14 Kovner 2015* - Kovner A, Lerner J. Doing well by doing good? Community development venture capital. Journal of Economics and Management Strategy. 2015;24(3):643-663.
15 Urban-Theodos 2016 - Theodos B, Fazili S, Seidman E. Scaling impact for community development financial institutions. Washington, DC: Urban Institute; 2016.
16 Urban-Seidman 2017 - Seidman E, Fazili S, Theodos B. Making sure there is a future: Capitalizing community development financial institutions. Washington, DC: Urban Institute; 2017.
17 Carsey-Swack 2012 - Swack M, Northrup J, Hangen E. CDFI industry analysis. Durham, NH: Center on Social Innovation and Finance, Carsey Institute, University of New Hampshire and Community Development Financial Institutions Fund, US Department of the Treasury; 2012.
18 FRB-Kokodoko 2015 - Kokodoko M. Growth and performance of the Native CDFI loan fund sector, 2001 – 2012. Minneapolis: Federal Reserve Bank of Minneapolis, Community Development Department; 2015.
19 FRB-Kokodoko 2017 - Kokodoko M. Findings from the 2017 Native CDFI survey: Industry opportunities and limitations. Minneapolis: Federal Reserve System; Federal Reserve Bank of Minneapolis; Center for Indian Country Development; 2017.
20 US Treasury CDFI Fund-Native Initiatives - US Department of the Treasury (US Treasury). Community Development Financial Institutions (CDFI) Fund: Native Initiatives.
21 FRB-Gerber 2018 - Gerber, S. Native CDFIs and banks partner to improve tribal communities. Minneapolis, MN: Federal Reserve Bank of Minneapolis; 2018
22 Urban-Edmonds 2018 - Edmonds L. Financing the development in transit-oriented development. Washington, DC: Urban Institute; 2018.
23 LISC-Greenberg 2019 - Greenberg DM. Community land trusts & community development: Partners against displacement. New York: Local Initiatives Support Corporation (LISC); 2019.
24 Kotelchuck 2011 - Kotelchuck R, Lowenstein D, Tobin JN. Community health centers and community development financial institutions: Joining forces to address determinants of health. Health Affairs. 2011;30(11):2090-2097.
25 Mattessich 2014 - Mattessich PW, Rausch EJ. Cross-sector collaboration to improve community health: A view of the current landscape. Health Affairs. 2014;33(11):1968-1974.
26 Dyer 2014* - Dyer AW. Credit access and urban regeneration in the United States. Advanced Engineering Forum. 2014;11:344-347.
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