Community Development Financial Institutions

Evidence Rating  
Expert Opinion
Evidence rating: Expert Opinion

Strategies with this rating are recommended by credible, impartial experts but have limited research documenting effects; further research, often with stronger designs, is needed to confirm effects.

Health Factors  

Community Development Financial Institutions (CDFIs) provide affordable and non-predatory financial services to underserved and disadvantaged individuals, businesses, and communities (Urban-Dev 2016) that have often been ignored by mainstream lenders1. CDFIs encompass a variety of different financial institutions, such as credit unions, banks, loan funds, or venture capital funds2. 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 facilities such as schools, childcare centers, and health care facilities2, 3, 4, 5, 6. 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 funds2. 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 communities7, 8. 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 color9. However, additional evidence is needed to confirm effects10.

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 unbanked11. 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 areas1.

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 communities8.

Black and Hispanic-owned businesses and those located in distressed communities are more likely to apply for funding from CDFIs12. Black-owned businesses in rural areas, however, were significantly less likely to apply at a CDFI than those in urban areas12. 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 collateral12.

Available evidence suggests community development credit unions offer an alternative to predatory lending, such as payday loans13, 14. 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 industries15. Community development venture capital may be less likely to result in significant profit but may attract traditional venture capital to underserved areas15. Experts suggest the effect of CDFIs on neighborhood revitalization, economic development, and business growth may be constrained by the relatively small amounts of funding available10 and the limitations of available data to detect effects11.

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 organizations16.

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 financing12. 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 in17. 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 CDFIs18.

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 partners1.

Equity Analysis

Potential to decrease disparities: Suggested by intervention design

Community Development Financial Institutions (CDFIs) are designed to reduce disparities in access to financial services for businesses and individuals in economically disadvantaged communities that have been underserved or ignored by mainstream lenders and financial service providers3, increasing business growth, community wealth, economic development, and economic revitalization in distressed communities7.

CDFIs appear to reach those they intend to help. In 2020, the Opportunity Finance Network reported that, on average, 84% of CDFI clients are from low-income, low-wealth, or historically disadvantaged groups; 60% of CDFI clients are people of color; and 50% of CDFI clients are women28. Black and Hispanic-owned businesses and those located in distressed communities are more likely to apply for funding from CDFIs, though Black-owned businesses may be less likely to be funded and Black-owned businesses in rural areas were significantly less likely to apply than those in urban areas12. While an average 27% of a CDFI’s clients were from rural areas in 202028 many rural communities receive no CDFI funding29. Experts recommend Tribal-owned CDFIs for development in rural Tribal communities30, and as of 2018, 70 rural CDFIs are led by Tribal groups29.

A small study at the census tract level was unable to find significant effects of CDFI funding on neighborhoods, but that could be due to data limitations11. Overall, the relatively small amounts of funding from CDFIs may also limit their impacts on neighborhood revitalization, economic development, and business growth10.

Historical Context

By the 1960s, disinvestment in both urban neighborhoods and rural areas had left them suffering from poverty, and both were often highly segregated31. Discriminatory housing, lending, and exclusionary zoning policies in the era of Jim Crow and government-sanctioned segregation led to the redlining practices of the Federal Housing Administration (FHA) and concentrated poverty. Redlining entrenched residential segregation, denying people of color access to government-insured mortgages and making the homes in the neighborhoods where they lived uninsurable32, while the Interstate Transportation Act financed highways that destroyed inner city neighborhoods in the 1950s and 1960s31.

Community development came out of the Civil Rights movement31 and the War on Poverty in the 1960s, moving from that era’s large centralized urban renewal projects (epitomized by ill-fated public housing projects) to broader networks of mostly non-profit organizations addressing the need for affordable housing. Federal policies to support this work include tax credits, (i.e., the Low Income Housing Tax Credit and New Market Tax Credit) and the Community Reinvestment Act requirements for banks to invest in communities, while Community Development Corporations, affordable housing developers, and CDFIs work together to implement projects. CDFIs themselves grew out of mission-focused loan funds in the early 1970s, which provided low interest loans to economically disadvantaged residents, and community development banks that were founded to counter the racist lending practices of major banks33. 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 198034. In 1994, the federal CDFI Fund was created as part of the US Department of the Treasury, providing federal certification of CDFIs and distributing funds federal funds to them33.

Equity Considerations

  • Who lacks access to financial services in your community? How well are CDFIs connecting those community members to financial services?
  • How can CDFIs incorporate an explicit racial equity perspective into lending to account for historical practices that denied people of color access to government-insured mortgages?
  • What resources do CDFIs need to adequately meet needs within your community?
  • What partnerships does your local CDFI have to support efforts to increase racial and gender equity within your community?
  • Do the projects funded by your CDFI increase investment in disadvantaged neighborhoods and rural areas? What efforts are in place to prevent displacement caused by gentrification?

Implementation Examples

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 individuals4.

The US Department of the Treasury certifies all CDFIs that receive grants from the CDFI Fund2. 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 activities10.

Native CDFI loan funds have grown over time19 and have the potential to make more loans within their communities if they had more funding20. The CDFI Fund’s Native Initiatives program provides funding, technical assistance, and training for Native CDFIs21. Native CDFIs can also partner with traditional lenders in addition to receiving CDFI funding22.

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 area23. CDFIs may partner with community land trusts to increase affordable housing in communities24 and have a history of partnering with community health centers25. 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 center26.

As of 2021, loan funds accounted for over half of CDFIs registered with the CDFI Fund, credit unions another were another 25%, banks 12%, holding companies 8%, and venture capital funds only 1%27.

Implementation Resources

CDFI Friendly America - CDFI Friendly America. We bring CDFIs to your community and we make sure you know how to make the most of them.

Native CDFI Network - Native 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.

Urban-Andrews 2019 - Andrews N. Race, gender, and equity in community development: Ten findings, six ways forward. Washington, DC: Urban Institute; 2019.

US Treasury-CDFI Fund - US Department of the Treasury (US Treasury). Community Development Financial Institutions Fund (CDFI).

Footnotes

* Journal subscription may be required for access.

1 Urban-Theodos 2017c - Theodos B, Hangen E. Expanding community development financial institutions: Growing capacity across the US. Washington, DC: Urban Institute; 2017.

2 Urban-Dev 2016 - Dev J. The unsung financial institutions that fund inclusive community development. Urban Wire: Finance. Washington, DC: Urban Institute; 2016.

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 FRB-Sass Rubin 2009 - Sass Rubin R. Shifting ground: Can community development loan funds continue to serve the neediest borrowers? Federal Reserve Bank of San Francisco. 2009: Working Paper 2009-01.

7 US Treasury-CDFI Fund - US Department of the Treasury (US Treasury). Community Development Financial Institutions Fund (CDFI).

8 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.

9 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.

10 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.

11 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.

12 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).

13 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.

14 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.

15 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.

16 Urban-Theodos 2016 - Theodos B, Fazili S, Seidman E. Scaling impact for community development financial institutions. Washington, DC: Urban Institute; 2016.

17 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.

18 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; Community Development Financial Institutions Fund, US Department of the Treasury; 2012.

19 FRB-Kokodoko 2015 - Kokodoko M. Growth and performance of the Native CDFI loan fund sector, 2001 – 2012. Minneapolis, MN: Federal Reserve Bank of Minneapolis, Community Development Department; 2015.

20 FRB-Kokodoko 2017 - Kokodoko M. Findings from the 2017 Native CDFI survey: Industry opportunities and limitations. Minneapolis, MN: Federal Reserve Bank of Minneapolis and Center for Indian Country Development; 2017.

21 US Treasury CDFI Fund-Native Initiatives - US Department of the Treasury (US Treasury). Community Development Financial Institutions (CDFI) Fund: Native Initiatives.

22 FRB-Gerber 2018 - Gerber S. Native CDFIs and banks partner to improve tribal communities. Minneapolis, MN: Federal Reserve Bank of Minneapolis; 2018.

23 Urban-Edmonds 2018 - Edmonds L. Financing the development in transit-oriented development. Washington, DC: Urban Institute; 2018.

24 LISC-Greenberg 2019 - Greenberg DM. Community land trusts & community development: Partners against displacement. New York: Local Initiatives Support Corporation (LISC); 2019.

25 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.

26 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.

27 CDFI Fund 2021 - CDFI Fund. CDFI Annual certification and data collection report (ACR): A snapshot for fiscal year 2020. 2021.

28 OFN-Membership 2020 - Opportunity Finance Network (OFN). Inside the membership: Fiscal year 2020 statistical highlights from the OFN membership. 2020.

29 Mosley 2019* - Mosley J. Community development financial institutions: Invaluable capital partners in low-income rural areas. State and Local Government Review. 2019;51(4):275-282.

30 OECD-McDonald 2019 - McDonald C. Promoting Indigenous community economic development, entrepreneurship and SMEs in a rural context. Organization for Economic Co-operation and Development (OECD), Regional Development Policy Committee (RDPC). 2019: Working Paper 2019-03.

31 Zdenek 2017 - Zdenek RO, Walsh D. Navigating community development: Harnessing comparative advantages to create strategic partnerships. New York: Palgrave Macmillan; 2017.

32 Kaplan 2007* - Kaplan J, Valls A. Housing discrimination as a basis for Black reparations. Public Affairs Quarterly. 2007;21(3):255-273.

33 PPB-Jutte 2019 - Jutte D. The role of community development as a partner in health. In: Michener JL, Castrucci BC, Bradley DW, et al., eds. The practical playbook II: Building multisector partnerships that work. Durham, NC: Duke Family Medicine & Community Health, de Beaumont Foundation, and Centers for Disease Control and Prevention (CDC); 2019.

34 Dyer 2014* - Dyer AW. Credit access and urban regeneration in the United States. Advanced Engineering Forum. 2014;11:344-347.

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