The voices of Urban Institute's researchers and staff
June 16, 2016

The unsung financial institutions that fund inclusive community development

June 16, 2016

Even as investment dollars—and with them, new apartments, restaurants, gyms, and businesses—cascade into neighborhoods and cities, low-income and minority communities and business owners are often left behind. Historically, these groups have had a hard time accessing the capital they need for projects that are important to their growth. But over the past 35 years, community development financial institutions (CDFIs) have stepped in. Now, as inequality rises, the CDFI industry must figure out how to expand its reach.

What are CDFIs?

CDFIs are private financial organizations driven by a mission to bring mainstream finance and economic inclusion to underserved communities. While CDFIs come in many forms—they can be for-profit or nonprofit, credit unions, banks, loan funds, or venture capital funds—they are all certified by the Treasury Department’s CDFI Fund to carry out their primary mission of helping communities grow equitably by offering affordable and sustainable financial services, as well as affordable credit and investment capital.

While you may not be familiar with CDFIs, you likely know many of the projects they support and invest in, including

What makes CDFIs different?

CDFIs tap into diverse partnerships and funding streams to connect their communities with the mainstream economy. They often partner with banks and other financial institutions, state and federal government entities, social investment funds, and philanthropy. CDFIs are especially appealing to their partners because CDFIs can earn profits on their investments while delivering social benefits. This also makes CDFIs politically popular on both sides of the aisle.

In addition to providing financial services to underserved markets, many CDFIs go the extra mile with their clients. Most of them pair loans with additional technical assistance, such as financial education and business development. As trusted community leaders, CDFIs can bring businesses, governments, residents, and community-based organizations together to make positive changes. Many of them are also policy advocates for issues like the borrowers’ rights in the face of predatory lending.

What is holding the industry back?

Despite its popularity, the industry remains relatively small. According to the CDFI Fund, the industry of just over 1,000 organizations has $108 billion in assets, which would barely crack the top-25 list of the largest individual banks in the country.

Because they keep their products affordable and accessible, CDFIs operate on low margins. Most cannot raise private equity capital, whether because of their nonprofit status or because of their constrained returns. Those that provide substantial programmatic or technical support to their clients also find themselves constantly searching for grants to support these services. This puts small or young CDFIs, especially, in a funding paradox. On one hand, these services are critical to growing their business and impact. On the other hand, even social investors are wary of organizations that appear less profitable because they are spending relatively large amounts of money to finance their services.

More recently, CDFIs have faced increasing competition from new lending sources, including peer-to-peer lending apps. While financial technology companies present a threat to older lending models, they may also provide an opportunity for CDFIs to partner with online lenders to reach broader audiences.

What is next for CDFIs?

As the recovery from the Great Recession continues to be uneven for communities across the nation, more people are looking to CDFIs to address geographic inequality and exclusion. This is especially true of regions that are currently not served by CDFIs. For the industry to broaden its reach and impact, it must take advantage of new technologies and unconventional funding structures. However, the most reliable and sustainable path to growth will come from earned revenues, whether from projects or services, that advance the CDFI’s mission. To fulfill this vision, CDFIs would benefit from greater financial support from their existing partners in banking, philanthropy, mission funding, and state and federal government.

Gladys Rivas, 10, jumps rope with members of a 100-voice choral student group from Texas during a block party to thank the NoMa district for welcoming the homeless shelter to the community outside Central Union Mission in Washington, DC on Saturday, July 11, 2015. Photo by Jabin Botsford/The Washington Post via Getty Images

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