Community Development Financial Institution - Explained
What is the Community Development Financial Institution?
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Table of ContentsWhat is the Community Development Financial institution?How Does a Community Development Financial institution Work?History of CDFIHow is CDFI Different?What CDFIs Do?Social impact of CDFIsSources of CDFIs investment
What is the Community Development Financial institution?
This is type of financial institution that offers assistance to low-income and underserved communities.
How Does a Community Development Financial institution Work?
Community Development Financial institution (CDFIs) collect funds and channel them to the community through financing small businesses, non-profit organizations, micro-enterprises, affordable housing, and commercial real estate. Their source of funding includes grants, foundations, low-interest loans, banks, or the government that aim towards satisfying the Community Reinvestment Law requirements. CDFIs are always certified by the United States Treasury Department and may include banks, non-profit organizations, credit unions, loan funds, and venture capital funds.
History of CDFI
1973Shore Bank was founded to serve low-income families in Chicago. 1977 Legislators passed the Community Reinvestment Act which focused on encouraging financial institutions such as banks to invest in low-income communities. 1979The Institute for Community Economics was founded, a major non-profit lending funds. 1994The CDFI program formed as well as the organization of CDFI Fund in the Treasury Department.
How is CDFI Different?
- The institution focuses on offering assistance to marginalize communities or low-income regions
- The institution focuses on addressing issues relating to market distortion as well as provide credit and financial services that are not provided by other institutions, and areas with high risk.
- CDFIs use social capital from grants, investments made by foundations, and other social investors.
- CDFIs provide financial education, counseling to the marginalized communities, and technical assistance for borrowers/consumers.
- The institutions collaborate with the community and other community entities as well as advocate for public policy changes to benefit the community.
What CDFIs Do?
- Offer financial education
- Provide loans to marginalized consumers
- Offer loans to micro-enterprises and small businesses
- Savings accounts and checking accounts
- Provide mortgage loans
- Loans for community facilities, schools, housing development, supermarkets, e.t.c
- Provide loans for renewable energy and energy efficiency facilities
- Invest capital in businesses
Social impact of CDFIs
- CDFIs create employment opportunities
- Help families improve their financial status, increase savings, and get out of debt
- CDFIs help families to become homeowners
- Improve the environment
- Help to create social housing
- Increase service availability for the community as well as access to meals
- Improve living conditions in poor communities
- Attract investment to the community
Sources of CDFIs investment
Apart from deposits and partners participation, CDFIs account on:
- Subsidies of CDFI Funds FA/TA
- Subsidies and low-interest rate investments by other government programs such as Magnet Capital, USDA, NMTC, and SBA
- Investments made by foundations, financial institutions, and social impact investors like corporations, profitable individuals, and institutions (hospitals and universities)
Most CDFIs have loan funds that are channeled to specific geographic regions or states and provide loans with low-interest rates to small business owners who may not qualify for bank loans. CDFIs operate under high contact model, just like old bankers and their funding include mentoring and other support services. This is one of the reasons why loans portfolios of CDFIs hold well during financial crises compared to bank portfolios. Most CDFIs engage in 7 (a) loans through the Community Advantage Program by SBA for loans of up to $250,000. Some of the institutions also maintain venture capital funds which provide royalties and capital.