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Community Development Financial Institutions

| Written by ILSR Admin | No Comments | Updated on May 10, 2010 The content that follows was originally published on the Institute for Local Self-Reliance website at http://ilsr.org/rule/financing-local-businesses/3007-2/

Community Development Financial Institutions (CDFIs) are mission-driven financial institutions that provide financial services to people and communities underserved by traditional financial institutions. This includes providing banking services to low-income people who have been bypassed by mainstream banks, as well as investing in businesses and community development in low-wealth areas.

There are four primary types of CDFIs:

  • Community development banks are for-profit banks that operate in economically distressed neighborhoods with a community development mission.
  • Community development credit unions provide affordable banking services to low-income people and are owned by their customers.
  • Community development loan funds underwrite loans in low-income communities and may specialize in areas such as housing or business lending.
  • Community development venture capital funds invest in small and medium-sized businesses in low-income communities.

Altogether, there are about 1,235 CDFIs in the U.S., including 360 banks, 295 credit unions, 500 loan funds, and 80 venture capital funds.

A 2007 report by the CDFI Data Project surveyed 505 CDFIs and found that they devoted 44 percent of their financing capacity to investing in and providing loans to small businesses. In 2007, CDFIs financed nearly 9,000 businesses and had $6.5 billion in loans outstanding to both small businesses and microenterprises.

Although the core model on which CDFIs are based goes back a century or more, CDFIs trace their modern history to the 1960s and 1970s, when mission-driven financial institutions were launched with an explicit mission to alleviate poverty.

CDFIs underwent rapid growth in the 1990s. Two federal policies contributed to this expansion. One was the creation of the CDFI Fund in 1994. The Fund provides equity capital to certified CDFIs through a competitive application process. In 2009, the fund invested $107 million in CDFIs. Recipients, which are required to match this capital with private investment, raise an average of $27 in private funds for every $1 in federal funds. A second factor in the growth of CDFIs was a 1995 revision to the Community Reinvestment Act, which allowed banks to meet their CRA requirements by making loans and investments in CDFIs.

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