Question of the Week
Impact Investing With Community Development Financial Institutions (CDFIs)
Happy Friday everyone!
The current political and economic climate has focused attention on values, leading more organization, advisors and clients to discuss social impact investing. We’ve seen companies like Netflix invest $100 million to financial institutions that serve black communities. Twitter, PayPal and Square followed suit instituting corporate initiatives combating racial injustice and poverty, using Community Development Financial Institutions (CDFIs) as a primary vehicle. Even the government has gotten involved as the SBA used CDFIs to promote access to capital in the latest round of Paycheck Protection Program loans.
Despite being around for decades, many people still don’t know what CDFIs are or how to use them. So today I want to give an overview of CDFIs and provide some useful resources for how you can use them to align your values with your investing.
What is a CDFI?
CDFIs are private financial institutions that are 100% dedicated to delivering responsible, affordable lending to help low-income, low-wealth, and other disadvantaged people and communities join the economic mainstream. They focus on supporting economic growth at the community level, usually by financing small, minority-owned businesses, microenterprises, affordable housing, nonprofit and volunteer organizations, and services essential to revitalizing low-income neighborhoods. Their goal is to help people become financially self-sufficient while also contributing to economic growth through community redevelopment.
CDFIs establish relationships with their borrowers and help them navigate some of the technical, challenging aspects of owning and operating their own businesses. By financing such organizations, CDFIs spark job growth and retention in hard-to-serve markets across the nation. Ideally both borrowers and the CDFI win. Borrowers receive guidance that makes them more successful, while the CDFI gains deeper knowledge of the local market and community. Also, by providing technical assistance, CDFIs increase the likelihood that the borrower will be successful and pay back their loan, thus generating new funds to be lent.
CDFIs fall into four categories:
- Community development banks: These federally insured banks are organized like traditional banks. but they are required to direct at least 60% of their financing to low- and moderate-income communities.
- Community development credit unions: These cooperatives are designed to provide financial services to their individual members. The National Credit Union Administration charters, supervises, and insures federal credit unions and insures the deposits up to $250,000 per share owner, per insured credit union.
- Community development loan funds: These funds lend to build local businesses, affordable housing, and community facilities. Their borrowers are small businesses, nonprofit organizations, charter schools, individuals, and organizations involved in community development projects. Loan funds also provide financial counseling to individual and business borrowers.
- Community development venture capital funds: Venture capital funds pool investor money to make equity investments in private operating companies that yield financial returns while accomplishing community development goals. They also provide equity and management expertise to small businesses, often owned by minorities, that have the potential for rapid growth.
Like many mission-driven businesses, CDFIs strive to be profitable, but profits aren’t their only or even their main goal. They put community first, not the shareholder. They measure their success through their impact on the communities they serve. They also focus on social responsibility and inclusion.
Quote of the Week
“Change will not come if we wait for some other person or some other time. We are the ones we’ve been waiting for. We are the change that we seek.” —Barack Obama
Task of the Week
Explore whether CDFIs are a right fit for you. You can check out the Opportunity Finance Networks’ searchable CDFI data base, which you can filter by the organization type, area served and lending type among other things. You can also find a state-by-state list of CDFIs here: cdfi.org/state-profiles/.