What is a community development financial institution (CDFI)?
Community Development Financial Institutions (CDFIs) are private sector financial institutions that focus primarily on personal lending and business development efforts in the poorest local communities in need of revitalization in the United States. CDFIs can receive federal funding through the US Treasury Department by completing an application. They can also receive funding from private sector sources such as individuals, businesses and religious institutions.
These entities came into being as a direct result of the Community Reinvestment Act of 1977, which was drafted because of inequalities in banking and economic development in communities in the United States.
The law (revised in 2020) ensured that business loans were made in economically disadvantaged neighborhoods and that home loans were made without bias restrictions, such as the nefarious and often racist practice known as ” Red line “. The effects of the recession of the 1970s prompted the federal government to take drastic measures to stem the flow of funds out of urban areas. Community development financial institutions have become an important part of this effort.
Key points to remember
- A Community Development Financial Institution (CDFI) is a private bank that promotes financial inclusion and economic development among the poorest communities.
- With a local focus, CDFIs seek out communities underserved by the traditional banking sector.
- CDFIs are often focused on social responsibility and inclusion, rather than pure profit motive, and may receive support from the federal government’s CDFI Fund.
Understanding Community Development Financial Institutions
Community investment generally refers to direct investments in poor communities through community development banks, credit unions, loan funds and microfinance institutions. Community investing is closely linked to socially responsible investing and focuses on improving the economics of underprivileged communities by providing banking services and small loans to fund businesses, nonprofit groups and affordable housing initiatives. .
Community Development Financial Institutions (CDFIs) focus on the needs of the poor and working class within urban and rural communities, as many of these citizens are underserved or ignored by commercial banks and traditional lending processes. The goal is to help this group of people become more financially self-sufficient and contribute more to overall economic growth through community redevelopment.
There are hundreds of licensed CDFIs operating in the United States, each emphasizing the use of innovative (and often less stringent) lending practices, educational efforts, and small business lending. CDFI’s vision is an America in which all people and communities have access to the investment capital and financial services they need to thrive.
CDFIs tend to be controlled locally, without interference from the federal government or the national corporate hierarchy.
Community development through the CDFI Fund
The CDFI Fund is a federal program that promotes access to capital and local economic growth through its program of community development financial institutions with direct investments that provide loans, investments, financial services and technical assistance to underserved populations and communities.
The fund also provides a tax credit allocation to community development entities that allows them to attract private sector investment and reinvest in low income communities.
Its Bank Enterprise Award program inspires banks to invest in their communities and in other CDFIs. CDFI’s bond guarantee program issues bonds to support CDFIs that make investments for eligible community or economic development purposes. Through its Capital Magnet Fund, CDFI offers competitively awarded grants to fund affordable housing solutions for low-income individuals and low-income communities nationwide.