What is a community development financial institution (CDFI)? – Councilor Forbes

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While the typical bank may promise that your money will be okay under their direction, few trading options promise that your money will be okay too. This is where community development finance institutions (CDFIs) come in.

A CDFI is a private financial institution whose main mission is to help communities that are traditionally excluded from banking and investment options.

Banking clients who wish to see their money help increase the economic independence of underserved communities and end the racial wealth gap can turn to a CDFI for their banking needs.

Here’s what you need to know about CDFIs and how they can fit into your financial life.

How CDFIs Work

CDFI’s mission is to meet the needs of low- and middle-income people within urban and rural communities, with a focus on those who have been underserved or ignored by traditional banks and loans. CDFIs are set up to create financial autonomy within these underserved communities, in order to trigger overall economic growth and community redevelopment.

There are currently over 1,100 certified CDFIs in the United States. Although CDFIs differ from each other in their practices and requirements, they tend to focus on innovative lending options (including less stringent lending practices), education awareness, and loans for individuals. small enterprises.

While CDFIs may be available on a large scale and / or nationwide (OneUnited Bank is an example), most of these institutions tend to be locally controlled and free from interference from a national or federal headquarters. This gives CDFIs the flexibility to bring value to the community without having to respond to shareholders or government oversight.

Since CDFIs are community-centric rather than shareholder-centric, they tend to be profitable but not to maximize profits.

The CDFI Fund

The idea of ​​a community-centric financial institution that provides self-help credit and lending solutions is not new – there have been minority-owned banks lending to low-income community members. returned to America since the 1880s.

Modern CDFIs date back to 1994. It was then that the Riegle Community Development and Regulatory Improvement Act of 1994 created the Community Development Financial Institutions Fund (CDFI Fund) to help revitalize economically struggling communities.

The CDFI Fund offers certification to CDFIs, which gives institutions the opportunity to apply for financial rewards that can help fund the institution’s mission. These rewards include the following:

  • The price of the banking company, which provides monetary rewards to FDIC-insured institutions that increase their lending to underserved communities
  • Advantage of the tax credit for new markets, which offers tax credits for private investment in communities in difficulty
  • CDFI Bond Guarantee, where the Secretary of the Treasury provides a 100% guarantee on the bonds issued by CDFI, giving the institution more lending power than it would have on its own
  • CDFI financial assistance, which provides CDFIs with money for loans, grants, equity investments, deposits, and credit union shares, which CDFIs are required to match dollar for dollar with non-federal funds
  • CDFI Technical Assistance, which is offered to CDFIs to increase their organizational capacity
  • Capital magnet fund, which offers competitively awarded grants for affordable housing solutions
  • Indigenous initiatives, which offers financial prizes, education prizes and technical prizes to CDFIs mainly serving indigenous communities

These federal allocations of money, aid, and tax credits allow CDFIs to expand their reach beyond what they could do independently. Although the CDFI Fund is set up so that the amount of funds and credits is limited, the Fund gives CDFIs the flexibility to determine where their federal rewards will be best allocated, rather than dictating what CDFIs do. have to do with their rewards.

Types of depository CDFIs

Community development banks and community development credit unions are depository CDFIs, which means they can be used as a banking alternative to a traditional bank or credit union. Here’s how they each work:

  • Community development banks are for-profit institutions that focus on providing capital to economically struggling communities, primarily through targeted loans and investments. Community development banks ensure that community members are part of their board of directors to ensure that the needs of the community are met and that their concerns are represented on the board. Deposits in community development banks are insured by the FDIC.
  • Community development credit unions, like traditional credit unions, they are non-profit financial cooperatives owned by their members. What sets a community development credit union apart is the mission of CDFI, which promotes savings and asset building and provides affordable retail finance and credit services to low-income people and communities. underserved. Deposits in community development credit unions are generally insured by the NCUA.

Banking customers who wish to use their regular banking services to help underserved communities can choose one of these types of CDFI custodians for their banking needs.

Within the CDFI ecosystem, there are also community development loan funds (CDLF) and community development venture capital funds (CVDC).

How to find CDFIs near you

Those interested in supporting CDFIs can find local institutions near them with the Searchable CDFI Fund Rewards Database. This database will give you the names of certified CDFIs that have received awards from the CDFI Fund, and you will be able to identify community development banks and credit unions that can meet your banking needs.

Invest in your community

While CDFIs may not offer the kind of profit-oriented mindset of traditional financial institutions, they do actively help improve the economic climate in their communities. Placing your money in a CDFI can help increase the economic independence of your local community, which benefits everyone.


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