By Audrey Zheng
A community development financial institution, or CDFI, is a financial entity that focuses primarily on economic development in underserved markets. These take four different forms: banks, credit unions, loan funds, and venture capital funds. Although these institutions vary in strict purpose and structure, all are financing entities dedicated to providing responsible, non-predatory financial services to marginalized communities. These community-focused enterprises are incredible resources for those groups (women, minorities, low-income, low-wealth, etc.) that have trouble accessing capital through traditional financial institutions.
CDFIs recognize that women entrepreneurs in particular are essential to the growth and development of their communities. Women are significantly more likely to reinvest in their families and communities than men. In emerging markets, women invest between 80 and 90 percent of their income in human capital in the form of health care and education for their families and communities – more than double the amount that men invest.   CDFIs appreciate the potential that women entrepreneurs hold to galvanize their communities and local economies
Community development banks (CDBs) are commercial banks that are generally not-for-profit. They are subject to the same rules and regulations as traditional banks. They are committed to economic development in traditionally underserved areas and offer typical retail banking services such as savings and checking accounts, mortgages, loan financing, and debit and credit cards. An example of a groundbreaking community development bank is Grameen Bank, a Nobel Peace Prize-winning CDB in Bangladesh that finances micro loans at low interest rates without collateral. Grameen targets those in rural, underserved, and impoverished areas, and women make up 97% of Grameen’s borrowers. These women were empowered to pursue their own endeavors, establish financial stability for themselves, and improve the situations of their families and their communities. Women entrepreneurs both at home and abroad face a huge problem of undercapitalization; community development banks like Grameen provide capital where traditional banks often don’t, and thus, an opportunity for women business owners to grow their businesses and help their communities.
Community development credit unions (CDCUs) function similarly to commercial banks in providing safe, non-predatory financial services. CUs are also not-for-profit, which means that they do make a small profit which is necessary in order to stay solvent. However, they are not profit-maximizing and are focused primarily on the good of their members. CDCUs are cooperatively owned and governed, meaning each member of the CU gets one vote in major decisions about the credit union. In addition to a share in the bank, members receive access to financial services at competitive rates. CDCUs also often offer financial education and financial literacy classes and counseling to help members achieve long-run economic health. These institutions are particularly effective in that they actively involve members in the community’s development. Members’ savings are reinvested in loans to small businesses within the community. Shareholders reinvest in their community and make active, informed choices about their finances and how their money is managed. Critically, the members and shareholders of a credit union are representative of the community that surrounds them – something that can almost never be said of a traditional bank. As a result, the boards that members elect are typically more representative of the community as well. CDCUs empower women specifically by giving them a vehicle to reinvest in their communities, by educating and enabling women to manage their personal finances and financial health, and by giving them a voice within the financial institution, and thus within the community at large.
Community development loan funds (CDLFs) are non-regulated loan services. Typically, CDLFs are not financially solvent and depend on grants and loans from public and philanthropic institutions. CDLFs are usually spread lenders, meaning they borrow capital at low interest rates, and then relend that capital at slightly higher interest rates. However, because they generally do not cover their own operating costs, these slightly higher interest rates are still competitive with those at other CDFIs. They also often provide training and technical assistance to those receiving business loans, as well as financial literacy education for all borrowers. CDLFs typically provide smaller loans to small to midsize businesses. Although they do not offer the full-stop shop for banking needs that banks and credit unions do, CDLFs are still a valuable resource and another good option or small business owners and entrepreneurs.
Community development venture capital funds (CDVCs) are venture capital funds focused on a “double bottom line.” CDVCs are for-profit institutions, meaning they aim for a financial bottom line in the form of return to investors. However, they also measure success by a social bottom line in the form of job creation and the overall development of underinvested areas. CDVCs do not find these two goals to be mutually exclusive. CDVC funds are most common in low-wealth areas such as inner city communities and rural areas where traditional VC and angel investors are extremely rare. CDVCs are generally funded by banks, non-depository financial institutions, philanthropic foundations, the government, and wealthy individuals. Only 2.7 percent of companies funded by traditional VC had women CEOs, so venture capital is a hugely untapped resource for women-owned businesses. CDVCs are great options for women, especially since women tend to be more risk-averse than men and may not wish to take out loans.
All of these types of CDFIs serve as hugely important resources to traditionally undercapitalized groups and their surrounding communities. Too often, entrepreneurs are either turned down by traditional banks or obtain loans on predatory terms. Awareness of these alternative sources of capital as well as increased participation in and usage of CDFIs can help empower and invigorate women and minority business owners, their communities, and the economy as a whole.
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