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CDFIs: Banking on the Future

Call it socially responsible investing. Call it compassionate capitalism. Call it what you will, but don't write it off as lip service. It's a conviction that's being put into action worldwide, as individuals and financial institutions make a difference by investing in low-income communities.

Community Development Financial Institutions (CDFIs) are financial organizations established with the goal of rebuilding struggling communities. They aren't grantmakers. Instead, they lend money to organizations and individuals who may be unable to receive loans from commercial institutions, enabling them to contribute to the revitalization of the entire community.

Decision-making at CDFIs is dictated by what is commonly known as a "double bottom line." Like traditional financial institutions, they expect to generate monetary returns. At the same time, however, they pay close attention to the social benefits generated by their investments.

It's a concept that's growing in popularity. According to the Community Investing Program, a project of the Social Investment Forum and Co-op America, CDFI assets in the US have grown from $7.6 billion in 2001 to $14 billion in 2003.

There are several different types of CDFIs, including banks, credit unions, loan funds, and venture capital funds.

Community development banks provide communities in need with many of the same services as commercial banks and are subject to the same government regulations. Community development banks, however, focus on improving their communities rather than maximizing the profits of their shareholders. They accomplish this goal primarily by providing loans to individuals and organizations that use the money in a manner that will ultimately benefit the community.

Community development credit unions operate much like standard credit unions. They are government-regulated nonprofits, owned and controlled by their members. Like community development banks, these credit unions focus on the revitalization of low-income communities by providing members with loans and standard banking services.

Community development loan funds are also nonprofit organizations, but they are not subject to government regulations. They aggregate loans and investments from socially responsible individuals and institutions at below-market rates, then re-lend the money to organizations working to rebuild the community.

Community development venture capital funds make equity investments in small to medium-sized businesses. The goal of these investments is to create prosperity in low-income communities through an infusion of wealth and jobs while generating a profit for investors.

Are you interested in becoming a community investor? Getting involved in socially responsible investment can be as simple as opening an account in your local community development bank or a community development credit union. By doing so, you'll be able to conduct your normal banking activities in a federally insured institution with the satisfaction of knowing that the profits you help generate are being invested back into the community.

Of course, it's also possible to invest directly in organizations that work toward community improvement. Socially responsible investors adhere to the same double bottom line as CDFIs, seeking financial gain without compromising their own social values. If you want to learn more about your options and how to get started or if you want to find a CDFI near you, a good place to begin is Community Investing Center.

Socially responsible investing, along with volunteering your time and making charitable donations, can be an effective way of supporting low-income communities and the organizations that work to help them.

Other Resources of Interest

Patrick Ferraro, 2004
© Philanthropic Research, Inc.

Patrick Ferraro is the Editor of the GuideStar Newsletter.
Topics: Trends