Volume 10; No. 4; Fall 1998
By David Daniel, Urban Studies Intern of Associated Colleges of
the Midwest. Reprinted from The Neighborhood Works (July/August
All too often, its the people and businesses that need credit the most
that cant get it. As a result, already distressed communities decline
further, increasing the need for money in the community but, at the same
time, making it harder to come by. Community development financial institutions
(CDFIs) help reverse this downward spiral, acting as financial intermediaries
that find ways to make loans and investments which traditional financial
institutions would consider risky or unbankable. In spite of this riskiness,
CDFIs do quite well overall: members of the CDFI Coalition, which represents
more than 350 established CDFIs in 50 states, have loaned and invested
some $3.5 billion in our nations most distressed communities with a collective
loan-loss rate comparable to the best banks.
CDFIs differ in structure, size and development-lending goals:
Community Development Banks (CDBs) are insured depository institutions.
Many CDBs go beyond merely lending money and include such components as
real estate development and skills development programs like job training,
business technical assistance and non-bank financing.
Capital sources for CDBs include conventional banks, insurance companies,
foundations, government agencies and wealthy individuals. Challenges facing
CDBs range from recruiting and retaining personnel, who need a certain
amount of expertise in the field to be useful, to creating a sense of
mission. Providing leadership in the community can be as important as
providing money. In many ways, CDBs are seen as the local handyman--often
intimately familiar with local problems, they can link area residents,
financial resources, and government programs in a coherent renewal effort.
South Shore Bank, for example, realized that reviving Chicagos South
Shore neighborhood meant renovating its many deteriorated multi-unit buildings.
So the banks holding company established a real estate company, City
Lands Corp. (now Shorebank Development Corp.) to develop residential and
commercial property to benefit low- and moderate-income residents. Today,
Shorebank trains residents to become property managers and provides assistance
in solving practical problems ranging from screening tenants to reducing
Community Development Credit Unions (CDCUs) are member-owned
and controlled financial cooperatives that bring credit and financial
services to people and communities with limited access to mainstream financial
institutions. CDCUs are organized around a common bond such as church
membership, employment, or geographic proximity.
In contrast to mainstream credit unions, CDCUs target low-income people
and communities. They can expand their capital base by accepting deposits
from non-member institutions and can receive low-interest loans, deposits
and technical assistance from the National Credit Union Administration
and the National Federation of Community Development Credit Unions. Finally,
they have greater flexibility in determining membership.
CDCUs require broad community buy-in to get rolling, which can take eighteen
months to three years. Other challenges facing CDCUs include competing
with other credit unions, who sometimes find distressed communities profitable,
and providing technical assistance to borrowers, such as credit counseling
and business planning. A labor-intensive endeavor, CDCUs serve large numbers
of people with very small borrowing and savings plans.
About 100 community development credit unions have lent more than $2
billion over the past 65 years, with a loss rate of less than 2 percent.
Community Development Loan Funds (CDLFs) are financial intermediaries
that borrow capital from socially conscious investors and lend it, primarily
in lower-income communities, to support nonprofit affordable housing efforts,
worker-owned and community-based businesses, and other projects. Funders
include individuals, foundations, banks and religious institutions.
In the world of CDLFs, technical assistance is crucial. Borrowers often
need help to plan and implement successful projects and develop capacity
to undertake more ambitious projects; banks need their loans repaid.
CDLFs traditionally have dealt with higher-risk borrowers, but the market
is changing quickly. In the past, CDLFs have faced challenges obtaining
investments from banks and other financial institutions, who, if they
lend at all, lend at much higher rates since they anticipate low returns.
Community Development Venture Capital Funds (CDVCs) provide
equity, similar to purchasing stock in a company, for community real estate
and small-and medium-sized business projects that provide good jobs in
low-income communities. Capital sources for CDVC funds are foundations,
corporations, individuals and government.
Financial institutions usually require borrowers to have a certain amount
of equity, so if their business goes under, the lender can recover at
least part of the loan. CDVCs can provide this equity. In this way--unlike
lenders--CDVCs become partners with businesses. CDVC funds help advance
the social good through more than just financing by, for example, joining
the boards of companies in which they invest and advocating good hiring,
labor and environmental practices.
To start a CDVC, one needs approximately $5 million to $10 million and
a fair amount of expertise. CDVCs have trouble attracting skilled people,
since anyone with enough expertise can earn a lot more money in the private
Microenterprise Development Loan Funds (MDLFs) foster social
and business development through loans and technical assistance to low-income
people, who run very small businesses or are self-employed, and who are
unable to get conventional credit. Like CDLFs, they offer training and
technical assistance to the borrower.
MDLFs work either by getting direct loans from the organization administering
the fund or through peer groups. In the latter scenario, small loans are
made to groups of eight to 10 people who loan the money to one or more
members with the best business plan. The rest of the group acts as guarantors
of the loan, ensuring that funds will be available to other members once
the first person has repaid the loan. These programs have had mixed results
when not tailored to an individual community.
MDLFs are fairly expensive to operate, since they require a lot of time
recruiting and training people, and providing technical assistance. On
the whole, though, they have helped many who otherwise would not have
had access to capital. About 50 microenterprise development loan funds
have lent more than $25 million, averaging $2,500 per loan.CI
This feature was reproduced with permission from The Neighborhood
Works, 2125 West North Avenue, Chicago, Illinois 60647, (773) 278-4800,
For more information, you may contact the CDFI Coalition, 924 Cherry
St., 2nd Floor, Philadelphia, PA 19107, (215) 923-4754, www.cdfi.org;
The Woodstock Institute, 407 S. Dearborn St. #550, Chicago, IL 60605,
(312) 427-8070; CDCVA, 700 Lonsdale Building, Duluth, MN 55802, (218)
722-0861; Chicago Community Loan Fund, 343 S. Dearborn St., Suite 1001,
Chicago, IL 60604, (312) 922-1350; Shorebank Corp., 1950 E. 71st St.,
Chicago, IL 60649, (773) 753-5697; National Federation of CDCUs, 120 Wall
St., 10th Floor, New York, NY, 10005, (212) 809-1850, x 220.