Not Just a Financial Institution: Measuring Success by Looking at the Double Bottom Line

Finding financing for community development projects can be a daunting task. Traditional type lenders may be able to help, but it is more likely that developers in low-income areas will need to look elsewhere for financing. A good place to find financing might be at a community development financial institution (CDFI). How is it different from a traditional lender?

Mainstream financial institutions are banks, savings and loans, and credit unions that act as intermediaries between the capital and debt markets, facilitating the flow of money through the economy. They also lend money to qualifying borrowers. While most financial institutions are required by the Community Reinvestment Act (CRA) to invest in and lend to low- and moderate-income people and communities and small businesses in their footprint, they also are required to ensure that all loans they make are safe and sound.

CDFIs also are financial institutions that act as intermediaries between the capital and debt markets and accept deposits from investors and lend to borrowers.

One difference between CDFIs and mainstream financial institutions is in their missions. The latter are in business to make money for their shareholders. CDFIs leverage money to support community development in low-income areas and with underserved populations. Success also is measured differently at a CDFI. While mainstream financial institutions look at their bottom line, CDFIs focus on the "double bottom line," considering economic gains and contributions to the community as important factors, along with dollars and cents.

The concept for CDFIs was developed in the 1960s as a way to address poverty and racial discrimination in both urban and rural areas. The small successes of these early organizations were used to lay the foundation for the current CDFI industry. Finding enough funding to make an impact on a community was hard, and CDFIs struggled. But change was on the way, and in 1994 the Treasury Department created the CDFI Fund.

Charged with a mission to expand the capacity of financial institutions that provide credit, capital and financial services to underserved populations, the CDFI Fund distributes money through a competitive application process. Since its creation, the fund has awarded more than $771 million in capital grants, equity investments and funding for technical assistance and organizational capacity-building to community development organizations and community development financial institutions, making the CDFI industry a force for economic change in low-income communities.

Providing More than Just Money

CDFIs work closely with community leaders and nonprofit organizations to develop financial products and technical assistance that will benefit their target market. That's where the services of a CDFI are greatest, since mainstream financial institutions normally can't offer products that have a high risk factor.

Large corporations also can purchase or hire expertise, while most nonprofits do not have the financial resources to do so. In the markets they serve, CDFIs even the playing field and help their customers flourish by offering more than just below-market-rate loans. By looking at the whole project and organization, CDFIs provide technical expertise as a value-added service.

Because they connect with nonprofit organizations working in distressed communities, CDFIs understand and address their needs with customized financial products. Mortgage financing for affordable housing and first-time homeowners, capital to renovate and to build community facilities, microloans for small businesses, and flexible underwriting are among the products and tools offered by CDFIs.

Through Partnerships, Everyone Benefits

Since most CDFIs are small, they often partner with mainstream financial institutions to offer financing for projects. In those partnerships, the CDFI will take the second position on a loan to ensure that the product is secured and the risk to the financial institution is minimal.

The partnerships are winning situations for all parties involved: the CDFIs, financial institutions and the community. The community benefits through new financial services that are targeted to a specific purpose. The mainstream financial institution may fulfill part of its CRA obligation. The CDFI advances its mission.

Many communities owe their economic and redevelopment success to partnerships with CDFIs.

For more information on CDFIs and the CDFI Fund, visit:

• The Coalition of CDFIs
  www.cdfi.org
• Opportunity Finance Network
  www.opportunityfinance.net
• The CDFI Fund
  www.cdfifund.gov