After half a century of multilevel loan funds, federal sanctions, and grassroots organizing, the community development finance industry has changed the relationship between mainstream financial services and economically disadvantaged people and communities. By offering access to basic financial services, affordable credit for home purchasing, rehabilitation, and maintenance, and loan and equity capital for business development, CDFIs are responding to needs not met in low-income communities, bringing hope for asset accumulation to vulnerable populations. However, as CDFIs push the boundaries of the past, their structure, outlook, and purpose are slowly transforming. More so than ever before, they’re becoming aggregators of capital and the quarterbacks of broader initiatives and partnerships that energize local community development. In order to continue this positive evolution, remain resilient, and grow, CDFIs will need to adapt to the constantly morphing economy and explore new avenues to funding.
Here are four major ways that the industry can improve upon itself with inside integration, outside assistance, and universal support.
CDFIs have demonstrated that financing nontraditional customers works if it is done in a way that recognizes the market’s and the customers’ idiosyncrasies. CDFIs have helped prove several things, many of which now constitute mainstream market thinking:
- that financing women and minority homeowners and business owners is not only possible, but profitable, and that race and gender are not reliable indicators of financial performance
- that managing risk in non-financial and non-traditional ways (such as intensive technical assistance) can work
- that unconventional financial customers are important to conventional financial service companies because they are future customers and solid assets
- that community-centered groups can organize capital, manage it responsibly, pair it with organized people, and create measurable changes in communities
Countless CDFIs have proven themselves sustainable, viable, successful models of aid surrounding self-help and self-responsibility, as opposed to charity and handouts. They are able to provide the most specialized and most needed assistance to their communities. The Reinvestment Fund, the CDFI Fund, and general community development organizations like the Food Trust need to have more exposure to widely share their success. We’ve seen with the New Markets Tax Credit Program and with the CDFI Bond Guarantee Program that when the opportunity is there for CDFIs to scale their operations, they step up and are able to meet the challenge. Sharing the progress and achievement of these programs and institutions will continue to validate them in the mainstream market.
- Maintaining strategic positioning
An overarching lesson of the CDFI industry is that an effective community development finance system must work just outside the margins of the conventional financial system, while constantly striving to generate change in mainstream ideas and practices. To succeed from the margins, community development finance must hold substantial resources and power yet remain nimble, as the margins shift constantly.
Being able to navigate in both the mainstream marketplace of wealth and the more crowded world of low-income communities is a precarious balance. The ability to maintain that balance will determine whether or not CDFIs remain relevant to both ends of the spectrum – for the low-income communities they serve, and the dominant providers of resources. Putting too much emphasis on either end will lead to divergence; funds may dry up from investors, or communities may become disenchanted with top-focused strategies. Acknowledging this position will allow CDFIs to strengthen relationships at both ends and work to ensure equilibrium.
- Including CDFI policies in law (permanently)
While there are certainly community development-centered programs and incentives included in our statues, many of them, like the CDFI Fund, New Markets Tax Credit, and Community Reinvestment Act are not incorporated permanently into law and require renewal every few years. Making CDFI poverty alleviation strategies integral to federal, state, and local policy as well as to private sector reforms of the financial services industry will be vital if we hope to continue the work that we’ve started. This will require devoted policy champions at all levels of government.
Despite the good work of CDFIs over the past decades, there is little academic research to critically analyze and overarching vision of what works and what doesn’t. The standardization of data, information, and information-sharing protocols will facilitate a more efficient flow of value-added information across informal and formal networks, reduce transaction costs, and simplify access to information about CDFIs and their performance. Additionally, with hard research, the likelihood of receiving grants, funding, and resources is increased for all players in the industry.
As a student at a university, I also would strongly advocate for CDFI collaboration with universities and corporations to train young and mid-career professionals in community development finance skills. Incorporating community development finance within business schools (especially ones that are traditionally corporate-minded [i.e. Fox School of Business]) will encourage an economy of justice and equity and will present community development as an integral part of the economy.
Through a focus on collaboration, innovation, incubation of creative energy, and dynamic problem solving, the future of the community development finance industry is bright. The potential to grow the impact of CDFIs is not only possible, but likely if we continue to strengthen the connections we currently have and work to make new connections.