Community development financial institutions

Definition

Community development financial institutions (CDFIs) are specialised financial institutions dedicated to providing financial services and support to underserved communities and populations. 

What are community development financial institutions?

The primary mission of CDFIs is to promote economic growth and community development in low-income and underserved areas. They aim to address systemic barriers to financial inclusion and provide access to affordable financial products and services, including credit, capital, and financial education.

CDFIs typically serve individuals, families, businesses, and organisations that have limited access to traditional banking services. They prioritise meeting the needs of these underserved populations by offering tailored financial solutions, and offer a wide range of financial products and services, including small business loans, microfinance, community development loans, and financial counselling.

CDFIs can take various forms, including community banks, credit unions, loan funds, venture capital funds, and microfinance institutions. To qualify as a CDFI, an institution must be certified. Certification is based on criteria such as the institution’s primary mission, target market, accountability, and impact on underserved communities.

In order to sustain their operations, CDFIs rely on a combination of public and private funding sources. This funding may include grants, loans, equity investments, deposits, and awards from government agencies, financial institutions, and individual investors.

Example of a community development financial institution

Imagine a CDFI named “Urban Opportunity Fund” operating in a low-income neighbourhood of a city. The fund specialises in providing affordable loans to small businesses owned by minority entrepreneurs who face barriers to accessing traditional bank financing.

One of their clients is Maria, who has a solid business plan and a passion for cooking, but she lacks the collateral and credit history required to secure a loan from a conventional bank. Therefore, she approaches the Urban Opportunity Fund for financial assistance. After reviewing her business plan and assessing her potential for success, the CDFI approves her application for a small business loan. With the loan from the Urban Opportunity Fund, Maria is able to lease a storefront, purchase kitchen equipment, and hire staff for her restaurant.