Community Development Financial Institution (CDFI)

What Is a Community Development Financial Institution (CDFI)?

Community Development Financial Institutions (CDFIs) are private sector financial institutions that focus primarily on personal lending and business development efforts in poorer local communities requiring revitalization in the U.S. CDFIs can receive federal funding through the U.S. Department of the Treasury by completing an application. They can also receive funding from private sector sources such as individuals, corporations, and religious institutions.

These entities sprung up as a direct result of the Community Reinvestment Act of 1977, which was drafted because of banking and economic development inequalities throughout communities in the U.S.

The Act (revised in 2020) helped insure that business loans were made in economically depressed neighborhoods and real estate loans were made without bias restrictions, such as the nefarious and often racist practice known as "red-lining." The effects of the recession in the 1970s prompted drastic federal action to stem the flow of funds out of urban areas. Community Development Financial Institutions became an important part of that effort.

Key Takeaways

  • A Community Development Financial Institution (CDFI) is a privately-owned bank that promotes financial inclusion and economic development among poorer communities.
  • With a local focus, CDFIs seek out those communities that are underserved by the traditional banking sector.
  • CDFIs often have a focus on social responsibility and inclusion, rather than a pure profit motive and may receive support from the federal government's CDFI Fund.

Understanding Community Development Financial Institutions

Community investing generally refers to direct investments into poor communities via community development banks, credit unions, loan fund and microfinance institutions. Community investing is closely tied to socially responsible investing and focuses on economically improving disadvantaged communities by offering banking services and small loans to fund businesses, non-profit groups and affordable housing initiatives.

Community Development Financial Institutions (CDFIs) focus on serving the needs of the poor and working class within urban and rural communities, as many of these citizens are underserved or ignored by traditional commercial banks and lending processes. The goal is to help this group of people become more financially self-sufficient and contribute more to overall economic growth through community redevelopment.

There are hundreds of chartered CDFIs operating in the United States, each with a focus on using innovative (and often less stringent) lending practices, educational efforts, and small business lending. The CDFI's vision is an America in which all people and communities have access to the investment capital and financial services they need to prosper.

CDFIs tend to be controlled locally, without interference from the federal government or national corporate hierarchy.

Community Development Through the CDFI Fund

The CDFI Fund is a federal program that promotes access to capital and local economic growth through its Community Development Financial Institutions Program with direct investment that provide loans, investments, financial services, and technical assistance to underserved populations and communities.

The fund also provides an allocation of tax credits to Community Development Entities that enables them to attract investment from the private sector and reinvest in low-income communities.

Its Bank Enterprise Award Program provides an incentive to banks to invest in their communities and in other CDFIs. The CDFI Bond Guarantee Program issues bonds to support CDFIs that make investments for eligible community or economic development purposes. Through its Capital Magnet Fund, the CDFI offers competitively awarded grants to finance affordable housing solutions for low-income people and low-income communities nationwide.