The current moment is one of tremendous opportunity for community development financial institutions (CDFIs). A confluence of events in the capital markets, government priorities, and political discourse has created an environment in which CDFIs could mobilize an unprecedented amount of capital to benefit the communities that they serve. The idea of investing for a social purpose has been mainstreamed, and commercial investment managers have deployed or are seeking to deploy over $20 trillion into investments that are aligned with social or environmental goals; CDFIs are an ideal vehicle for this “impact investing”.

However, CDFIs are simultaneously facing two great challenges. The first is immediate: the local communities that CDFIs serve are experiencing severe economic crises due to Covid-19. Small businesses and nonprofit organizations in areas historically lacking or denied capital access, particularly low-wage communities of color, represent a core constituency of CDFI borrowers, and they are facing existential threats.

The second challenge for CDFIs is longer-term but just as critical: the need to diversify their capital base. The single largest capital source for CDFIs is loans from banks, which are driven by the requirements of the Community Reinvestment Act (CRA) to invest in certain lower-wage areas of the US. Consequently, CRA-motivated funding has geographic limitations, as well as being subject to changes in regulations, bank capital requirements, and other factors exogenous to CDFIs.

The New York Forward Loan Fund (NYFLF) offers an exciting model that will help CDFIs address both the immediate economic crisis and long-term capital base challenges. The NYFLF is a coordinated response to the Covid-19 pandemic involving the State of New York, banks, foundations and other mission-oriented investors, and five CDFIs with significant lending operations in New York State. In just a few weeks, the NYFLF raised $100 million for the deployment of thousands of low-rate, small-balance loans to small businesses and nonprofits; as of this writing, the five originating CDFIs already identified enough qualifying loans to fully exhaust NYFLF’s capital. The NYFLF’s funding mechanism and loan product could be replicated across the country to help address the near-term challenge of rapidly investing in disinvested communities.

Read the full article about community development financial institutions (CDFIs) by Michael Hearne at LISC.