Despite being around for decades, many people still don’t know what CDFIs are or how to use them. I want to give an overview of CDFIs and provide some useful resources for how you can use them to align your desire for social justice with your investing.

What is a CDFI?

CDFIs are private financial institutions that are 100% dedicated to delivering responsible, affordable lending to help low-income, low-wealth, and other disadvantaged people and communities join the economic mainstream. They focus on supporting economic growth at the community level, usually by financing small, minority-owned businesses, microenterprises, affordable housing, nonprofit and volunteer organizations, and services essential to revitalizing low-income neighborhoods. Their goal is to help people become financially self-sufficient while also contributing to economic growth through community redevelopment.

CDFIs fall into four categories:

  • Community development banks: These federally insured banks are organized like traditional banks. but they are required to direct at least 60% of their financing to low- and moderate-income communities.
  • Community development credit unions: These cooperatives are designed to provide financial services to their individual members. The National Credit Union Administration charters, supervises, and insures federal credit unions and insures the deposits up to $250,000 per share owner, per insured credit union.
  • Community development loan funds: These funds lend to build local businesses, affordable housing, and community facilities. Their borrowers are small businesses, nonprofit organizations, charter schools, individuals, and organizations involved in community development projects. Loan funds also provide financial counseling to individual and business borrowers.
  • Community development venture capital Funds: Venture capital funds pool investor money to make equity investments in private operating companies that yield financial returns while accomplishing community development goals. They also provide equity and management expertise to small businesses, often owned by minorities, that have the potential for rapid growth.

The impact and performance of CDFIs

According to the Opportunity Finance Network (OFN), a network of CDFIs, through its fiscal year 2018, its member CDFIs provided more than $75 billion in lending. This led to the creation or maintenance of 1.56 million jobs, the start or expansion of 419,150 businesses and microenterprises, and the development or rehabilitation of over 2.1 million housing units and 11,592 community facility projects.

Not only do CDFIs provide effective and efficient funding to their communities, they continue to increase the amount of money that goes into local businesses. OFN member CDFIs experienced average growth rates in business lending of 7.2% during recessionary years (2007–2009) and 13.2% during post-recessionary years (2010–2016). For comparison, the U.S. Small Business Administration (SBA) 7(a) loan rates averaged ‑13.6% during recession and 17.3% post-recession.

How to invest in CDFIs

CDFIs receive most of their funding from three sources: banks, the federal government, and institutional investors. Despite their varied funding sources, the demand for capital still outweighs the supply. This is where individual investors like you can come in.

Read the full article about community development financial institutions by Brian Thompson at Forbes.