By Stu Fram, Haas MBA 2022

While interest in using financial capital as a tool to create positive social and environmental impact has exploded in recent years, one category of investors have been leveraging capital for good since the 1990s: Community Development Financial Institutions (CDFIs). CDFIs are community based, private financial institutions who expand economic opportunity in low-income neighborhoods by providing financial products and services for residents and businesses.

In 2020, CDFIs are playing a vital role in supporting local businesses and organizations impacted by COVID-19.

Photo Credit: www.bankofamerica.com

Many communities across the US remain critically underserved by traditional financial systems. CDFIs fill in this gap, providing small business loans, fairly-priced mortgages, and other financial products and services to enable job creation, affordable housing, and community facilities.

When Congress created the Paycheck Protection Program (PPP) to facilitate the flow of capital from financial institutions to small businesses in need, CDFIs were among those lenders working to ensure that funds flowed into traditionally overlooked, particularly vulnerable markets. Recognizing this unique role that CDFIs could play, after the initial PPP funds ran out, Congress approved a second round of funding, of which $10 billion was set aside to be loaned out exclusively by CDFIs.

In addition to supporting local businesses through the PPP, some CDFIs have launched separate, COVID-specific funds to provide additional support to small businesses and organizations. For example, the NYC COVID-19 Response & Impact Fund, administered by the CDFI Nonprofit Finance Fund and the New York Community Trust, has deployed $37 million in unsecured, no-interest loans and $73 million in grants to New York City organizations.

Finally, as the US has begun looking more critically at systemic racism and the racial wealth gap, CDFIs have been used as a mechanism for deploying capital and building wealth in marginalized communities. In one example, Netflix recently committed to moving 2% of its cash holdings (~$100 million) into CDFIs explicitly serving black communities.

The thousands of CDFIs operating nationally span 4 categories:

  • Banks, which provide capital to rebuild economically distressed communities through targeted lending and investing.
  • Credit Unions, which promote ownership of assets and savings and provide affordable credit and retail financial services to people in low-income communities, often with special outreach to minority communities.
  • Loan Funds, which provide financing and development services to businesses, organizations, and individuals in low-income communities.
  • Venture Capital Providers, which provide equity and debt-with-equity-features for small and medium-sized businesses in distressed communities.

Check out these local Bay Area CDFIs: