A Community Development Financial Institution (CDFI) is a private financial institution that works in economically distressed markets that are underserved in the traditional financial arena. CDFIs provide a unique range of financial products and services to individuals, small- to mid-sized businesses, microenterprises and nonprofit organizations. These include loans to:
- Small business owners to expand their businesses, fund their operations, purchase equipment or buy a building
- Microenterprises to start their businesses
- Nonprofit organizations to develop affordable housing, build community facilities, expand services and promote economic development initiatives
- Individuals to buy their first homes or automobiles for transportation to and from work
The core foundations of all CDFI loans are that they create jobs, encourage long-term financial sustainability and stabilize communities.
Across the U.S., over 1,000 CDFIs have loaned and invested billions into our nation’s most distressed communities. What’s more, their loans and investments have leveraged billions more from the private sector for development activities in low-wealth communities across the country. Along with funding, CDFIs also provide technical assistance and form long-term relationships with their borrowers, and establish public and private partnerships with organizations that can provide needed training to add value to the business.
The CDFI Fund, run by the U.S. Department of the Treasury, was established in 1994 and makes awards to CDFIs in the form of loans, grants, deposits or equity investments. Financial institutions must apply for status as a CDFI and meet certain requirements, such as serving specific geographic regions, offering economic education or counseling, and having a central mission of improving the community.
CDFIs get their loan capital from national and community banks, socially-motivated individuals, religious institutions, foundations and corporations. This money is lent at a below-market rate of interest for periods of time, and the CDFIs make regular payments of interest for the use of it. At the end of the loan term, the capital is either returned or the term can be extended and renewed.
U.S. Treasury CDFI Fund Director Annie Donovan calls CDFIs “a national treasure.” Read her recent keynote address.