Community development financial institutions serve communities that have been systematically left out or overlooked by traditional financial institutions. Unlike traditional banks, CDFIs rely less on credit history and emphasize establishing financial literacy within the communities they serve.
What is a CDFI?
CDFIs provide financing and development services to promote community development in underserved communities. The US government supports CDFI programs through funding and tax credits. Though these institutions must apply and qualify for the status, it opens the door to resources.
To be eligible for CDFI certification, a financial institution must meet the following criteria:
- It must be focused on promoting community development.
- It must be a legal and nongovernment entity.
- It must serve at least one of the program’s target markets.
- It must provide development and educational services.
What does a CDFI do?
CDFIs provide a range of benefits and essential financial services to vulnerable communities and nonprofits. CDFIs are designed to promote financial growth by offering educational and financial services centered around the community it serves. Some of these services include opportunities for affordable loans for people with poor or no credit histories, as well as financial and technical assistance.
How many CDFIs are there?
CDFIs are divided into five categories: loan funds, credit unions, banks, depository holding companies and venture capital funds. According to the Opportunity Finance Network, there are over 1,300 CDFIs across the US. To find CDFIs in your community, visit the Opportunity Finance Network’s CDFI locator to learn more about OFN and CDFIs based in rural, urban and Native communities across America.
What is the difference between a bank and a CDFI?
CDFIs include regulated institutions such as banks and credit unions and unregulated institutions like loan and venture capital funds. To apply for CDFI certification, an organization must be a legal entity with a primary mission of promoting community development, in contrast to banks, which may find it too risky to invest in communities that historically have been economically isolated.
The bottom line
CDFIs aim to build strong relationships with their communities to maximize educational and financial services that help people navigate difficult economic situations. With the help of the CDFI fund, they have support from the federal government to serve neglected communities and help them gain financial literacy.
