What is a CDFI

by Bette

Reviewed: May 31, 2024

Visitor Question: I heard that a CDFI can be important in neighborhood revitalization. What is that anyway? Must have something to do with finance, but I couldn't figure it out from the context.

Editors' Reply:

A Community Development Financial Institution (CDFI) in the U.S. is a non-governmental organization having a certification through the U.S. Department of Treasury. Since we verified off-line that you heard about the CDFI in the U.S., it's a pretty good bet that's the correct answer to your question.

To be certified by the CDFI Fund of the Treasury Department, an organization must be a financing organization whose primary mission is community development. It must show a specific target market.

Congress established the CDFI designation in 1994. As of now there are more than 850 certified CDFI's, although many other institutions probably meet the requirements if they wished to apply.

Examples include community development loan funds, community development banks, credit unions, microenterprise loan funds (also called microloans or microfinance elsewhere), and some community development corporations.

Don't confuse CDFIs with CDEs (community development entities), which also are certified by the same unit at the Treasury Department. CDEs are much more numerous because their purpose is to use new market tax credit funds. An organization can be both a CDFI and a CDE.

By the way, if you are hanging out on this website, there is seldom a need to understand new market tax credits, which are usually very complex to establish and which usually apply to projects so large that they are outside of the scope of most neighborhood organizations or community-scale leaders that we serve.

But since someone asked the question, we will continue on with more about CDFIs.

The advantage of a CDFI is that they are eligible to receive certain types of funding from the Treasury.

Now let's tie this answer back to your question about how a CDFI can be important in neighborhood revitalization. If the neighborhood contains a high percentage of households that are "unbanked," as the term is called, meaning they don't have a bank account, it may benefit by having an alternative financial entity such as community credit union or community bank.

Why are people unbanked? They might be homeless, illegal immigrants, legal immigrants or refugees who don't understand banks and don't trust them, people who have bounced too many checks and therefore are denied a bank account, or people from groups who historically haven't trusted banks. If you have a number of such households in your neighborhood, it means their collective cash assets aren't going to work for your community. (With the current stance of the banks in not loaning much money, this might be beside the point, but let's think that historically banks have made their money by loaning out their deposits rather than charging fees.)

A certified CDFI has to keep lending and supporting projects within the neighborhood, or risk being de-certified. That's why these institutions can be important to the neighborhood as a whole. Rather than lending money in a more affluent part of town, they will be willing to make possibly riskier investments within their service area. Sometimes they will be the only bank willing to make such a loan. So if you have such a treasure, good for you. If not, don't worry about it unless you are having trouble obtaining financing for worthwhile neighborhood-based projects.

Of course many, if not most, positive neighborhood-based projects have trouble finding funding, don't they?

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