In my home state of Massachusetts, there are 46 Community Development Financial Institutions (CDFIs) working to provide access to flexible, patient capital to individuals, organizations, and businesses in under-resourced communities. These organizations all have a similar mission — to make access to capital more equitable. And they all provide capital to important, but often overlooked groups of individuals and organizations. According to the Opportunity Finance Network, 84% of community finance borrowers are low-income, 60% are people of color, 50% are women, and 28% live in rural areas. Additionally, CDFIs fund key infrastructure that builds resilient and thriving communities — from schools to supermarkets to health care centers.
On the surface, these institutions may look broadly similar. So as an investor, you’re probably wondering whether it really matters which CDFI you fund — aren’t they all having the same impact?
In a word — no.
Yes, CDFIs all share a similar mission of supporting local community development, but they aren’t a homogenous group. Let’s look again at my home state. Some of the CDFIs in Massachusetts focus on specific issue areas such as affordable housing or education. Others work locally, specifically addressing the needs of Boston, New Bedford, Worcester or the Cape. And a further group is comprised of local branches of nationally known organizations, scaling programs and services which have worked for similar under-resourced communities nationwide. CDFIs adapt their programs, services, focus, and scale to the communities they are trying to serve and the impact they are trying to have. As a result, just as CDFIs have varying investment options and risk and return profiles, CDFIs have differing impact goals as well.
To help investors better identify the type of CDFI that might best align with their impact goals, we’ve looked at the CDFI landscape and broken it into three broad impact areas, which we explore in more detail below.
Issue focused innovators
These CDFIs often focus on targeted issues — such as disability services, farm or mobile-home ownership, or the needs of specific racial or ethnic minority groups like Native populations. Typically, these issues are their sole or primarily focus and issue focused CDFIs address them using tactics deeply tailored to the needs of their beneficiaries. Given their relatively smaller balance sheets and willingness to test trailblazing solutions, these CDFIs often require highly risk-tolerant capital ranging from grants, recoverable grants, or program-related investments (PRIs) from philanthropic institutions and individuals to best serve their beneficiaries.
Funders of broad community needs
These CDFIs tend to be much more nuanced and unsurprisingly, their strength and ability to deliver services to their community is highly dependent on the resources available in the location they serve. For example, smaller, locally focused CDFIs in less affluent regions of the country like Appalachia or the deep South may be in need of greater philanthropic support to holistically serve their communities’ financing needs.
Contrast that with those working in larger, better-resourced communities like the Northeast. These institutions often have bigger balance sheets as well as the ability to serve their communities’ development needs in a way that can provide both impact to their communities and options for investors comparable in risk and return to market rate investment alternatives.
National or multi-regional CDFIs
These institutions excel at leveraging their size and reach to scale proven, tested models, enabling successes from one community to be replicated all over the country. Take the success that one CDFI saw developing affordable housing specifically for teachers to remain living and working in Philadelphia.
The project’s developers had tackled a similar challenge in Baltimore and developed a model for teachers to live and work affordably — and comfortably — to alleviate one of the barriers resulting in the education challenges of the local community. Once a demonstrated success, the CDFI was able to provide financing to replicate this model in Philadelphia with a loan to purchase the site, a former textile and lamp factory. The project now provides teachers and nonprofits cost-savings on housing and workspaces to help promote a collaborative and supportive environment, alleviating some of the challenges the education community is facing.
To make these types of projects work at scale, many larger CDFIs offer general obligation notes that enable investors to support the infrastructure that makes communities thrive at financial profiles often comparable to traditional fixed income products. With decades of success in lending, these institutions offer note programs (which are rated by third-party industry organizations like Aeris or S&P) that, when appropriate, can be considered an alternative to stable low-yield assets.
Investors interested in building up and supporting communities can look to CDFIs as a robust and multi-faceted way not just to meet varying risk and investment objectives, but to create different forms of community impact.
The communities around us can only be as strong as the foundations that support them. Regardless of whether you choose to move the needle on specific issue areas, provide capital to bolster specific community areas, or use your dollars to scale tested solutions that drive results, impact investors can play a critical role in helping communities flourish by supporting CDFIs working to advance the issues that matter most.