Who Finances Healthy Communities?
While mainstream banking has often overlooked communities of color, along with communities that are rural or have low incomes, one approach that funders and investors can use to advance health equity is strategic community investment.
Communities thrive because of people. When people establish roots, make friendships, raise families, and participate in activities like volunteering, mentoring, or advocacy, a place becomes a community. In turn, these residents rely on the community’s jobs, houses, economy, and services to support them in living their healthiest, most fulfilling lives.
Traditional banks and financial institutions often provide the money communities need to build new housing, improve infrastructure, or support local businesses that create good jobs and essential services. All of these activities help communities become healthier places to live. But, while banks have a duty to serve the communities where they do business, mainstream investors historically have discriminated against and excluded people of color from opportunity, leading to less wealth accumulated over generations.
For example, if an entrepreneur or small-business owner wants to invest in a new storefront or equipment, such as a truck for deliveries or a new oven for a restaurant, the owner will often seek out a loan from a bank. However, a 2021 report found that Black- and Latino-owned firms that applied for non-emergency financing were less than half as likely as white-owned firms to be fully approved—even when they presented a low credit risk.
This is where community development finance comes in.
What Is Community Development Finance?
Community development financial institutions (CDFIs) are mission-driven lenders that include banks, credit unions, loan funds, and venture capital funds. CDFIs seek to invest in community improvements that build wealth for the people who live locally, and guard against displacement (such as through gentrification).
Take Old Fort, N.C., a small mountain town in an economically distressed area of Appalachia. With community development finance, a community development corporation is creating the Catawba Vale Collaborative, a mixed-use commercial development that will combine housing, retail, offices, a worker-owned manufacturing firm, and a community space. Most critically, the Collaborative reflects the values of Old Fort’s residents, who came together to plan the revitalization. The initiative can provide jobs for local residents, rather than bringing in outside workers who could displace residents. The partnership’s mission is to comprehensively redefine rural economic development in Appalachian communities. The primary organizations making up the Collaborative are Camp Grier and the G5 Trail Collective, Eagle Market Streets Development Corporation, the University of North Carolina at Chapel Hill, and Texas Tech University.
Strengthening the Community Development Finance System
At RWJF, we’ve long recognized that the community development finance system is critical to creating opportunity in communities with low incomes and communities of color. That’s why, along with other funders and investors, RWJF is making impact investments in community development finance networks, supporting communities working to advance health equity. These investments span the spectrum of community development finance and include the following:
- Community Development Credit Unions (CDCUs). These cooperatively owned institutions accept deposits, make loans, and provide other fairly priced financial services, often serving communities of color and consumers with low incomes. Over the years, CDCUs have helped make significant strides toward greater financial inclusion. Throughout the COVID-19 pandemic, CDCUs were on the front line of responding to the financial needs of families and business owners affected by the economic downturn. Preserving the solvency and viability of CDCUs is critical to ensuring communities have access to affordable financial services. Inclusiv is a network of credit unions that serve more than 18 million people. With RWJF’s $4 million investment, Inclusiv will expand the capacity of its members to provide loans and other services to their customers delivered with attention to the unique cultural dynamics of the community.
- Community Development Finance Institutions (CDFIs). There are currently more than 1,000 CDFIs operating in the U.S. Among the several CDFI networks that we’ve invested is the National Association for Latino Community Asset Builders (NALCAB). With our $4 million investment, NALCAB will provide loans to affordable housing developers and small businesses in Latino communities within its network, which spans the entire country. Through the RWJF investment, NALCAB members will deepen their impact on their communities. For example, a $1 million loan to a NALCAB member lender may generate an estimated 30 community loans, each of which stands to create 2.5 new local jobs.
- Development Finance Agencies (DFAs). DFAs, which include local or state finance agencies and port authorities, support economic development through a broad range of capital financing mechanisms. We’re supporting the Council of Development Finance Agencies to develop the Equity Capital Loan Guarantee Program, toward the goal of increasing lending to small businesses that are owned at least 51% by persons who self-identify as socially or economically disadvantaged as determined by the U.S. Small Business Administration. By providing guaranteed protection up to $18 million, we hope to encourage DFAs to test new lending practices—for example, not relying on credit scores—with the goal of qualifying more borrowers for capital to grow their businesses.
- Minority Deposit Institutions (MDIs). MDIs are local banks and credit unions where 51 percent or more of the stock is owned by "socially and economically disadvantaged individuals,” or if a majority of the Board of Directors is minority and the community the institution serves is predominantly minority. RWJF is using MDIs for its own banking, depositing $35 million dollars in seven institutions. By placing our money with MDIs, we’re also increasing their deposit base—thus increasing their ability to meet the financial needs of their customers.
These community development finance organizations provide the economic fabric for building healthy communities in places that historically have been excluded from opportunity. Funders and other investors can play a unique role in spurring economic growth and helping communities overcome barriers to opportunity. By investing in community development finance organizations supporting people and businesses the mainstream financial system does not reach, they can help create a healthier, more prosperous future for all.
About the Author
Zoila Jennings brings her career focus on social justice and poverty alleviation—through targeted community financing—to her work as an impact investments officer.