Community Development Finance

From Wikipedia, the free encyclopedia

Community development finance is a relatively new term (10 years) for a set of activities that have been taking place in societies for hundreds if not thousands of years. Community development strategies include the use of finance- essentially specialized loan products - to bring about change in low income or disinvested communities, and to provide financing to individuals who have no access to traditional financial institutions.

The financial terms of community development finance are designed to meet the needs of the customer in order to ensure success, and in order to ensure the building of assets or the preservation of assets. Examples from Third World countries include a loan of a few hundred dollars to enable a woman to buy a cow. She can then feed her children and sell milk to others, which helps her repay the loan. Eventually she will own the cow.

Community development finance has hundreds of roots in the United States. Many of them are from the field of low-income housing, others from small business lending. The model of the cow in another country might be a fruit cart on wheels in the Mexican neighborhood of Chicago - far too small a loan for any bank and no real collateral, but the family will be fed.

In 1996 the U.S. Congress passed the Community Development Financial Institutions Act, which provided funds to what then became known as "CDFIs." These funds built new resources and enabled the field to grow. Coupled with a regulatory link to the Community Investment Act, which requires banks to invest in or meet the credit needs of all aras of their market areas, CDFIs have now grown into a sizable force in the world of access to credit. Today over 100 CDFIs provide small loans for equipment or improvements to a business, large loans as part of affordable housing projects, and multi-million dollar loans for construction of a new nonprofit health clinic in a low income neighborhood. As the banking environment has become more competitive, CDFIs have played an important role in leveraging funds and also in education and public policy, ensuring that there is a more equitable distribution of capital at fair rates and terms, to all members of a given community.