Grantees & Grantmaking | November 2, 2022

CDFIs Were Created to Remove Barriers for Populations Denied Prosperity. Here’s How Funders Can Be Supportive.

CDFIs can re-center and advance this original purpose if funders work collaboratively.

Community development financial institutions (CDFIs), which are grounded in the communities they serve, have been removing barriers to equitable access to financial services for decades. Native CDFIs are doing the same in Indigenous communities. At the outset, the goal for CDFIs was to improve how economic systems function by providing lending services for communities historically denied access to opportunities to prosper.

And that baseline goal to provide banking services to the unbanked remains critical. “We’ve learned over the years—and especially during the pandemic—that the gap in access to capital remains significantly wide, especially in rural America, tribal environments, and marginalized communities,” says Lynn Meyer, director of lending at Community LendingWorks, a Foundation grantee and CDFI focused on strengthening underbanked Oregon communities through business and personal lending.

Some CDFIs have adopted mainstream banking models that emphasize numbers and scale and avoid risk, practices that unintentionally perpetuate the systemic barriers CDFIs were designed to topple.

However, over time, a problem has emerged. In response to funder requirements—and often under pressure to achieve investment returns—some CDFIs have adopted mainstream banking models that emphasize numbers and scale and avoid risk, practices that unintentionally perpetuate the systemic barriers CDFIs were designed to topple.

Keep looking for ways to do better.

Nikki Foster, a Foundation program officer who works closely with many of our CDFI grantees, puts it this way: “After the racial reckoning our country has been experiencing, and fueled by the Foundation’s new grantmaking approach, we asked: Are we supporting racial equity and racial justice to the best of our capacity? Are we, even unintentionally, keeping in place barriers posed by our current banking systems? How can we improve, especially with CDFIs?”

That led the program team to identify the pressure points CDFIs are experiencing in collaborations with the Foundation, its peers, and other impact investors. “Are we contributing to the creation of a parallel banking model that mirrors the dominant economic system—which still often blocks or limits access to people of color and other people CDFIs were created to serve?” Nikki reflected. “What can we do differently? And better?”

Ask, listen, rethink, improve.

We talked with some of our CDFI grantees to get their informed perspectives on how funders and investors—like the Foundation and its peer organizations—can adjust our practices to help CDFIs and Native CDFIs be as efficient and effective as possible bringing capital to groups and entrepreneurs who are underserved by traditional lenders but remain vital resources and leaders.

Their reflections offer insights into how philanthropies and other types of impact investors can reexamine their perspectives, guidelines, and procedures in ways that help CDFIs stay focused on delivering on their original mission.

NDN Fund loan recipient, Indigenous-focused Anahuacalmecac International University Preparatory of North America, Los Angeles. Photo courtesy of NDN Fund.

Help CDFIs stay nimble with longer loan terms and larger investment pools.

Kim Pate (Cherokee and Choctaw) is managing director of NDN Fund, the impact investing and lending arm of NDN Collective, an Indigenous-led organization that builds Indigenous power. It advances narrative change, activism, grantmaking, capacity building, and other activities that help Indigenous communities make decisions about their lives and enact their decisions.

“We’re working to remove barriers, like traditional collateral, and embracing loan policies and procedures that better reflect the needs of the communities we serve,” Kim reports. “Our Resilience Impact Assessment is a good example. It’s the hub of our engagement with borrowers and the first step in creating a tailored, supportive infrastructure around our borrowers.”

Kim makes a case for the benefit of providing large, long-term funds as a way to help NDN Fund better address the needs of its borrowers. “A long-term 1 percent loan to NDN Fund in a program-related investment (PRI), for example, would allow us to pass the savings of a low interest rate on to the businesses and organizations we lend to,” she observes. “And multimillion-dollar pools of funds would help us offer million-dollar-plus loans to borrowers who need that level of capital.”

Program-related investments (PRIs) are a type of mission investment foundations can make that align with their organizational goals and prioritize social outcomes over profit and provide less-than-market-rate returns. PRIs, like grants, are a way to make low-cost capital available to nonprofits, businesses, and other organizations that advance the mission by serving community needs.

She adds, “There’s a gap in available services for organizations in Indian Country ready to leverage that level of funding, and we have the infrastructure and desire to fill that need. If we had large pools at a low rate for, say, a seven- to 10-year horizon, we’d be freed up from chasing funds and cobbling together financing from multiple sources.”

That ongoing task of finding capital adds to organizational overhead and drains resources that could otherwise be directed toward the power-building services NDN Fund offers its borrowers. Kim says, “We succeed when they succeed—and we meet them where they are. We bring a cohesive set of strategies that we call braided capital, meaning they may get a loan, but it might be accompanied by a grant. And our power building supports the growth of their project along the way.”

Community LendingWorks helped Amy Baker, founder of Threadbare Print House, Eugene, OR, purchase new printing equipment to expand production capacity. Photo courtesy of Community LendingWorks.

Reexamine three specific areas of your funding practices.

Lynn echoes Kim’s sentiments and shares three ideas for adjustments funders could consider to ease some of the administrative burdens shouldered by CDFIs:

1. The process of onboarding PRIs is long—often six to nine months—and it demands a huge amount of staff time. Finding ways to streamline that process would help CDFIs put more energy into serving the needs of their borrowers.

2. Longer investment timelines would allow CDFIs to incorporate longer loan terms, when that’s appropriate. It would also let them cycle through the lending and repayment process using the same pool of money with more than one borrower, thus multiplying the impact of the funds.

3. Some funders’ reporting demands can be burdensome. Perhaps they could think about annual or twice-yearly reports rather than quarterly. CDFIs that have multiple funders can find themselves constantly working on reporting the various (often different) metrics funders require rather than doing the work of actually deploying the capital. Or maybe some of the reporting could be done as a check-in over the phone or via Zoom.

Stay the course—and stay flexible.

Maggie Kirby Weiland is SVP and development director of Craft3, a CDFI that serves Washington and Oregon businesses, nonprofits, tribes, and individuals. Craft3’s investments build household and business wealth, amplify community voice and agency, and create lasting networks of trust and mutual support. Maggie says she hopes impact investors will stay committed to advancing racial equity.

“When funders commit over the long term, we can be more confident we have the necessary partners and resources to serve the needs of our communities. Some investors are driven by trending causes. That can be good; it shows they’re paying attention. However, some make highly visible statements or gifts, but then move on to the next cause, which can be disruptive.

“To substantially move the needle on persistent and pervasive issues like racial injustice—which require a multigenerational effort to overcome—we need many dedicated partners making large, long-term commitments with relevant, ‘impact-first’ investment terms.”

Craft3 customer, Soul Collective, Seattle. Photo by Carly Diaz.

According to Che Wong, a senior business lender and manager of Craft3’s Equitable Lending program, “We aim to be borrower-centric, meaning we provide—as many CDFIs do—more than just capital. We offer technical assistance, business coaching, and access to other professional services that our borrowers need. Grant funds to support those efforts are vital.”

Che and Maggie also note that funders could be more collaborative in the area of impact measurement (i.e., the metrics lenders and funders collect to evaluate effectiveness). “Is there a way CDFIs and funders could work together to better balance reporting needs?” Maggie asks.

She also observes that while standardization helps funders understand the effectiveness of their investments, collaborating on relevant definitions and being open to some proxy metrics may be a way to streamline reporting burdens for CDFIs and their clients.

Trust. And embrace practices that build justice.

CDFIs were created to reduce gaps in financial equity, and they’ve been successfully doing so by opening access to credit, loans, and other financial services for underbanked communities.

They’re frontline institutions with time-tested effectiveness at serving their communities in culturally appropriate ways that are specifically tailored to the needs of those they serve.

“Even if we come at it from slightly different perspectives,” Che points out, “CDFIs and their funders share the same central goal: building financial equity in underserved communities. And there’s room to be more collaborative in how we structure the funding that will benefit our borrowers.”

The funding community—our Foundation included—can help CDFIs do their work more efficiently. “The world’s problems often feel so big,” Nikki reflects. “But the Foundation and our colleagues in philanthropy and impact investing have opportunities to support the assets—the cultural and community abundance—that CDFIs fuel. The change they lead is healing.”

“CDFIs and their funders share the same central goal: building financial equity in underserved communities. And there’s room to be more collaborative in how we structure the funding that will benefit our borrowers.” 

Che Wong
Senior Business Lender – Equitable Lending Program Manager, Craft3

Through funding CDFIs, we have opportunities to listen, learn, and trust the organizations poised to reimagine and restructure lending in ways that help heal people and communities.

“More flexible funding of CDFIs and Native CDFIs—the organizations already working in, listening to, and engaging their communities,” Nikki says, “could meaningfully accelerate the implementation of economic systems and policies that are just for everyone.”

Find out how your organization can support the equity- and justice-building work of CDFIs:
Learn more about Foundation grantees that contributed to this post: 
Read about Native CDFIs and mission investing: 

PHOTO TOP: Craft3 customer, Jackson’s Catfish Corner, Seattle. Photo by Carly Diaz.

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