With roots in the civil rights, anti-poverty, and other progressive movements, the mission of Community Development Financial Institutions (CDFIs) is to create more equitable access to financial products and services, particularly for low-income neighborhoods and communities of color which have faced discriminatory financial policies. CDFIs operate within a financial system steeped in a history of racial discrimination and they work to correct injustices.
Racial inequities in lending are well documented. For example, entrepreneurs of color are more likely to be denied loans—Black borrowers are turned down 38% of the time, followed by their Latino (33%), Asian (24%), and white (20%) counterparts, according to the 2022 Small Business Credit Survey. Even when entrepreneurs of color are approved for loans, they usually don’t get the full amount they sought. That has led many Black entrepreneurs not to apply for loans at all.
To help CDFIs address these patterns of injustice, the Nonprofit Finance Fund (NFF) and Capital Impact Partners studied how CDFIs in six states work with nonprofits and center communities of color in their lending and investments. The result is the Catalyzing Finance for Racial Equity Report, which explores five building blocks to advance racial equity in CDFI lending.
“Advancing racial equity requires that we listen to communities of color and constantly interrogate and improve our practices and policies,” said Aisha Benson, CEO of NFF. “By sharing our experiences of what’s working and what isn’t, among peer CDFIs, we can speed progress toward shared equity goals.”
The five building blocks and recommendations to enact them include:
Show a commitment to racial equity and communities of color by attending business events, ribbon-cuttings, local fairs, networking events, and the like. Build relationships with other organizations that have earned trust with potential borrowers. Be accountable to your own racial equity goals as well as to outside stakeholders. Building trust is not easy or fast but is foundational to everything else.
Know who your target clients are and have honest dialogue with them to learn what they want and need. Deliver targeted, community centric services in a respectful way that makes continued dialogue possible. Be transparent in explaining processes, provide timely decisions, and if you have to say no to a borrower, provide other resources and referrals so the person can learn how to qualify for a loan.
Design technical assistance offerings such as business planning, marketing, or skills training based on knowledge of the communities being served. Provide in-house assistance and develop partnerships with other local providers. Don’t rely on general best practices or programs that worked elsewhere. Talk with your clients to build an understanding of what they need.
Take a “total return” approach to investing, that considers not just interest on a loan, but how clients can leverage loans for additional funding to increase social and economic impact. Constantly assess loan structures to fit client and community needs. Be flexible in loan structure and terms. Offer payment options beyond simple interest rates, such as revenue-based financing, project-based return, or other non-traditional structures. Dismantle non-race-informed lending policies to deliver more capital to communities of color.
Too often, interest rates for CDFI loans are higher than for loans from a commercial bank. This conflicts with the CDFI mission of serving communities that have been discriminated against and economically marginalized. One way CDFIs can proactively seek to lower interest rates is by applying for grants to support special loan products or test innovative programs that may be riskier. A willingness to pursue cheaper capital demonstrates a commitment to racial equity and to communities that have been underserved and
underestimated.
Learn more about the Catalyzing Finance for Racial Equity Report.
