Investing in CDFIs to drive equitable economic growth: A commentary by Carolina Martinez

Three ways philanthropies can support community development financial institutions

Over the last two years—as many businesses struggled to stay afloat amid COVID-19 lockdowns, supply chain disruptions, and staffing shortages—community development financial institutions (CDFIs) provided a lifeline to small business owners, especially women and people of color.      CDFIs have a mandate to funnel much-needed responsible capital to small business borrowers in low-income communities, communities of color, and other populations facing structural barriers to credit access, and are well positioned to offer financing to these underserved borrowers as the economy continues to recover.

Investing in CDFIs is a winning strategy for philanthropic funders aiming to drive equitable economic growth and address systemic racial and gender barriers to economic opportunity. Grantmakers can play a key role in these efforts by providing more flexible capital that enables CDFIs to scale their operations to reach more socially and economically disadvantaged entrepreneurs—those whom the mainstream financial system has long failed. Most mainstream banks lend less today to small businesses than they did before the 2008 financial crisis.In fact, according to the Association for Enterprise Opportunity, 8,000 loans are declined by banks on a daily basis. In addition, women, immigrants, and people of color face structural barriers that mean they face even higher hurdles to securing a loan. Adding to the problem are alternative lenders, including predatory lenders, who have stepped in to fill the gap with products that are expensive and damaging to the health of small businesses.

While the pandemic has intensified these trends, it also has shown how CDFIs can make a real difference. The problematic rollout of the early rounds of the Paycheck Protection Program (PPP) demonstrated the limitations of big banks, which focused on their existing customers (including some large, profitable corporations) and overlooked borrowers in underserved communities. CDFIs, by contrast, deployed their PPP loans the way that Congress intended. The Small Business Administration reports that 78 percent of PPP loans made by CDFIs were under $150,000 and 40 percent were made to borrowers in low- and moderate-income areas, compared with overall program averages of 50 percent and 28 percent....

Read the full commentary by Carolina Martinez, CEO of CAMEO.

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