Black-led CDFIs are poised to revitalize communities of color
Black-led CDFIs are uniquely attuned to Black communities yet have six times less capital than White-led CDFIs.
We know one thing from the 2008 economic meltdown: Communities of color were stripped of wealth and had only recently begun to find their footing again. When the COVID-19 pandemic swept the country, it was once again Black and Brown communities bearing the brunt of the damage. As community lending leaders told us last summer, the country cannot afford to repeat the mistakes of the 2008 financial meltdown when far too little money went back to those communities and households bearing the brunt of foreclosures and layoffs.
At the front lines making sure history doesn’t repeat itself today are Black-led community development financial institutions (CDFIs).
“This is an important time for CDFIs,” Ellis Carr, CEO of Capital Impact Partners said. “Black-led CDFIs have an opportunity because of the connection to the community, and the lived experience that allows them to connect with members of the community.”
“Black-led CDFIs have an opportunity because of the connection to the community, and the lived experience that allows them to connect with members of the community.”
CDFIs have a long history in the Black community. Having begun with the first Black credit unions in the 1930s, they expanded in response to President Lyndon Johnson’s War on Poverty in the late 1960s and early 1970s by diversifying their funding sources to include corporations, foundations, and religious institutions.
Still, it wasn’t enough. Rampant racial discrimination compelled the federal government, toward the end of the decade, to enact the Community Reinvestment Act. While the legislation mandated that banks provide credit for their entire markets rather than cherry pick areas based on race, it was rarely, if ever, enforced.
Nearly 20 years later, in 1994, the establishment of the CDFI Fund via the Riegle Community Development and Regulatory Improvement Act more than doubled the number of CDFIs in the U.S. from 300 to 615. Today, there are more than 1,000 certified CDFIs in the country, which have received roughly $3 billion from the CDFI Fund since inception, along with more than $50 million in New Market Tax Credits. CDFIs in turn leverage that money twelve times over to help low-income communities. For every $1 in CDFI Fund awards, CDFIs generate $12 in financing to communities and residents left out of the economic mainstream, according to Opportunity Finance Network, an alliance of CDFIs.
For every $1 in CDFI Fund awards, CDFIs generate $12 in financing to communities and residents.
Still, almost a century after their start, Black-led CDFIs remain behind compared to those led by White people. Notably, White-led CDFIs hold six times the assets as Black-led CDFIs, and while assets have been growing over time for White-led CDFIs, they have been stagnant for Black-led CDFIs. Moreover, of the 315 CDFIs that received CDFI Fund awards in 2017, roughly one-fourth were led by minorities.
COVID-19 Comes Calling
When the pandemic first took hold in March, CDFIs were on the front lines in triage mode as businesses across the country were shut down. With only about one month of cash on hand, the smallest businesses were in dire need of cash infusions just to stay afloat. The Paycheck Protection Program would help some, but the need was growing by the day.
These small main street businesses in lower-income neighborhoods are the very clients CDFIs serve, and the danger of even the smallest loans going belly up was great, threatening the survival of the CDFIs themselves. Liquidity for CDFIs was and is pivotal, particularly for African American CDFIs working in the hardest-hit areas.
Often it was only CDFIs who were left to fight the battle as other lenders moved up the scale to safety in bigger, more established businesses. Meanwhile, small businesses were moving down the scale: credit scores were declining, cash flow was drying up. As banks fled to quality, these businesses were cut adrift, facing the prospect of turning to predatory lenders with exorbitant interest rates and fees. A January 2021 poll found that for the second month running, half of Black-owned small businesses could not make rent.
Katrina Malone, chief program officer for Hope Credit Union, a Jackson, Mississippi-based CDFI, noted that nationwide lockdowns saw two of every five Black-owned businesses and one of every three Hispanic-owned businesses close down through August. CDFIs were pivoting as fast as they could to get money to businesses with new technologies and tapping new sources of capital and liquidity as well as working hard to connect underserved small businesses to the federal government’s Paycheck Protection Program.
“At HOPE, this meant redirecting nearly half of our workforce to take and process PPP loan applications. It also meant working with existing borrowers to put payment deferrals in place during the spring shutdowns while raising the resources to weather the crisis.”
“For Black-led CDFIs, having a trusting relationship with their customers and knowing a community’s culture are big advantages.”
Donna Gambrell, CEO at Appalachian Community Capital and Chair of the African American Alliance of Black-led CDFI CEOs, said that Black-led CDFIs are currently helping small Black-owned businesses with relief programs composed of smaller loans and, in some cases, grants. They’re offering advisory services for modifying business plans, they’re creating mentorship programs, they’re helping small businesses pivot to online and advocating for more funding and for government to apply a racial equity lens in programs intended to benefit minority businesses.
“For Black-led CDFIs, having a trusting relationship with their customers and knowing a community’s culture are big advantages,” she said. “CDFI lenders may attend the same churches as their customer, patronize the same hair salon or barbershop, and see each other out and about in the community.”
The African American Alliance of Black-Led CDFI CEOs that Gambrell is part of in turn is helping to support Black-led CDFIs. The Alliance, a collective of African American CEOs, launched in 2018 to expand the infrastructure for Black businesses and agencies and the CDFIs that support them. It currently has 45 member institutions spanning all 50 states, with a total loan pool across all members of $1.5 billion. COVID-19 would turn out to be a trial by fire for this new organization, but it is weathering the storm.
“The organization came together not only to share knowledge and expertise, but to present a unified voice regarding what is needed to create growth opportunities in Black communities and to be at the table when decisions are being made regarding policies and programs intended to spur that growth,” said Gambrell. “We have the means to reach customers that other lenders can’t or won’t.”
An Influx of New Capital
Financial institutions such as Cincinnati-based Fifth Third Bank have taken notice of CDFIs’ importance. In December, the bank launched a three-year, $2.8 billion program to foster greater racial equity and inclusion, as well as expand its partnerships with CDFIs. In August 2020, U.S. Bank announced $1 million in grants for 15 Black-led CDFIs, including support for the Alliance of African American CDFI CEOs.
Fifth Third’s chief corporate community and economic development officer, Jada Grandy-Mock, said that the bank will focus on CDFIs that have a proven track record of serving Black-owned small businesses that meet its underwriting requirements and have the operational capacity for investments through its Community Development Company. She added that Fifth Third will also provide philanthropic support for efforts supporting Black-owned small businesses.
“Equality, equity, and inclusion is one of four strategic initiatives for Fifth Third’s Human Capital division,” Stephanie Smith, the bank’s chief inclusion and diversity officer, said. The bank wants to see measurable results by 2023 on its racial equality, equity and inclusion plans, she said.
“Banks and corporates are more understanding, and acknowledging, of the issues present in BIPOC communities.”
However, the newfound influx of capital following the Black Lives Matter protests — spurred by the murders of Eric Garner and Breonna Taylor — has brought attention to the barriers that exist within the finance industry itself.
“Banks and corporates are more understanding, and acknowledging, of the issues present in BIPOC communities, which is now allowing CDFIs to link the challenges we have in supporting communities,” said Carr. But, he added, “there are two areas that stymie our flexibility: one is general capital, and the other is understanding who that capital is from and the conditions associated with it. Banks and corporations have to play a supportive role in making this shift.”
Carr noted that, as financial intermediaries, CDFIs receive money primarily from larger financial institutions. While the funding can enable CDFIs to introduce “equity like” products that allow people in the community to build wealth over time, the mainstream financial markets view these products as unproven and more risky, which precludes CDFIs’ ability to scale them, he said.
“Those larger institutions dictate the rules through which we can utilize that money, but they don’t necessarily have the knowledge and understanding of the community’s needs, and how those products need to be structured,” Carr said.
In many instances, the businesses are so small and undercapitalized that loans and more debt are not sustainable. Equity investments — essentially money with no payback requirement, akin to venture capital — would be more useful, though those investors are few and far between at the moment. In the end, more innovation is desperately needed.
“Investors need to be willing to make low-multi-year commitments, to be involved with their community partners for a longer term, and to be willing to accept the fact that there are going to be some failures,” said Gambrell. Black-led CDFIs know what they’re doing, she said, so investors should give up the notion of controlling every aspect of how funds are used and trust that the CDFI is making the right decisions, she said.
Until then, CDFIs are a business and must attend to their own bottom lines if they want to continue to support low-income communities.
“With a CDFI, you’re never going to get rich, but you’re not a charity either,” said Gambrell. “The goal is to get to a net-net so that you’re not losing money, but you’re not gouging people either. It’s important to find the balance on this spectrum.”
A Drop in the Bucket
The contributions from Fifth Third and others are substantial, but some say it’s just a drop in the bucket given the level of need in communities of color.
“CDFIs can do some of the things, but they can’t do everything,” Gambrell said. “There are only 1,100 in the country, so you have to create systems to distribute wealth and put processes, policies, and practices in place and embed them in the community to make sure change is long lasting.”
The unemployment rate for Black people has been consistently twice that of Whites since the federal government began collecting data in 1971. That number surged, more than doubling from 5.2 percent in November 2019 to 12.0 percent at its peak in September 2020. In contrast, White unemployment peaked at 7 percent in September.
Even though the number of Black businesses operating in the U.S. had returned to pre-lockdown levels at 1.1 million in September, the racial gaps in wealth and access to capital are real and enduring.
An analysis conducted by McKinsey and Company found that closing the racial wealth gap would add up to $1.5 trillion in economic activity over the next 10 years through job creation and income gains. But it will take much more work to undo damage wrought by generations of inequality.
“Moving the needle in communities that have been subjected to institutional racism and discrimination for generations takes time,” Gambrell said. “I know that folks don’t always like to hear this, but it also takes significant amounts of patient capital, combined with policy changes, community engagement, a holistic approach to community and economic development, and other factors to make a difference.”