What is Community Investing?
Community investing is financing that generates resources and opportunities for economically disadvantaged people in urban and rural communities in the U.S. and abroad that are under-served by traditional financial institutions. Community investors make it possible for local organizations to create jobs, provide financial services to low-income individuals, and supply capital for small businesses, affordable housing and community services such as childcare.
Your investments can have a direct impact on people’s lives. Affordable housing. Neighborhood revitalization. Small business development. Child care. Job creation. Many rural and urban communities in the U.S. and abroad are in need of these critical elements of economic growth as well as other vital social services that support economic development. Low-income people living in these communities are not looking for handouts. What they seek is a fair chance to improve their communities and build better lives for themselves and their children. Individual investors have the opportunity to make an impact on distressed urban and rural communities while at the same time receiving a return on their investment. This opportunity is called community investing (CI). Traditional financial institutions in many cases have abandoned distressed urban and rural communities because they believe they cannot make a profit there. Thus, the residents of these communities do not have access to traditional banking services and capital. If someone wants to borrow money to start a business, for example, he or she usually must borrow from unconventional lenders, which charge higher interest rates than most banks. To compound the problem, many residents of distressed rural and urban communities have poor credit histories or no credit histories at all. Consequently they are considered high risk borrowers and are charged high interest rates on loans and mortgages. A high interest rate often means a borrower has a lower chance for success because of the added financial burden. Community development financial institutions (CDFIs) have established systematic solutions to these lending challenges. The solutions often combine more flexible underwriting guidelines with some type of financial education and coordinated social services.
(Underwriting is the process a bank uses to determine whether it will accept or reject a loan application.) The education and social services are usually provided through collaboration with nonprofit organizations or public agencies. These solutions have resulted in thousands of new affordable homes, small businesses, and jobs. This guide will explain the variety of investments you can make with a CDFI. They range from savings accounts at a community development bank to unsecured term investments in a community development loan fund or a microfinance institution. The array of available investments allows you to invest as little or as much as you would like. The rates of return on community investments generally are between zero and five percent. Community investments, therefore, are less competitive when market interest rates are high and more competitive when market rates are low. In terms of making a difference in people’s lives, however, relatively few investment options can compete with community investments.
Types of Community Investing
Both individuals and institutions invest in four main types of Community Development Financial Institutions (CDFIs) that provide funds to communities in need. They are:
- Community Development Banks (CDBs)
- Community Development Loan Funds (CDLFs)
- Community Development Credit Unions (CDCUs)
- Community Development Venture Capital Funds (CDVCs)
Investors place capital directly into any one of the four types of community investing organizations or through specialized community investment portfolios—made available through trade associations for the Common Good.
What Is the Impact Of Community Investing?
- Affordable Housing
- Small Businesses
- Community Facilities
- International Communities
- Women & Minorities
Small Business Development
Nonprofit Organizations and Social Services
Community Development Financial Institutions
Community Development Banks and Credit Unions
Purpose and Characteristics
- Provide affordable credit and retail financial services to distressed
- Regulated by the government
- Certificates of Deposit (CD)
- Money market accounts
- Individual Retirement Account (IRAs)
- Savings accounts
- Checking accounts
- Accounts are insured by the federal (US)government:
Federal Deposit Insurance Corporation for banks National Credit Union Administration for credit unions
Community Development Loan Funds
How To Make A Community Investment
Where To Get More Information
- What is Community Investing?
- Foundation for International Community Assistance (FINCA)
- Estate Conservation Associates: Terminology