In an era of mega-banks, mergers, and acquisitions, development banks offer a much-needed alternative. Development banks are for-profit, insured banks or savings institutions that operate in underserved areas, with a primary purpose of community development.
Regulated like traditional banking institutions, development banks typically offer a full line of competitively priced deposit and loan products -- such as checking accounts, savings accounts, CD's, and money market funds. They are different, however, in that they target their services to economically distressed neighborhoods or a targeted population of low-income people or others who lack adequate access to financial services.
In addition, development banks typically provide some sort of non-financial, capacity or market building development services, either directly or through a subsidiary or affiliate. For example, this may take the form of job training, affordable housing development, or money management assistance.
Development banks operate profitably without subsidy; however they balance their focus on generating earnings and shareholder return with an equal, if not greater, focus on their community development mission. Despite initial skepticism of the development banking concept and the relatively small number of development banks, the practice has been highly successful in terms of both development impact and financial performance. This comes from a number of factors:
- Development banks offer a broad range of products and services designed to provide the financial resources needed for local residents and businesses to realize their potential.
- Since they are regulated, for-profit institutions like any other bank, development banks must be well-managed, financially solvent, and responsive to market conditions.
- They tend to focus on a geographically defined area, so they have an exceptional knowledge of their target markets and develop strong relationships with their customers.
- Development banks are usually owned by a mix of local corporate, civic, and community interests, giving them access to a broad base of resources.
- FDIC insurance makes deposits in development banks very safe investments, which allows them to leverage their equity with deposits from a broad range of investors.
Industry-wide, it is estimated that the country's over 400 CDFI's (which includes development banks and other types of financial institutions) have loaned and invested more than $4 billion in distressed communities across the country. In 1998 alone, the investees of the National Community Investment Fund (a national intermediary which reinvests institutional capital in community development oriented depositories) originated $24.7 million in 433 development loans and investments.
As the development banking industry continues to grow and mature, several trade groups are working to refine measures of both financial and development success. In the meantime, development banks continue to lend millions of dollars to local entrepreneurs each year efficiently, profitably, and with the goal of helping to rebuild the economies of underinvested communities.