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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.

Some History

Historically, traditional community banks and savings and loans served local neighborhoods; but they were mainly located white neighborhoods. When the neighborhood demographics changed racially, the banks left, taking with them the capital and financial resources needed to help keep neighborhoods strong.

Seeking to reverse this trend, four individuals who were colleagues at a local Chicago bank got together in the early 1970's and organized the purchase of the then failing South Shore Bank, located on the city's South Side. The founders wanted to demonstrate that a permanently capitalized bank could be a proactive force in restoring the economy of a neighborhood that had undergone demographic transition. With this purchase, the concept of a community development bank became a reality.

Together with its affiliates--a real estate development company, non-profit human service organization, and venture capital company--South Shore has succeeded in its origin mission. The Bank ended 1999 with $839 million in assets, closed $78 million in 834 loans in its target communities, and posted $7.5 million in net income. Its ability to combine a "dual bottom line" of development impact and financial return has brought the bank national attention, and the model has since been replicated in several communities across the country.

Recognizing the efficacy of this business-based approach to community development, the U.S. Treasury Department launched the Community Development Financial Institution (CDFI) Fund in 1994. Designed to increase the number and capacity of private sector organizations providing financial services to distressed communities, the CDFI Fund:

  • Certifies eligible organizations as Community Development Financial Institutions (CDFI's), recognizing their primary mission of community development
  • Provides start-up capital and other operating monies to certified CDFI's on a competitive basis
  • Provides incentives for traditional banks and thrifts to increase their lending, investment, and services in distressed communities

CDFI's may take the form of banks, credit unions, loan funds, venture capital funds, microloan funds, or intermediaries. Currently approximately 400 certified CDFI's operate throughout the United States, ranging from small loan funds that close just a few deals a year, to banks that have millions of dollars in assets. Each plays an important role in helping to rebuild underinvested communities.

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