New Report Helps Financial Institutions Address Inequity and Systemic Discrimination in Lending
The Catalyzing Finance for Racial Equity Report from mission-driven lenders Nonprofit Finance Fund and Capital Impact Partners surfaces community and peer recommendations.
APRIL 26, 2023 (New York, NY/Arlington, VA) – Community Development Financial Institutions (CDFIs) were born out of the Civil Rights Movement to ensure that nonprofits and businesses — particularly those in communities of color and communities with lower incomes — have equitable access to loans. However, much work still needs to be done.
A new report examines ways that CDFIs, and other financial institutions, can further change their business practices to embed racial equity in their lending and investment practices.
The Catalyzing Finance for Racial Equity Report (PDF) is the result of a partnership between Nonprofit Finance Fund (NFF) and Capital Impact Partners, two mission-driven CDFIs. The recommendations are derived from interviews with 15 organizations in five states, including CDFI peers and community organizations. Those in-depth conversations covered subjects such as their experiences with community development and lending, as well as how CDFI practices and services could be improved to better support community health.
“Advancing racial equity requires that we listen to communities of color and constantly interrogate and improve our practices and policies,” said Aisha Benson, CEO of NFF. “By sharing our experiences of what’s working and what isn’t among peer CDFIs, we can speed progress toward shared equity goals.”
The report features five key building blocks, as well as crucial details and insightful examples of how other CDFIs have put these ideas into practice. These include:
- Building trust with communities
- Client-service mindset that centers the needs of community-based borrowers
- Technical assistance tailored to projects and practitioners
- Flexible capital solutions to solve problems of community-responsive organizations
- Appropriately priced capital
Community-based nonprofits and small businesses are engines of the economy — employing workers and purchasing and providing needed goods and services. Racial inequities in lending have a negative ripple effect and are well documented across many scenarios. For example, entrepreneurs of color are more likely to be denied loans (PDF) — Black borrowers are turned down 38 percent of the time, followed by their Latino (33%), Asian (24%), and white (20%) counterparts. And even when they are approved for loans, they usually don’t get the full amount they sought. That has led many Black entrepreneurs not to apply for loans at all.
“Systemic racism still pervades financial systems in the United States. The Catalyzing Finance for Racial Equity Report is an important and enlightening resource that our organization will use as we continue making our own practices more open and equitable,” said Ellis Carr, president and CEO of Capital Impact Partners. Capital Impact Partners is one of the Momentus Capital branded family of organizations, which also includes CDC Small Business Finance and Ventures Lending Technologies, among other organizations. “I’m hopeful that CDFIs and other financial institutions throughout the United States will use the recommendations from the report. We must work together at a field-wide level to collectively address racist lending practices so that we can fully achieve our goal: equal access for everyone, no matter who you are, where you live, or how much money you have.”
The report provides insights from participating CDFIs and suggests questions to challenge and guide lenders as they explore new ways to address inequities in lending and join broader movements for racial equality. Some of these questions include:
- What support can we provide to staff so they can better assess potential clients’ needs?
- Are we designing and delivering technical assistance in flexible, connected, and entrepreneurial ways?
- Are we seeking non-traditional sources of our own capital that gives us greater ability to flex to customized client needs?
With support from the W.K. Kellogg Foundation and research partnership from the Racial Equity Asset Lab (The REAL), this project explored the experiences — both good and bad — that nonprofits had while working with CDFIs. It also examined the successful steps that some local and national CDFIs have taken to address inequity within their own lending practices.
Learning from Other Organizations That Are Working to Address Inequity
Several organizations interviewed for this report spoke of the importance of building relationships, being present in many ways, and listening and learning about what prospective clients want and need. This effort will often be led by staff who do not have explicit lending responsibilities, or is done in partnership with lending staff as part of initiatives that are oriented around community needs rather than exclusively focused on loan production.
For example, Invest Detroit created the Strategic Neighborhood Fund, an initiative with the City of Detroit, that focuses investment in 10 different neighborhoods across Detroit through four pillars of investment: 1) patient loan capital for commercial corridor development projects, 2) catalytic park investment in local parks, 3) streetscape improvements along the historic commercial corridors, and 4) housing stabilization through strategic grants.
And some CDFIs described how they have taken a flexible approach to capital in order to meet the needs of community-centered borrowers.
For instance, ProsperUs Detroit has responded to the needs of early-stage Black-owned small businesses by designing an uncollateralized small business product, while Nusenda Co-op Capital in New Mexico empowers its 18 partners to design their own loan structures, recognizing both the diversity of effective approaches and the necessity that they be community-rooted.
For more information, read the full report (PDF).
About Nonprofit Finance Fund
Nonprofit Finance Fund® (NFF®) is a nonprofit lender, consultant, and advocate. For more than 40 years, we’ve worked to strengthen nonprofit organizations and improve the way money flows to social good. We believe that alongside others we must build a more equitable and just social sector, and are committed to helping community-centered organizations led by and serving people of color access the money and resources they need to realize their communities’ aspirations.
As a community development financial institution (CDFI), NFF manages a portfolio of over $393 million. Since 1980, we have provided over $1.1 billion in financing and access to additional capital in support of over $3.5 billion in projects for thousands of organizations nationwide. To learn more, visit https://nff.org.
About Capital Impact Partners
Capital Impact is transforming how capital and investments flow into communities to provide people access to the capital and opportunities they deserve. A nonprofit Community Development Financial Institution (CDFI), we work to champion key issues of equity and social and economic justice by deploying mission-driven financing, capacity-building programs, and impact investing opportunities. Capital Impact is now part of the Momentus Capital branded family of organizations, including CDC Small Business Finance and Ventures Lending Technologies. Collectively, we offer a continuum of financial, knowledge, and social capital to help local leaders build inclusive and equitable communities and create generational wealth. This includes a comprehensive package of loan products, impact investment opportunities, training and business advising programs, and technology services that advance locally-led solutions.