CDFIs are small, local banks that have strong connections to the communities they serve. Most are nonprofit institutions and are considered to be of the community and for the community. According to Ellen Seidman, they know local needs, can better anticipate changes and have more flexibility. With a strong interest in the success of their borrowers, they are in the business of "community conservation."
CDFIs operate in communities that the Milken Institute classifies as emerging domestic markets: poor and marginalized areas often characterized by bigger minority populations. Larger, mainstream banks generally don't invest in these areas because of the misplaced perception of risk, Seidman said. George McCarthy reinforced her point, saying that "risky" groups are not really risky if the loans are properly made and managed. He added that the notion of blaming the current banking crisis on subprime loans to risky groups of borrowers did not hold up after examining the facts.
Doug Bystry knows this well because he runs an extremely successful for-profit CDFI in California that has grown while other lending institutions have been floundering. Bystry incorporated as a for-profit firm rather than a nonprofit because he thought it would be easier to attract capital. His loan officers use guidelines that encourage them to say "no" when necessary. By engaging in good business practices, he has shown that these emerging markets are viable.
David Sand agrees. His firm, Access Capital, provides money management services for CDFIs. It only invests in double bottom-line activities, and officials do their homework before providing securities. Unlike many of his industry counterparts, Sand ensures that they only provide securities backed by real, underlying collateral. They take the time to ask the right questions and ensure the value of their activities. As a result, Access Capital has grown 22 percent since December 2008.
Phaedra Ellis-Lamkins provides green jobs as a career ladder for people from these communities and thinks the time is right for large-scale job creation within this sector. Her firm, Green for All, looks for areas with new net jobs and dirty industries that are transforming themselves into green ones.
One challenge is access to capital. While testifying before the House Appropriations Committee on this issue, she noted, many "Republicans don′t believe in global warming, but they want to be part of the solution if it means new jobs for their constituents." New jobs in recycling, waste management and the logistical functions of a green economy will increase the economic activity within these "emerging markets" and lead to real economic growth, she said.
The panelists agreed that as long as credit markets remain frozen, the economic woes will continue. But CDFIs have been doing well in areas where financial success was least expected. In fact, McCarthy said CDFIs were created to fill the gap left by the large financial institutions that refused to serve poor communities. However, CDFIs will not be able to "scale up" and solve our financial problems. Perhaps the real lesson for larger, struggling financial institutions is that they can perform better by following the example of CDFIs: stick to the basics of good banking.