What's a community development financial institution? Knowing the answer could be key to a community's progress

The main obstacle to economic development in many rural areas is a shortage of capital for investment. One source of capital can be a community development financial instiution, one of the most important sources of venture capital in poor places. They invest federal and private-sector money in start-ups and other projects in economically disadvantaged communities.

The U.S. has more than 1,000 CDFIs, but “I don’t think they’re very well understood,” said Betsy Whaley, chief strategy officer the Mountain Association, a CDFI for Appalachian Kentucky. “Most projects couldn’t be funded by a traditional bank; banks won’t fund start-ups; they just won’t.”

The role of CDFIs in fighting rural poverty is being explored in a series of articles in Nonprofit Quarterly, co-produced by Partners for Rural Transformation, a coalition of six regional CDFIs in Appalachia, the rural West, Indian Country, South Texas, and the Mississippi Delta.

"CDFIs strengthen local economies, generate wealth that sticks, and foster agency and power among local people to determine their destinies. This is true in urban areas and, critically, rural communities," writes PRT President Jose Quinonez, who offers examples, starting with this one:

"In 2018, a nurse practitioner with over a decade’s experience opened an urgent care facility in her hometown of Clarksdale, Miss. When committing to opening the clinic, she was ready to invest her savings to open the facility, but she had no idea it would be so difficult to obtain the rest of the necessary financing. She had a strong business plan and the medical skills to succeed, but still faced difficulties getting banks or state agencies to back her. When she finally got a loan approved, the loan conditions included putting a second mortgage on her home, which she agreed to do. But home values in Clarksdale were so low that her house fell short of the minimum appraisal value, and the loan fell through. This is where Communities Unlimited stepped in, providing a small loan and technical assistance. Now, the urgent care center employs nine people and pays good wages in a community with low incomes and high unemployment. Moreover, the business provides critical services to an area with few health-care options."