CDFI certification could help new financial institutions meet capital requirements

Written by Tom Feltner on April 7, 2010 - 12:00am

In the current economic environment, one of the most significant challenges for a new financial institution is raising the substantial level of capital required to begin operations.  Currently, a financial institution must be operating to receive certification and be eligible for funding from the Community Development Financial Institution (CDFI) Fund.  A recent Woodstock Institute request to Treasury asked to change this policy and allow financial institutions planning to operate as a CDFI to qualify for funding.

Since funding from the CDFI Fund is an extremely competitive process, and it is important that resources be directed to those organizations best able to use of funding to meet the financial needs of low-wealth communities, Woodstock proposes that additional criteria be included to ensure that new financial institutions applying for funding have, as their primary purpose, the financial needs of low-wealth people.

 

These criteria could include:

Does the financial institution have the primary purpose of providing financial services to the underserved and is this purpose clearly delineated in its charter application?

Does the financial institution’s offering circular make clear to prospective investors that the financial institution is a community development bank, and detail the mission-related scope of its services?

Will the financial institution have, as its primary customers, low-wealth people or people living in low-wealth communities, and will it be located in a low-wealth census tract?

As the capital thresholds for new financial institutions increase, accessing funding from the CDFI Fund could play an important role in the creation of new CDFIs if this proposal is adopted.

 

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