I’ve recently joined the board of Washington CASH – Community Alliance for Self Help. They do a Grameen Bank micro lending model here in Washington State. This means that while loans are made to individuals, they must be signed off on by a peer lending group who is responsible for helping to pay it off. A distinguishing characteristic of these loans is that they are collateral-free. Thus they’re loans that regular banks can’t do. “Regular” Banks, particularly those that have FDIC deposit insurance, have rules about how risky they can get with their investing. Thus there’s a market need for institutions able to take bigger risks in categories that aren’t likely to interest private investors.
It’s actually tricky to do for two reasons: 1) our business economy is much more formalized – you can’t just go out on a corner outside the Mariners game and hawk your home-made snack. We have complex permitting, licensing and taxing that developing countries don’t have (or don’t enforce well). 2) lending groups in developing countries are often villagers who have many relationships. Here lending groups are formed by strangers brought together for 8 week classes. Obstacles aside, WA CASH is now in it’s 10th year of operation and has helped many businesses get off the ground, some of which have grown to have multiple employees. I’m looking forward to learning this area better.
As part of serving this category of need WA CASH is an official Community Development Financial Institution (CDFI), a class of institution that had attracted my attention because of the community focus. Shorebank Enterprise Pacific is a CDFI. To get clarity, I did a little bit of research into exactly what this means.
The Community Development Financial Institution is a designation created by Congress in 1994. Organizations apply to the Department of the Treasury for the designation, which must be renewed every 3 years. It can be renewed indefinitely. The CDFI designation makes an organization eligible to apply for federal funds via the CDFI program. Further the designation means that banks can count grants and loans to your org towards their Community Reinvestment Act requirements. By partnering with a bank the bank can apply for a Bank Enterprise Award (BEA).
To be a CDFI your org has to meet the following requirements:
Be a legal entity at the time of certification application
Have a primary mission of promoting community development
Be a financing entity
Either regulated, such as a bank, credit union, thrift
Or unregulated, but demonstrate that your activities are primarily financial based on your staff time and your capital uses.
Examples: Bank or Thrift, Credit Union, Depository Institution Holding Co (this seems to mean being the holding company of a bank, all affiliates must meet the requirements), A loan fund, A community development venture capital fund
Primarily serve one or more target markets
the target market has a geographic designation
the target market is a LITP – Low Income Targeted Population which means 80% of Area Median Income or less (area either being the state or the local urban area)
the target market is an OTP: Other Targeted Population; “Identifiable groups of individuals in the applicant’s service area for which there exists a strong basis in evidence that they lack access to loans, Equity Investments and/or Financial Services.” These categories seem to primarily be racial.
Provide development services in conjunction with its financing activities
Development Services are technical assistance or training activities that prepare borrowers to access the organization’s Financial Products. Examples include credit and/or homebuyer counseling, business plan development, or business finances training.
Maintain accountability to its defined target market
A CDFI Certification Applicant must demonstrate that it is accountable to its designated Target Market(s). A CDFI can demonstrate accountability through either its Governing Board, Advisory Board, conduct of focus group and/or community meetings or surveys within the Target Market.
Be a non-government entity and not be under control of any government entity (Tribal governments excluded).
WA CASH focuses on a category of business called “microenterprise”. The Association for Enterprise Opportunity (AEO) says “AEO and the microenterprise development industry have defined a microenterprise as a business with five or less employees, which requires $35,000 or less in start up capital, and which does not have access to the traditional commercial banking sector.” According to another footnote on their website, this is in line with the SBA microloan program which makes loans up to a maximum of $35,000 (raised from $25,000 in 2000).
All on a very different scale than angel investing, where companies seem to be raising a minimum o f 3 million. All about capital structure and business model, though it’s hard to not also notice that one group is primarily white men while the other is primarily women of color. Long lines of history lead to here, how do we move towards a different future?