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These Alternative Banks Could Be the Key to Shrinking the Racial Wealth Gap

Black community development financial institutions face challenges despite an influx of cash from federal corporations and foundations in 2020.

Data shows that over a 10-year period, more than 330 Black community development financial institutions funded 63,000 jobs, 160,000 affordable rental housing units, and 515,000 educational facilities for minority and underserved communities. (Getty Images)

Following the racial justice protests of 2020, several financial corporations and foundations promised to make investments to advance racial equality. Companies such as JP Chase Morgan, Mastercard, and Citi Foundation poured millions of dollars into Black community development financial institutions (CDFIs) as white business leaders reckoned with the ways systemic racism has impaired economic progress in many Black communities.

But nearly three years later, the nation’s racial wealth gap remains. The median net worth of Black families is about $24,000, in comparison to $188,000 for white families. And the typical wealth of a white family is eight times the wealth of a typical Black family, according to data from the 2019 Survey of Consumer Finances. 

Read more: What’s Missing in Financial Literacy Courses in School? Experts Explain.

Banker Lenwood Long Sr., co-founder and president/CEO of the African American Alliance of CDFI CEOs, said the financial investments fell short because Black banks have been affected by the racial asset gap.

“For every dollar we have, white CDFIs get six. We still get trickle-down economics. We still get crumbs,” Long said. “We’re the under-resourced serving the under-resourced.”

CDFIs are full-service banks that offer checking accounts, mortgage and small-business loans, and funding for infrastructure projects such as affordable housing and community facilities. Unlike a traditional bank, community banks must ensure 60% of their financial activities serve at least one low-income community. They also work with customers deemed high risk, meaning they may have limited or poor credit history.

The systemic racism Black communities face means businesses don’t have much equity or collateral, Long said. As a result, Black people are deemed high risk, but it’s because they don’t have as many  economic resources as white businesses do, he added. Experts say investors use this as an excuse to not invest.

More than 150 years after philanthropists, ministers and entrepreneurs discussed the need for Black-owned or led banks, they could be a crucial part of closing the wealth gap, some experts say. 

Why does history still matter?

After the Civil War, Black soldiers and emancipated people needed a place to secure their savings.

In March 1865, President Abraham Lincoln made the vision a reality when he signed legislation to create the Freedman’s Savings and Trust Co. — or the Freedman’s Savings Bank — a savings bank for freed people and their descendants. 

But, the decline of the economy, mismanagement, and fraud by white financiers who oversaw the bank culminated in the demise of the Freedman’s Savings Bank, leaving thousands of Black people without savings and a distrust for the banking system. Despite the setback, Black people created their own credit unions and banks in an effort to provide credit, job training, and financial education to their communities. 

One model Black lenders used: CDFIs, which are mission-driven banks, credit unions, nonprofit loan funds, and venture capital funds rooted in community development to combat financial exclusion. With this model, Black CDFIs have been able to increase community wealth for entrepreneurs and Black families for decades. However, they are particularly challenged with raising capital.

The U.S. Treasury Department hoped to tackle this issue in 1994 through the Riegle Community Development and Regulatory Improvement Act, which established the CDFI Fund that provides loans, technical assistance, and financial services to CDFIs. However, Black-led CDFIs continue to receive less federal funding and acquire fewer assets, which limits their reach to provide financial services.

How do CDFIs actually work?

To become certified as a CDFI, the financial institutions must be committed to increasing financial access to people and businesses in economically distressed communities. While CDFIs rely on public and private funding, the designation from the Treasury Department allows them to receive federal grants under the CDFI Fund. 

However, Black banks, which are also known as minority depository institutions (MDIs), don’t have the capital to sustain economic hardship because they lack access to capital markets that mainstream traditional banks have, said Nicole Elam, president and CEO of the National Bankers Association, formerly the Negro Bankers Association. 

Read more: Struggling to Talk About Money? Here’s a List of Resources to Teach Financial Literacy.

White-led CDFIs hold six times the amount of assets than Black-led CDFIs, according to a Hope Policy Institute analysis of federal data. In 2017, minority-led CDFIs had $5 billion in total assets, while white-led institutions had $35 billion in total assets. Of the 315 CDFIs that received awards from the CDFI Fund, minority-led institutions received 26%. 

Other than funding, Black CDFIs struggle to market themselves because they don’t have the budget for it, Elam said. While most people may not know the term CDFI, they know the banks that exist in their communities — but may not know the additional services they provide.

Since 2001, Black banks have declined by more than half. Of the 144 MDIs, only 21 are Black. About 20% of the 1,300 CDFIs are Black owned, according to respondents of the Congressional Research Service’s 2020 annual certification report.

As a small institution, CDFIs have a limited staff and have struggled to keep up with demand since 2018. A 2019 survey by the Federal Reserve found that more than 80% of CDFIs said limited staff hindered their performance, and 44% cited a lack of necessary skills. About 32% of CDFIs received more loan requests than they could fund.

“Capital is what these banks need to survive and thrive and lend to their communities,” Elam said. “When you have an economic downturn, Black and brown communities are hardest hit, and you find them having to close their doors because they don’t have the capital they need to sustain economic hardship.”

But do we still need them?

With many banking options today, Elam said funders don’t think “there’s a need anymore for Black banks” because they don’t see them as profitable. 

Research shows the opposite, however.

Over a 10-year period, more than 330 Black CDFIs funded 63,000 jobs, 160,000 affordable rental housing units, and 515,000 educational facilities for minority and underserved communities. The success of CDFIs show that race and gender “do not serve as sufficiently reliable measures of financial performance” and investing in people of color by financing their homes and businesses is profitable,” according to an August 2022 report by the Congressional Research Service.

Since CDFIs aren’t traditional financial institutions, it is difficult to measure how well they are helping Black people because their customers face greater “income volatility and would be expected to fail more often than conventional borrowers,” the report said. And data collection around these institutions remain unknown.

The lack of data and the myth of not being profitable pushes large corporations and traditional banks from investing in lower-income communities, Elam said. But the primary goal for Black banks isn’t profit, but to educate, empower, and finance Black communities through coaching and relationship banking. As a result, Black leaders are able to look beyond a person’s credit score or other data and analyze the history of their community to determine what resources are best for them rather than rejecting their loan application, for example, she said.

“[Leadership] may understand the fact there is a history of redlining in this community, and so maybe the small-business owner may not have a mortgage but consistent rent payments to approve them for a loan,” Elam said. “This is the challenge that isn’t always scalable.”

Recognizing the hurdle of sustainability, Long convened with about 20 CDFI CEOs in 2018 to address the racial wealth gap, funding challenges, and “edify and build each other up.” An idea birthed from that meeting: the coalition for Black leaders of CDFIs. Since then, the organization has received grants from foundations and banks, including the Kresge Foundation and U.S. Bank, to support staff training, professional development, and technology advancement for CDFIs across the country.

What’s the benefit of CDFIs?

For Black people, banking with Black-led CDFIs leads to more loan approvals than from other institutions because Black banks make capital more accessible. Because they focus on relationship building, Black people who lead CDFIs know the challenges facing their customers, which helps them tailor their programs or products to meet customers’ needs. 

In the rural South, Black residents in Drew, Mississippi, a predominantly Black town of about 2,300 people, struggled to get groceries since the closure of their supermarket in 2014. Drew is considered a food desert, and in order to grocery shop, residents would drive or carpool 20 miles to Walmart in Cleveland.

In 2021, the community group Drew Collaborative reached out to Hope Credit Union, a Black-owned CDFI focused on Alabama, Arkansas, Louisiana, Mississippi, and Tennessee, to create an online grocery store where residents order their items and either pick them up at a local warehouse or have them delivered.

In New York, Carver Federal Savings Bank, a Black-owned community bank, provides free financial coaching and legal assistance for small-business owners with fewer than 20 employees, said Lloyd Doaman, executive director of Carver Community Development Corp., a subsidiary of the bank.

Through a partnership with the Society for Financial Education and Professional Development Inc., the bank is able to train student ambassadors to teach financial literacy to their peers at three HBCUs: Medgar Evers College, Howard University, and University of the District of Columbia. So far, over 1,000 students have been trained. Currently, the institution is planning to host workshops and training centered around financial literacy and an introduction to banks for local schools and community organizations.

“If you’re talking to a young person that is not familiar with the banking system, it’s important to share with them who we are as a bank, and what we provide and why this is important,” Doaman said. “Ultimately, it helps with wealth generation, and we all understand and know that there is a huge wealth gap in our communities, and financial education is one of the ways that we can bridge that wealth gap.”