How does community investing work?
Community investing utilizes investor capital to finance or guarantee loans to individuals and organizations that have historically been denied access to capital by traditional financial institutions. These loans are used for housing, small business creation, and education or personal development in the U.S., or are made available to local financial institutions abroad to finance international community development. The investment process begins when an investor makes an investment into a Community Investment Institution (CII), an intermediary that accepts investor capital and provides financial services to the community it serves. In turn, the CII lends capital to credible individuals and community organizations and provides training and support to ensure the success of the loan. At the end of the investment term, the investor receives her or his principal plus returns from the CII.
What is a CDFI? How is it different from a CII?
Community Investment Institution (CII) is the umbrella term for the many different financial institutions that do community investing. Community development financial institutions (CDFIs) are the primary type of institution for community investing because they are specifically designed to accept investor capital and carry out community development work.
CDFIs are federally certified financial institutions that accept investor capital and extends or guarantees credit to low-income individuals for endeavors with a community development or personal advancement focus. CDFIs include banks, credit unions, loan and guarantee funds, and venture capital funds. For a more detailed explanation of these different institutions and the investment products they offer, see Community Investing Products.
What are the community investment products available to me?
There are numerous community investing products offered by different types of CIIs. The primary community investing options are offered by community development financial institutions (CDFIs), consisting of banks, credit unions, loan and guarantee funds, and venture capital funds. Investors can open savings, checking, IRA, and money market accounts at the banks and credit unions, and make debt and equity investments in the loan funds and venture capital funds. For a more detailed explanation of the community investing products available to you, click here
Are Community Investing Institutions (CIIs) stable financial institutions?
CIIs have proven safe and attractive for many investors, but there are risks. Community development banks and credit unions are federally insured per depositor up to at least $100,000, just like traditional banks and credit unions. The community development loan funds and venture capital funds are not insured or regulated, but do employ lending and management strategies that ensure their stability, and also have credit enhancements. Investors who are considering investing in a particular CII should visit our section on Evaluating Risk for a complete due diligence primer for assessing the risk of CIIs. Investors should also contact the CIIs directly to ask specific questions regarding their stability as an organization.
How liquid are community investments?
It depends on the type of investment. Savings, checking, and money market accounts in community development banks and credit unions have no minimum term and are liquid investments. Certificates of Deposits do have terms of one month or more, and may or may not be considered “liquid” depending on the portfolio of the institution or individual. Investments in community development loan funds and venture capital funds are generally not considered to be liquid and have terms that are chosen by the investor at the beginning of the investment.
Are community investments tax deductible?
No. Community investments earn competitive returns, like non-community development investments, but also produce a social return that is attractive to investors and helps communities in need.
Where can I learn more about specific Community Investing institutions and products?
In our Community Investment Database you will find financial and social impact information on more than 500 CIIs.
What does community investing “impact” refer to?
Community investing “impact” refers to the positive changes community investing makes in the lives of low-income individuals and on the economic structures that perpetuate poverty. CIIs focus their community development work on different outcomes, such as the construction of affordable housing, financing of small businesses, or promotion of woman and minority ownership. Click here to read more about the domestic and international impact being created by community investing.
What rates of return can I expect from my community investments?
Community development banks and credit unions often have savings, checking and money market accounts; Individual Retirement Accounts (IRAs); and Certificates of Deposit (CDs) that earn market-rate returns. The returns on these products vary depending on the type of investment and for CDs, the investment term. For current rates of return, contact the banks and credit unions directly. Click here to search our investment finder database for local community development banks and credit unions.
The returns on investments in community development loan funds are set by the investor and the loan fund at the beginning of the investment, and usually range between 0-4%.
Investments in venture capital funds finance promising new businesses, and returns are dependent on the success of the businesses and can vary greatly.
Are community investments federally insured?
All investments in community development banks and credit unions are federally insured up to at least $100,000 per depositor, just like in traditional banks and credit unions. Some community development banks are able to offer federal insurance on deposits up to $15 million using the Certificate of Deposit Account Registry Service program. Investments in community development loan funds and venture capital funds are not insured, nor are they regulated. However, they do have credit enhancements and employ lending strategies and business practices that mitigate investment risk. See our section on Evaluating Risk for an overview of investment risk and a complete due diligence primer for CIIs.
What risks are involved in community investments?
As with any investment, there are risks involved in community investments. Investing in community development banks and credit unions is considered low-risk and are insured up to at least $100,000 per depositor. Community development loan fund or venture capital investments have different risks that investors need to be aware of, but these institutions have plans and practices built into their operations that mitigate risk. Investors should carefully evaluate the risks as they would for any other investment and request appropriate materials such as a prospectus from the CIIs. For an overview of the risks associated with community investments and a primer on due diligence, see Evaluating Risk.
What are the benefits for my institution or firm?
Portfolio management firms, mutual fund companies, and institutions reap many rewards from doing community investing. Community investing allows portfolio managers to serve their clients in a more personal manner, mutual fund companies to gain marketing advantage, and institutions to take part in strengthening their local communities and put their mission statements into action.
Is community investing part of a federal program?
No. Investments in CIIs are investments in private, for-profit or non-profit, financial institutions.
All investments in community development banks and credit unions are federally insured up to at least $100,000 per depositor, just like in traditional banks and credit unions. The federal government does support community investing by directing federal funds into CIIs through the CDFI Fund, and creates incentive programs such as the New Markets Tax Credit that encourages private financial institutions to invest more capital in CIIs.
Can I speak to other financial professionals who have experience in this field?
Yes, please contact the Community Investing Program.
Where on this website should I begin?
To learn more about specific CIIs, the products they offer, and their community development work, go to our Community Investment Database. For those investors who need more background on how community investing works, start with the Overview; or for information specific to the type of investor you are, see For Investors.