Banks can help in Underinvested Economies

Banks can help in Underinvested Economies



Aug. 2007  - In 1973, ShoreBank pioneered 
the concept that a bank focused on lending in underinvested minority 
communities could help reinvigorate local economies, making a profit while 
creating a better future for the neighborhoods it serves. Thirty-four 
years later, the practice of community development banking has come of 
age.

  
ShoreBank now invests more than $1 million each day in community 
development and conservation loans. In addition, 62 community development 
banks across the country now work toward the same goals. Like ShoreBank, 
these institutions engage in the practice of community development 
banking, providing residents and businesses in communities often ignored 
by traditional banks with access to fairly priced, equitably underwritten 
credit products. 
The socially responsible investment community is a critical resource of 
capital for community investing. In response to the Social Investment 
Forum's challenge to socially responsible investors to place one percent 
of SRI assets in community investing, investments at Community Development 
Financial Institutions (CDFIs) have nearly quintupled from the $4 billion 
identified by the Social Investment Forum a decade ago. 
Between 2003 and 2005, investment in CFDIs grew by 40 percent to $19.6 
billion, according to the Social Investment Forum's 2005 Report on 
Socially Responsible Investing Trends in the United States.
The Challenges Facing CDFIs Today 
As we look forward to the next 15 years, the widening gap between 
America's rich and poor means that community development banking will face 
new challenges, even as the need for financial services in low-wealth 
communities increases. 
The FDIC estimates that more than 10 million American households are 
unbanked or underbanked; among immigrant workers, this percentage is 
estimated to be much higher. Individuals without access to the banking 
system pay excessive fees for basic financial services and are a prime 
market for predatory lenders. 
To address these and other issues facing low-wealth communities, community 
development bankers will be asked to innovate with new products for 
residents and local businesses. Creativity will be needed to develop 
products that can connect unbanked individuals to the mainstream economy. 
This challenge is further complicated by the lack of trust in traditional 
financial institutions demonstrated by many of the unbanked. The ability 
to offer fairly priced and equitably underwritten products will be key to 
rebuilding a covenant between communities and their banks. 
Community development banks will need to look different, be located in new 
and more accessible places, and offer convenient technology as well as 
access to employees who are trusted members of the communities they 
service. 
The Role of Socially Responsible Investors 
One of the prime tasks that community development banks perform is to 
import capital into underserved communities by gathering deposits in the 
mainstream national marketplace and deploying them as loans in the 
communities they serve. 
The socially responsible investment community has become more aware that 
it needs to be a source for these deposits if community development banks 
are to meet the growing need for credit in underinvested communities. As a 
result, deposit levels at community development banks have grown 
significantly. 
To take this growth to the next level, the investment community and 
community development banks will need to continue working together to 
create products that meet the needs of larger investors, expand the 
ability of financial professionals to assist their clients in supporting 
community development banks, and find distribution channels that can 
leverage more retail deposits. 
The first steps have been taken. Domini Social Investment showed 
thoughtful leadership in 1994 when they established the Domini Money 
Market Account at ShoreBank; this account deploys millions of dollars in 
deposits into community investing. 
The creation of the CDARs program, which offers up to $30 million of FDIC 
insurance to a single customer, has been a tremendous leap forward for 
larger investors. Calvert Foundation's Community Investment (CI) Notes is 
the first product that can leverage the large mainstream broker network to 
gather retail investments. 
These efforts, however, are only first steps toward meeting the needs of 
the diverse SRI investor community. Collaboration must continue in order 
to create the rich product line needed to ensure that community 
development banks have the funds available to meet growing loan demand. 
The Future of Community Banking: New Problems, New Solutions 
One of the most significant developments in banking today is the growing 
popularity of the high-yield savings account introduced by ING Direct. 
This product has redefined consumer convenience and recalibrated savings 
account interest rates. Community development banks may find this an 
opportunity to collect more deposits from the national marketplace. As 
high-priced savings accounts become standard product offerings, however, 
the banks will also have to find ways to cope with their impact on profit 
margins. 
Community development bankers can best respond to shrinking profit margins 
by embracing technology that improves operational efficiency. This change 
will help reduce the cost of administration and overhead. 
Equally important, however, is the improvement to customer service that it 
will provide. The overall impact should be to give smaller community 
development banks access to the national mainstream marketplace, a new 
resource for the capital needed to fund loans. 
Finally, community development banks must address the new set of issues 
presented to low-wealth communities by global warming. The cost of energy 
for heating and air conditioning will increase just as the climate change 
predicted by scientists is causing new and more severe weather patterns. 
As we saw with Katrina, the impact of climate change is likely to fall 
disproportionally on low income and minority communities. 
Community development bankers will be called on both to educate their 
customers about the need for energy conservation and to finance 
conservation loans that can help lower energy usage and make buildings 
more affordable. 
The community development bank of the future will value its conservation 
lending as much as its double bottom line of community development lending 
and profitability. 
So, what will the community development bank of 2022 look like? We can 
imagine a community where individuals walk or bike to a local kiosk to 
make deposits, apply for loans, or just talk with a banker about their 
financial needs. The kiosk will probably be driven entirely by technology, 
but the ability to talk face-to-face with a trusted banker will be just a 
phone call away. 
Because currency usage will be rare in the U.S., underinvested communities 
will have a greater need for community development banks to connect them 
to the mainstream economy with online checking accounts, debit cards, 
credit cards and fairly priced loans. Local businesses will rely on the 
community development bank to finance their expansion, help manage their 
cash flow, and provide the loans needed for new building. 
The community development bank will require all property loans to include 
energy-conservation features, and will provide the information customers 
need to make wise decisions about energy-efficient upgrades. 
A much larger number of the working poor will be older as the baby boomers 
begin to enter their 70s. Community development bankers will adapt 
customer service practices and loan products to the needs of low income 
seniors that face difficult health care decisions, reduced housing choices 
and the need to continue working well into their late 70s. 
Community development banks will be numerous and located in most cities. 
Underinvested communities will become hubs of economic activity and the 
location of new business start ups. 
Investment dollars will flow in to community development banks as savers 
from all over the U.S. use the convenience of online banking to act on 
their preference to bank with a community development bank, because they 
will want to be sure their savings are being used to create economic 
development and a healthy environment. 

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