The Broader Market

by Jordan Eizenga

A recent paper from the San Francisco Federal Reserve Bank provides a fairly good assessment of the relationship between conventional lenders and CDFIs, which I wrote about a few weeks back.  The most notable part of this paper was the long term benefit of CDFI lending practices to larger financial institutions that engage in small business lending.  The authors write:

Underlying the bank-CDFI relationship is an assumption that the CDFI will refer stronger, more bankable borrowers to the bank in the future, often after those companies have built their credit history with the CDFI…..[B]anks want to ensure that the CDFI sends them bankable CDFI “graduates” for small business lending services.

The point is simple: big financial institutions can increase their customer base through lending to CDFIs.  CDFI credit products allow low income and asset borrowers to grow to a point at which these borrowers now require more comprehensive and sophisticated financial services typically offered by larger, conventional financial institutions.