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Funding: Invest in Local Financial Institutions (Federal, State, Local)

Community banks, community development financial institutions (CDFIs), and minority depository institutions (MDIs) are important sources of capital for new and small businesses. Yet consolidation in the banking industry has exacerbated gaps in capital access for new and small businesses, especially those owned by entrepreneurs of color. The number of community banks declined by more than 2,000 from 2008 to 2018; the number of MDIs went from 164 at the end of 2001 to 143 at the end of the third quarter of 2020. The number of Black-owned banks declined by more than half between 2001 and the third quarter of 2020, from 48 to 20. To improve access to capital, policymakers should:

  • Expand the U.S. Treasury Department’s CDFI Fund to help CDFIs scale and lend to more new and small businesses in their communities.
  • Encourage the capitalization of local financial institutions by backstopping “equity-like” investment in CDFIs and MDIs and strengthening investor tax credits.
  • Provide technical assistance and funding to help CDFIs expand operations.
  • Work with philanthropic organizations to create funding pools that reduce risk and interest of CDFIs’ short-term lending to businesses not eligible for SBA loans.
  • Establish community deposit programs or expand existing community deposit programs to facilitate greater lending to new and small businesses.
Supporting Evidence
  • While only 22% ($1.8 trillion) of bank loans in 2014 came from community banks, these local financial institutions accounted for more than 50% of all small business loans.
  • Analysis of early lending through the Paycheck Protection Program (PPP) found that more PPP loans were made in states where small local banks have a bigger share of the market.
  • From 1994 to 2019, the CDFI Fund awarded nearly $3.6 billion to CDFIs. With an annual budget of $250 million in 2019, the CDFI Fund helped spur the financing of more than 19,000 businesses in underserved areas that lacked access to traditional lending.  

Rhode Island’s BankLOCAL is a community deposit program that was established in 2017 and expanded by $10 million in November 2019 to $30 million. The program deposits a 2-to-1 match for small business loans made by local financial institutions to encourage greater lending to local businesses. Thus far, it has matched almost 350 small business loans, totaling over $37.5 million. Women, minority, first-time, and military veteran entrepreneurs have received 32% of these loans. In 2020, minorities accounted for only 27.6% of all SBA 7(a) loans.