Sandy Gerber - Community Development Senior Project Manager
Published September 1, 2008 | September 2008 issue
A community development financial institution (CDFI) is an organization that provides loans and financial services to underserved communities. CDFIs were created to bridge the lending gap between low- and moderate-income neighborhoods and mainstream financial institutions.
Some CDFIs are organized as community development banks, while others come in the form of community development credit unions, loan funds, or venture capital funds. CDFIs get their money from banks, corporations, foundations, individuals, governments, and faith-based institutions. The single largest funding source for CDFIs is the CDFI Fund, a program of the U.S. Department of the Treasury. The CDFI Fund certifies CDFIs and awards them resources through a competitive application process. (For more on the CDFI Fund, see the sidebar below.)
CDFIs have a successful track record, as indicated by fully deployed capital and the production of jobs and affordable housing, and they tend to be financially sound. For example, at the end of fiscal year 2005, the loan loss ratio for all certified CDFIs was only 0.3 percent, or $6,799,247 out of $2,711,161,088 in total outstanding loans.1/
According to Mark Pinsky, president of a CDFI membership organization called Opportunity Finance Network, CDFIs have helped banks reassess their perception of risk in underserved markets. As Pinsky noted in a 2005 interview, "CDFIs show that if you lend or invest wisely, it's possible to provide a solid return to your investors and manage capital responsibly while connecting nonconforming customers to the economic mainstream."2/
Many CDFIs have become specialized in serving particular populations or geographic areas. For example, a CDFI might focus on providing affordable housing to recent immigrants or making small business loans within a designated county. A subset of the CDFI field specializes in providing loans and financial services to Native communities. The Ninth Federal Reserve District is home to a large proportion of Native CDFIs, and one Ninth District state in particular—South Dakota—is an important proving ground for the Native CDFI field. In this article, we trace the development of CDFIs and share specific information about several Native CDFIs in South Dakota.
The origins of CDFIs date back several decades. In the 1960s, the federal government established the Office of Economic Opportunity to support antipoverty initiatives in urban and rural communities. Some of these initiatives, such as Community Action Programs (CAPs), promoted citizen engagement and community control. CAPs gave rise to community development corporations (CDCs) and CDFIs arose out of the necessity to secure financing for the grassroots economic development efforts of CDCs. ShoreBank in Chicago, which was founded in 1973, is often cited as one of the earliest CDFIs.3/
Throughout the 1970s, the movement to revitalize low-income communities gathered momentum as major institutions stepped forward to provide support. CDCs got a significant boost from the Ford Foundation, and CDFIs expanded their funding sources through contributions from individuals and faith-based organizations. Federal agencies, including the U.S. Department of Housing and Urban Development, the Department of Agriculture, and the Economic Development Administration, launched business development loan funds. Community development banks and credit unions were organized during the decade as well.
The growth of the CDFI field accelerated in the 1990s, spurred by two events. The first was the establishment of the CDFI Fund in 1994. The second event occurred in 1995, when the Community Reinvestment Act (CRA) was revised. The CRA requires depository institutions to meet the credit needs of their entire communities, including low- and moderate-income neighborhoods. Under the revised rules, banks could get CRA credit for lending to and investing in CDFIs. In addition, the rise of national CDFI intermediaries and trade associations such as Opportunity Finance Network provided an advocacy, policy, and technical assistance arm to the burgeoning CDFI movement. There are now approximately 800 certified CDFIs across the U.S., according to the CDFI Fund, plus many additional CDFIs that have not sought or received certification.
While the 1970s through the 1990s saw rapid growth of CDFIs across the U.S. as a whole, American Indian reservations were experiencing a different reality. As of 1999, there were only two Native-focused CDFIs in the country, despite the fact that most Indian reservations are made up of low- and moderate-income communities—the very market that CDFIs were created to serve.
In November 2001, the CDFI Fund released a comprehensive report on lending in Native communities titled The Report of the Native American Lending Study (NALS) that described 17 major barriers to accessing capital for business development, homeownership, facilities construction, and other major projects on Indian reservations. Specific barriers included a lack of financial institutions on or near Indian lands, a lack of networking among Native-owned businesses and equity investors, uncertainty regarding tribal commercial laws and regulations, and a lack of technical assistance resources. The report proposed a range of remedies, including improving tribal legal infrastructure and planning processes; creating mechanisms for delivering capital on Indian lands; increasing the level of equity investment and the number of financial institutions on or near Indian lands; developing financial products and services that meet the needs of Native customers; and expanding financial literacy efforts, technical assistance, and training.4/
Following the release of the NALS, the CDFI Fund sought to increase the amount of support, financing, and technical assistance for establishing or expanding Native CDFIs (NCDFIs). As defined by the CDFI Fund, an NCDFI is a certified CDFI that primarily serves Native American, Alaska Native, or Native Hawaiian people or communities.5/
As of May 2008, the CDFI Fund recognized 49 NCDFIs in the U.S. In addition, there were approximately 100 Native-focused financing institutions in varying stages of development. The largest numbers of NCDFIs are found in Arizona, Oklahoma, South Dakota, Minnesota, and Montana. The latter three states are located in the Ninth Federal Reserve District, and one of them—South Dakota—is where the NCDFI story officially began.
As the home of several NCDFIs, South Dakota provides a window on the origins and accomplishments of the NCDFI field. The state is home to a total of eight CDFIs that focus on Native communities. Three of them are relatively new and not yet certified as NCDFIs: Cheyenne River Community Federal Credit Union, Sicangu Fund, and Teton Financial, Inc. The remaining five have received NCDFI certification: Lakota Funds; Four Bands Community Fund; Mazaska Owecaso Otipi Financial; Sisseton-Wahpeton Federal Credit Union; and First Nations Oweesta Corporation, the only NCDFI intermediary in the country. We now turn to a discussion of the history and activities of South Dakota's NCDFIs.
In 1986, Oglala Lakota Tribal College and First Nations Development Institute, a national advocacy organization for Native communities, collaborated to establish Lakota Funds (LF). LF was created as a revolving loan fund to finance small businesses on the Pine Ridge Indian Reservation in southwestern South Dakota. The CDFI Fund certified LF in 2002 and later designated it the first NCDFI in the nation.
The founders of LF cite two inspirations, one indigenous and one global. The first was wawokiye, the Lakota value of "generosity, helping without expecting rewards or payment."6/ The second inspiration was the Grameen Bank in Bangladesh, a microlending program that has become a model for antipoverty initiatives on several continents.
Around the time of its founding, LF was the only commercial lender located on the 7,000-square-mile Pine Ridge Reservation, where the per capita annual income was just over $3,500 and the unemployment rate was nearly 30 percent.7/ According to Elsie Meeks, a founder and former executive director of LF, rather than "build an economy on donations of used clothes" and other charity, the founders would focus on key roadblocks to economic development, many of them cited years later in the NALS: access to capital, technical assistance, business networks, and infrastructure.8/
LF began as a microlender. Initially, it financed artists and craftspeople and had a maximum loan size of $500. LF now offers five categories of loans, with limits ranging from $500 to $200,000, and its portfolio includes resorts, contractors, and retail shops.
LF places a heavy emphasis on entrepreneur development. The organization offers a six-week seminar on the fundamentals of business planning called the Core Four Business Planning Course. The Wawokiye Business Institute, a technical assistance affiliate that was recently established at LF, begins where the Core Four training ends. The institute's Success Coaches provide intensive, one-on-one coaching to fledgling entrepreneurs to give them the best possible chance to succeed.
To promote the financial well-being of the broader reservation community, LF conducts a six-week training course focused on personal finance, budgeting and saving, repairing credit, and reading a credit report. LF builds on the training by operating an individual development account (IDA) program through which people can open savings accounts that provide a two-to-one match for every dollar saved. The savings can only be withdrawn for asset-building purposes: a down payment on a house, funds for starting a business, or money for additional education.
Two recent LF initiatives include the 10,000 Arrows campaign, which seeks donations, grants, investments, and leveraged capital as a means of increasing LF's lending capacity, and the Oyote Woableza Otipi Project, which involves developing two new loan products, improving LF's lending and investment policies, creating partnerships in lending and technical assistance, and promoting business expansion.
Over its 23-year history, LF has made notable progress in developing a private sector on Pine Ridge. According to LF Executive Director Dowell Casselli Smith, the organization has helped establish 325 businesses on the reservation, made a total of $4,118,054 in loans, created 937 jobs, and trained more than 3,600 active or aspiring entrepreneurs.
Four Bands Community Fund (Four Bands) is an NCDFI located on the Cheyenne River Indian Reservation in northwestern South Dakota. Since the fund was founded in 2000, it has experienced tremendous growth and is now a guiding force behind small business lending, entrepreneur development, financial education, and state-tribal business development collaborations on the reservation.
According to Executive Director Tanya Fiddler, traditional Lakota values such as generosity, courage, respect, and wisdom underlie the fund's work. Four Bands is based on the concept of Icahya Woecun, or "the place to grow." The major goal of Four Bands is to expedite business development and asset building in reservation communities. Loans from the fund can be used for working capital; purchase of land, equipment, or vehicles; or construction.
Four Bands offers extensive business development training that includes an orientation class called Planting the Seeds of Entrepreneurship and a comprehensive business development class called CREATE (Cheyenne River Entrepreneurial Assistance Training and Education). In addition, Four Bands offers a financial literacy class and an IDA program and makes a special effort to reach out to youth by offering money management and entrepreneurship education in the local schools, plus a supplementary youth entrepreneur internship program.
Fiddler acknowledges the challenges her organization faces. In a statement on Four Bands' web site, she notes that from a pessimist's perspective, or "a glass half empty," the Cheyenne River Indian Reservation is made up of "very rural towns located large distances from each other and [facing] some of the highest unemployment and poverty rates in the country." However, from an "'asset-based' approach—a glass half full," the reservation is made up of "people with a rich and unique culture, art, leadership, and history."9/
To make the most of those assets, Four Bands is supporting Native Discovery, a culturally based tourism project that promotes opportunities on the Cheyenne River, Rosebud, and Pine Ridge reservations. Four Bands has worked closely with the State of South Dakota Department of Tourism to advance Native Discovery. The project's web site at www.nativediscovery.org directs prospective visitors to artists, businesses, cultural performances, maps, and group and self-guided tours. The site is offered in multiple languages in order to appeal to international tourists, who have been particularly interested in the history and culture of American Indian tribes in the United States.
Mazaska Owecaso Otipi Financial, Inc. (Mazaska), is an NCDFI created in 2004 by the Oglala Sioux Tribe Partnership for Housing (OSTPH). OSTPH is a Native Housing Development Corporation that was established on the Pine Ridge Indian Reservation in 1999 to provide mortgage loans, homeownership counseling, and support for self-help construction.
The mission of Mazaska is to decrease the cost of housing on the reservation and increase the number of homes owned by tribal members. One approach Mazaska has pursued for decreasing housing costs is to originate home construction loans directly rather than work through third-party lenders, who attach expensive requirements to the loans. For example, third-party lenders required new construction on Pine Ridge to include amenities that cost borrowers up to an additional $5,000. When Mazaska began originating its own loans, it dispensed with the amenities and helped borrowers save money.
During Mazaska's short history as an NCDFI, it has focused on improving the performance of the loan portfolio it inherited from OSTPH, creating a set of comprehensive loan policies, and developing several new loan products. In addition, Mazaska has risk-rated its portfolio and adjusted its loan loss reserve account accordingly. The underlying goal of Mazaska's improvements and enhancements is to position the NCDFI to increase the number of homeowners on Pine Ridge. Mazaska has committed to originating at least 15 mortgages per year in order to promote homeownership on the reservation and expedite the elimination of substandard housing units.
In contrast to well-established organizations like LF and Four Bands, the Sisseton-Wahpeton Federal Credit Union (SWFCU) on the Sisseton-Wahpeton Sioux Reservation in Agency Village, S.D., is just beginning to find its legs as an NCDFI.
SWFCU was established in 1979 to provide financial services to members of the Sisseton-Wahpeton Sioux tribe and employees of the school systems and federal agencies that serve the reservation. For nearly 30 years, the credit union has provided savings accounts, personal and vehicle loans, and other services to its customers. It currently has assets of $3 million and more than 2,100 members.
In the early 2000s, the Sisseton-Wahpeton tribe launched an effort to promote policies that would favor small business development on the reservation. To further the effort, the tribe applied for and received NCDFI certification for SWFCU. However, a change in political leadership in 2002 put the tribe's plans for the newly certified entity on hold for several years. Elections in 2006 installed a new administration and the tribe is now in the process of reviving its NCDFI.
According to Barry Zephier, the tribe's small business development specialist, the aim is to expand SWFCU's lending capacity and then spin the NCDFI component off as one or more stand-alone entities that will provide small business and housing loans, technical assistance, and educational services.
"We want to take it to the point where we can provide education and support for small business owners, to help them get started and be successful," Zephier says. "Eventually, we'd like to get the educational component into our K-12 schools and community college, so tribal members will know about credit building before they decide to become business owners."
To prepare for the revival of the Sisseton-Wahpeton community's NCDFI, Zephier is attending training workshops sponsored by community development organizations and seeking advice from other tribes with CDFI experience. A number of the other South Dakota-based Native organizations profiled here, including Four Bands and First Nations Oweesta, have provided guidance and technical assistance.
First Nations Oweesta (Oweesta) is the only NCDFI intermediary in the country. It was incorporated in 1999 as an affiliate of First Nations Development Institute and is funded through foundations, banks, service fees, government programs, and individual donors. Oweesta helps Native communities determine whether and how to initiate CDFIs and other asset-building programs. It offers training in all aspects of operating a CDFI, including chartering, governance, capitalization, loan products, loan policies, and market studies; helps NCDFIs establish business revolving loan funds, credit unions, banks, and housing loan funds; and provides one-on-one technical assistance. Oweesta also operates a business development fund that provides loans to NCDFIs ranging from $50,000 to $250,000. Grant programs and additional loan products are in development.
In addition to institution building, asset building, housing, and other development projects, Oweesta has a strong interest in promoting financial literacy in Native communities.
"At the local level, our clients often need to provide a lot of technical assistance and training to potential entrepreneurs—for example, in financial literacy—before they're able to get and effectively utilize loans," says Stewart Sarkozy-Banoczy, vice president and chief operating officer of Oweesta. "We at Oweesta provide whatever assistance is necessary on the national level so our clients have the tools to do that."
Oweesta spearheads the technical assistance and training components of the Building Native Communities: Financial Skills for Families curriculum and is a founding member of the Native Financial Education Coalition, a planning and collaboration hub for Native financial education efforts, pilot projects, information exchanges, and policy updates.
Oweesta's unique role as an innovator and information broker enables it to experiment with bold ideas. One example is the Enterprise Development System (EDS), a conceptual model for launching successful entrepreneurs. EDS is based on the premise that "by systematically growing the private sector in Native communities, conditions of long-term poverty can be reduced."10/ The fourfold program includes client-centered, on-site, long-term technical assistance, with access to equity and debt capital; policy change to support entrepreneurship; education; and access to networks.
One major step Oweesta has taken toward implementing entrepreneurship systems for Native communities was to establish the Native Enterprise and Entrepreneurship Development (NEED) Initiative, funded by the CDFI Fund. NEED is a training and technical assistance program that helps Native communities form partnerships and develop supportive social, physical, legal, and business climates for entrepreneurs.
Although NCDFIs got a late start in comparison to the broader CDFI field and faced circumstances that seemed daunting, their progress on multiple fronts should stimulate a greater flow of resources in their direction. Additional funding and support will enable NCDFIs to continue growing in numbers, capacity, and influence. According to individuals involved with South Dakota's NCDFIs, there is strong interest in expanding the field.
"Interest in CDFIs is on the rise in Indian Country," says Zephier of the Sisseton-Wahpeton tribe. "More people are looking at the CDFI model and asking, 'How can we bring this to our community?'"
Sarkozy-Banoczy of Oweesta sees promise in a "giant wave of NCDFIs that have emerged recently," and notes that large amounts of funding that the CDFI Fund has recently awarded to NCDFIs are "a good sign for other funders to take note of."
However, he acknowledges the challenges Native communities face. To promote economic development, they need to build their human capital through training and technical assistance. They also need to address basic legal and physical infrastructure needs before commercial development can take place. In Sarkozy-Banoczy's words, "We have to crawl before we can walk."
In South Dakota, NCDFIs are working to help their communities do both of those things. Their commitment is an indication that the NCDFI field holds promise for enabling Native communities to meet their challenges and take their first steps toward a new economic reality.
CDFI Fund provides capital for community building
The CDFI Fund, a program of the U.S. Department of the Treasury, is the largest source of capital for CDFIs. It was established in 1994 with the passage of the Riegle Community Development Banking and Financial Institutions Act. As noted in our main article, the CDFI Fund certifies CDFIs and, through a competitive application process, awards them grants, loans, equity investments, and technical assistance funding to support capacity building and capitalization. In order to receive CDFI Fund monies, a CDFI must provide matching funds from private or nonfederal sources. 2006 saw the eleventh round of funding for the CDFI Fund, which has awarded more than $800 million to community organizations and financial institutions.
In addition to providing direct support for CDFIs, the fund conducts two programs designed to promote private sector investment in CDFIs. The first is the Bank Enterprise Awards Program, which encourages bank-CDFI partnerships by providing cash awards to banks that invest in CDFIs. As of 2002, banks had received more than $179 million in awards. The second is the New Markets Tax Credit (NMTC) Program, which provides tax credits to private companies that invest in specialized organizations called community development entities, or CDEs. All certified CDFIs are classified as CDEs and are therefore eligible for NMTC investments.
For more about the CDFI Fund, visit www.cdfifund.gov.
1/ Three Year Trend Analysis of Community Investment Impact System Institutional Level Report Data, FY 2003–2005, CDFI Fund, December 2007.
2/ "CDFIs at a crossroads: A conversation with Mark Pinsky of National Community Capital Association," Community Dividend, Issue 3, 2005.
3/ The label "CDFI" was not created until years later; however, we use it throughout this article for consistency.
4/ The Report of the Native American Lending Study, Community Development Financial Institutions Fund, November 2001, pp. 4–10.
5/ In addition, an NCDFI must identify a target market consisting of a Native American population, qualified census tracts located in Indian reservations or Alaska Native villages, and/or a low-income population. To read the full definition of an NCDFI, visit www.cdfifund.gov/docs/certification/CDFI/CDFIcertificationApplication.pdf.
6/ Standard College Dictionary, Harcourt, Brace & World, Funk & Wagnalls, 1966, p. 1,283.
7/ U.S. Census Bureau, 1990.