A Look at Community-Based Programs
By Catherine Friend White
While it doesn’t get much press, community investing is a key part of the revolution in socially responsible investing. Community investing lets local banks and business people work together to help their neighborhoods. Through a community development bank, credit union, or loan fund, you can invest in a certificate of deposit (CD), money market account, or IRA that helps to finance small businesses, housing, and other local projects.
Community investing recognizes that credit is hard for some people to get, especially women and minorities who live and work in underprivileged areas. Borrowers who are lucky enough to secure loans in these circumstances must often pay higher interest rates than those available elsewhere or borrow less money than they need.
By providing loans shunned by traditional banks, community investing programs fill an important gap. A gap that has grown following recent legislation that repealed parts of the 1933 Glass-Steagall Act and the 1956 Bank Holding Company–laws that have kept financial institutions from denying service to specific groups or regions.
Already, a surge in social activism has made community investing one of the fastest-growing areas of the financial industry. In 1999, $5.4 billion was invested in community development financial institutions, a 35% increase from 1997.
Questions To Ask Before Investing
Choosing a community-investing program requires some extra legwork. Here are several questions to consider.
- What Kind Of Return Do I Want?
Community investing is a fragmented industry with different types of investment vehicles, maturities, and risk levels. Some CDs and savings accounts have returns that are competitive with those for traditional banks while other programs pay below-market rates. Because it’s difficult to assign an economic value to the social benefits of community investing, it makes little sense to compare the returns from those programs with the returns for other investments. Instead, you might start with the minimum return you need and find a program that meets both your social and financial goals.
- What Is My Investment Time Frame?
While some community development banks offer CDs with a minimum investment period as short as six months, community loan fund programs generally require a commitment of one to five years. In some cases, you may be able to liquidate a longer-term investment before its maturity date for a lesser return, but it’s important to investigate term lengths before you invest.
- Can I Put My Principal At Risk?
With a federally insured CD from a community development bank, you are guaranteed to get your money back. Other community investments may have private-sector insurance, but such coverage can trim your return by increasing the institution’s operating costs. Some community investments, such as those through a loan fund, may not be secured at all.
- What Is The Track Record For Paying Investors Back?
Whether you invest in a corporate bond or a community loan fund – you should always analyze the risk of default by the issuer. This is especially important for community development loans funds and other programs that are not insured.
You can start with the group’s track record for repaying investors. If there isn’t much of a track record, check the institution’s managerial experience and the qualifications of its board of advisors. With the help of your financial advisor, you can also look at the institution’s financial health and the lending opportunities available in its targeted markets.
Community Investing Resources
- Coalition of Community Development Financial Institutions [http://www.cdfi.org; (215) 923-5363] Advocacy group for community banks, credit unions, and loan funds.
- National Federation of Community Development Credit Unions [http://www.natfed.org; (212) 809-1850]. Industry trade group.
- SocialFunds.com [http://www.socialfunds.com] Web site covering socially responsible mutual funds with general information on community investing.
- Social Investment Forum [http://www.socialinvest.org] Trade group for socially responsible financial firms whose in-depth guide to community investing includes lists of bank, credit union, and loan fund programs.
- Accion International [email@example.com; (617) 492-4930] Loan fund that helps the working poor of Latin America and the United States.
- Calvert Social Investment Foundation [http://www.calvertgroup.com; (800) 248-0337] Investment manager that pools opportunities in housing, community development and microenterprise loan programs in the U. S. and abroad.
- Environmental Loan Fund [http://www.envsc.org; (202) 966-9834] Provider of loans and technical assistance to regional, state, and local environmental organizations.
- Rural Community Assistance Corporation [http://www.rcac.org; (916) 376-0507] Loan fund that helps rural communities improve their economy.
- South Shore Bank [http://www.sbk.com; (773) 753-5850] Promoter of housing and small business lending in Illinois.