Tuesday, March 21, 2006

Community Development Banking

One of the money/values choices I'm happiest with is my money market account, which is deposited in a community development bank.

Community development banks are banks whose mission is to support and provide resources for low-income communities which are traditionally financially underserved. Unlike ordinary banks with one (financial) bottom-line, community development banks also consider the social impact of the loans they make, and measure their success based on a double bottom-line (supporting people and communities, and operating profitably) or a triple bottom-line (which also includes environmental impact).

Community development financial institutions (CDFIs) make lots of loans to help people and organizations in low-income communities buy homes, start small businesses, develop non-profits, and build and rehab affordable housing. They may also make small loans to individuals abroad (micro-credit).

They often make loans to people who have trouble finding loans anywhere else-- people with bad credit histories or no credit history at all, people without collateral or co-signers-- so they take on a somewhat greater risk than traditional banks. But the rate of default on their loans is actually pretty comparable to traditional banks. One reason why comes from this article at MSN Money:

[Says Mike Pinsky, president and CEO of The National Community Capital Association:] "We specialize in projects where the perception of risk is higher than the actual risk."

For example, community-development institutions often provide mortgages to low-income borrowers who were turned down by other lenders because of their bad credit. The institutions have discovered that they can find good credit risks when they remove unpaid medical bills from the credit-scoring equation.

"A lot of the people in low-wealth areas are very hard-working and they pay their bills," Pinsky said. But they're often uninsured and unable to cover soaring medical bills from an accident or illness.

"If you remove the unpaid health-care bills (from their credit scores), they often qualify for prime credit," he said.
Domini Social Investments, the same investment firm where I have my Roth IRA, has a great money market account. All of the assets in the money market account go straight to ShoreBank, one of the oldest and most well-known community development banks, based right here in Chicago. And right now it has a 4.07% APY, which is just fine by me. I know it's not the absolute highest interest rate I could find, but it's a great balance for me personally. I'm happy knowing my money is having a positive social impact, and my savings are at least keeping a little ahead of inflation.

I could go on and on about this-- and I bet I will, at some point in the future-- but for now, you can learn more about community development financial institutions (banks and credit unions, community development loan funds, even venture capital) at the Community Investing Center, or read some of the great real life success stories here. And if the environment is a high priority for you, check out this really neat environmental bank.


fivecentnickel.com said...

I didn't look very hard, but I couldn't find rate information at the eco-bank. I would assume that these sorts of endeavors have lower interest rates than do banks like HSBC Direct and Emigrant Direct. We do our local banking at BofA (yeah, I know) for convenience and accessibility and hold our 'cash stash' at HSBC direct, where it earns a bit over 5%. I would personally prefer to maximize our earnings and then donate heavily to our charities of choice. However people choose to approach this, your point about making smart decisions with your money (esp with regard to the positive impact that you can have) is well taken.

Penny Nickel said...

I found this link to the rates. As you guessed, they're lower-- about 2% for savings/MM accounts, 3.5-4%ish for CDs. As I noted in the post, I use the money market account at Domini, which goes into both Shorebank (standard community development) and Shorebank Pacific (the eco-bank), and the rates are higher-- current APY 4.28%. But it still won't top the top places.

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George said...


I just wanted to say thank you for all the useful advice on SRI. After several months of dithering (due to some paperwork issues that were my fault), I managed to move my savings from Citibank to Shorebank. It feels good to know that my money is being used for a fairly small number of possible projects, most of which I would consider beneficial to humanity in some way. Of course Citibank might have been doing that too, but there was no way to know.

I also wanted to throw out there that the % rate was not a factor for me at all, since I'm not saving as a way to make money -- I see savings more as a necessary burden (for me to be able to change my career in a few years) which it is my responsibility to put into a place where they do least harm.

What I would love to see would be quite simply a fully transparent bank, where all decisions and investments using my money (and everybody else's) would just be immediately available online. I hope we will get to that point -- if you have heard anything about such a bank, I would love to hear more! Googling it gave me just pipe dreams on post-Davos blog posts.