Community development banks promote economic development in low-income areas, often offering microfinance services. They aim to provide services where banking is limited, and their profitability can vary. In the US, they are certified by the Community Development Financial Institutions Fund, while internationally they exist under different names and configurations.
A community development bank is a type of bank that operates as a business, but also has the objective of promoting economic development in less affluent areas. Internationally, these banks often offer microfinance services aimed at helping people start businesses. Within the United States, a community development bank is one that is certified under a specific Treasury-backed scheme.
The main objective of a community development bank is to provide services in areas where banking is limited. This is usually because those areas are home to low-income people who are not seen as attractive to major banks. This tends to be a comparative rather than an absolute measure of wealth. For example, areas in major developed nations that are served by community development banks may be considerably better off than areas in poorer nations, but the residents may be comparatively poor and unbanked.
The profitability of a community development bank can vary widely. In some cases, the bank is still a business operation with the goal of making a profit. In other cases, the goal is to make little profit or simply break even, making financial services more affordable. For example, in some configurations, the bank can get away with offering cheap loans paying low rates or even no rates to savers. This is because these savers often can’t even get an account elsewhere, or are prepared to accept low interest rates in order to access loan services when needed.
Within the United States, a community development bank is formally classified as a community development financial institution. As such, it must be certified by the Community Development Financial Institutions Fund, which is part of the US Treasury. The fund provides financial assistance and information and advice to banks.
Internationally, the concept of a community development bank often exists under different names and configurations. For example, in developing countries, such services are often known as microfinance establishments, since they offer loans to very small businesses that would not be considered valuable by a major bank. In developed countries, there is a variant known as a credit union that offers affordable savings accounts and loans to people with lower incomes. Technically, a credit union is not a bank, as it is legally owned by the people who use the services. The legal regulation of community development banks and similar institutions can vary widely from country to country.
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