Complex transactions: Community development financial institutions lending to ethnic entrepreneurs in Los Angeles

Abstract

Despite federal and state efforts to ensure equal access to credit, ethnic disparities in financial capital remain. Community Development Financial Institutions (CDFIs) represent one type of institution working to address this inequality. Based on interviews with the staff of ten Los Angeles, CA (USA) area CDFIs, this article explores the unique way CDFIs lend to ethnic entrepreneurs. The findings highlight the role of CDFIs in providing extensive technical assistance, utilizing flexible lending criteria, and building co-ethnic weak ties. Furthermore, CDFI staff members’ specialized knowledge about particular ethnic groups, shared cultural background, and/or language ability allow them to take on greater risk. As the demand for financial capital grows in a tight credit market, it will become increasingly important to understand these community institutions and their potential impact on community development more broadly.

Keywords:

• community development financial institutions
• race/ethnicity
• entrepreneurship
• small business
• lending
• weak ties

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. A similar distinction was made by Benjamin et al. (2004) in discussing various CDFIs.

2. As of 2013, New York has the largest number of certified CDFIs, 65. California is next with 37 certified CDFIs. Pennsylvania and Texas follow New York and California with 30 and 25, respectively. Certified CDFIs have to be approved by the Treasury Department’s CDFIs Fund.

3. Based on professional expertise regarding CDFIs, I identified CDFIs on the list serving a high proportion (more than 50%) of ethnic entrepreneurs. I also sent this list to a CDFI Fund program manager to review. Finally, I confirmed my list based by asking interviewees the names of other CDFIs serving ethnic entrepreneurs.

4. This report included CDFIs in Southern California beyond Los Angeles. In addition, the inclusion of loan funds beyond those providing business loans such as affordable housing also makes this estimate more liberal.

5. See Li et al. (2002), Dymski and Mohanty (1999), and Hum (2010).