Business Development Financial Institutions: Theory, Practice, And Impact

Document Type

Paper

Publication Date

10-1-2001

Published In

Business Development Financial Institutions: Theory, Practice, And Impact

Series Title

Institute For Research On Poverty Discussion Paper

Abstract

Over the past decade, many communities have sought to promote their economic development by launching business development financial institutions, or BDFIs for short. A BDFI is a private financial institution that seeks to advance the economic development of a community by providing loans or equity capital to small- and medium-size businesses in a targeted region. BDFIs can be for-profit or not-for-profit entities, but to qualify as development financial institutions, they must be willing to accept below-market rates of return on their capital in order to further community economic development goals. Major funders of BDFIs have included local and state governments; the federal government, primarily through its Community Development Financial Institutions Fund; commercial banks, largely motivated by tax credits and the Community Reinvestment Act; and philanthropic foundations. In this paper, we analyze the economic development theory underlying BDFIs. We examine their business practices and discuss efforts to quantify their development impact.

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