Business Development Financial Institutions: Theory, Practice, And Impact

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Business Development Financial Institutions: Theory, Practice, And Impact

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Institute For Research On Poverty Discussion Paper


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.