A Canadian Community Development Financial Institution Program
Canada and the US have a lot in common when it comes to equity issues, but Canada makes it more difficult to discern because data is not disaggregated by racialized demographics. It’s hard to understand the dynamics of racial wealth and income gaps if you don’t look at demographic data.
Policy-makers are coming around as to why this is problematic (and many others have written about the problems with this so I will save most of my thoughts on the matter), but I can say for sure that this “color (or colour) blindness perpetuates inequities because it allows policy-makers and funders to and social purpose efforts to miss or skip the process of wondering “does this decision adversely affect some people more than others?” This should cause us to pause and decide whether we need safeguards for equity-seeking groups living on the margins.
Case in point, if you assume all Canadians struggling on the margins are a monolithic demographic and you as the Bank of Canada raise interest rates to stem inflation, you assume all people are impacted the same. Some will have to sell their homes or go into foreclosure, but it’s fine because pain is distributed fairly. If Black and Indigenous homeowners are over-represented in the group that is struggling on the margins, they will be more likely than their white counterparts to exit homeownership or enter into foreclosure as a result, which will lead to a loss in the benefits to generational wealth building that homeownership offers for North Americans, and in an even worse-case scenario, will lead to higher rates of homelessness for Black and Indigenous Canadians.
There are places where data is disaggregated, and we can also make assumptions based on US data. For example, we know that African American homeownership rates are around 45% in America, which is way lower than white counterparts. We know that the Black Canadian rate is similar (one of the few disaggregated stats that’s easy to find), while the national average is nearly 30% higher (at above 70%).
From this, even though Canada doesn’t keep this information, we can then assume that Black Canadians have similar struggles with access to capital to start or scale a business, as leveraging a mortgage for capital is one way white-owned businesses start and grow (in addition to inheritance or borrowing from wealthy relatives). We can then assume that Black entrepreneurs in Canada are less likely to grow their business to hire multiple employees. African American employer businesses make up 2% of business in the US, while African Americans make up 14% of the population. We can assume the numbers are similar here. Additionally, we can assume that Black and Indigenous Canadians are more likely be underbanked and turn to predatory loans, as both groups are over-represented below the poverty line in Canada.
So there are ways to know without knowing that racial wealth gaps exist in Canada, but if we pretend we don’t know, we can ignore investing in solutions.
One south of the border practice should be adopted in Canada: the way that Americans developed programs that leverage community development lenders to address the lack of capital access that comes from a financial system that favours people who already have wealth and assets (like property and inheritance).
The US has a program called the Community Development Financial Institution, or CDFI Program. The Treasury Department provides hundreds of millions of dollars in grants each year to financial institutions designated as CDFIs. These grants are used as loan capital, as technical assistance, or most interestingly, as collateral to leverage the capital they have on hand to do more lending to people or projects considered more of a default risk. The loans are for things like payday loan alternatives, auto refinancing, debt consolidation, and other consumer loans, or startup and scale-up loans for businesses. Some CDFIs are focused on homeownership or affordable housing development. Some CDFIs provide lower interest rates for nonprofit developers to build housing or community centres.
The Treasury funding used for collateralizing loans is usually referred to as a Loan Guarantee Fund. Canada has used this model (most notable is the $1 billion Aboriginal Loan Guarantee Program which supports Indigenous participation in electricity infrastructure projects) to some success. It’s time to establish this as a broader practice, especially with the long-delayed but upcoming deployment of $755,000,000 that the Government invested in the Social Finance Fund, as well as impact investing and other possibly financial institutions investments. Loan Guarantee Funds, as noted, are used as collateral in place of a physical object like a car or a home that the financial institution can posses if someone misses payments. It “de-risks” the loan for the financial institution.
The Baltimore Community Loan Fund combines Loan Guarantee and technical assistance in the form of business coaching to mostly African American entrepreneurs who ordinarily would not qualify for loans because of poor credit and no collateral. In the past four years, they have made more than 100 zero-collateral loans of up to $50,000 for startups and $150,000 for scale-ups. They can do this because 1) they know their borrowers will succeed in their business venture because they have coaches involved, and 2) their regulators in Maryland are not concerned that they are placing their assets at risk because the fund is there to pay them back if a borrower defaults. As of 2023, there has not been a single default in four years.
The need has never been more urgent for Canada to adopt a system like this as Canadians are struggling to make ends meet with inflation, capital access is getting more difficult, household financial resilience is wavering, rents are becoming more and more unaffordable, and we’re facing a mortgage refinancing crisis that will send monthly expenses of homeowners to untenable levels. Creating a Canadian version of this program would unlock hundreds of millions of capital to lend in spaces that lack access to safe, non-predatory loan products. For every $1 in a loan guarantee fund, CDFIs in the States lend up to $10-$12. A $50,000,000 fund to start in Canada could lead to $600,000,000 in lending.
Here are some enabling conditions needed to create a Canadian CDFI Program to help people who are struggling on the margins to get by:
Create a certification + monitoring infrastructure at the Federal and Provincial levels.
The CDFI designation should be a Federal designation with Provincial oversight
Financial institutions that apply for approval as CDFIs must include federal, provincial, and community reviewers.
Local/regional/provincial financial institutions apply for designation
Stringent criteria is based on track records of underwriting for consumers and projects that have difficulty securing mainstream loans, and who provide or wish to provide special purpose loans to equity-deserving borrowers in designated geographic areas with higher levels of disinvestment.
Financial Institutions must be trusted in their communities.
Loan products must be accessible and safe for helping consumers to avoid predatory alternartives, or to enjoy financial inclusion where barriers would otherwise exist.
Provincial regulators must understand the purpose of the program and believe in the mission.
This requires trauma-informed training about historic and systemic racism in the Canadian financial system.
Feds develop RFP requirements. Provinces oversee regulatory exemptions and ensure new and existing lending entrities are safeguarding deposits and capital on-hand while also striking a balance between lending amounts, rates, terms, and leveraging loan guarantee funding as collateral.
Fund allocation
Administration
Deternine federal intermediaries and staff with managers, administrators, and TA providers.
Capital Flow
Grants to Financial Institutions in one pot nation-wide, or divided into provincial buckets.
Special TA and operations grants to emerging, BIPOC-led lenders.
General grants are for loan capital, loan loss reserve, and operations.
Operations include: hiring staff, purchasing loan software, and salaries for directors.
Philanthropy, Foundations, and Provincial and Municipal governments can contribute to infrastructure by funding financial institutions for capital, loan loss reserves, impact investments, grants to hire financial counsellors, business coaches, homebuyer educators, etc.
Existing Banks can support the program with ESG-related funding, recognizing that CDFI lenders are not competitors because they are making loans that they, as large financial institutions, have no interest in servicing, and that they can purchase “good” loans from CDFIs to replace capital for more lending.
Loan Products Canadian Financial Institutions must provide with special purpose underwriting terms when they receive CDFI Status:
Mortgages
Construction loans
Home repair loans
Zero-collateral business startup or scale-up loans
Commercial Property Development Loans
Laneway loans
Auto loans
Auto loan refis
Consumer loans
Credit building loans
Credit consolidation loans (refinance bundled predatory loans)
Student loans
Citizenship and certificate loans
Other/etc
Rates/Terms:
Based on alternative underwriting
Justifiable to regulators
Rates no more than prime + % necessary to fund continued operations or maintain loan guarantee pool, as determined by financial institutions. Can be reduced through grants, secondary loans, etc from philanthopy/foundations/localities/individual donors/or financial institutions.
Blended Capital Enhancements for historically excluded BIPOC consumers:
Racialized Canadians from communities that have been historcially excluded from wealth building, property ownership, and lending will not have inherited wealth or wealth accumulated from asset ownership at the same rate or levels as Canadians who have not experienced exclusion, so funds must also be allocated for households from these communities, not just lending entities. This includes:
Matched savings
Grants for asset acquisition (homes, vehicles, business startups/scale-ups, education, etc)
Financial TA must be provided. Households involved in asset acquisition journeys should have access to financial TA, including financial counseling, business coaching, and homebuyer education. These TA providers help households determine matched savings and grant amounts needed to complete asset acquisition journeys.
Role of big banks, mainstream credit unions without designation:
As mentioned, banks will likely not be able to offer competitive terms to consumers, nor would they if they could because of financial and regulatory pressures. They should view consumers receiving loans on this journey as future customers brought in to mainstream, non-predatory lenders from ties to predatory alternatives. Big banks can make contributions to the Canadian CDFI system to keep to their commitments to fund Black and Indigenous capital access.
Banks and credit unions can purchase mortgages and loans to keep capital revolving to Canadian CDFIs. By setting debt and purchasing mortgages, Banks can invest and receive large returns on their investments in mortgages and loans that have been verified to be “low-risk” by CDFI lenders (as individual consumer credit scores increase, and/or they show histories of on-time payments of CDFI loans). This is an opportunity to accelerate capital access and economic growth in Canada that is a win/win for all.
More Infrastructure:
The States have a number of supporting entities that provide support and assistance to CDFIs, including trade organizations, associations, and grant writers. Until financial institutions can pay membership dues and fees for service, the Government should stand up similar organizations.
The Government of Canada should set aside funds to develop the infrastructure and administer at least $50,000,000 in grants for capital, technical assistance, and $50,000,000 in grants for loan guarantee to start.