Changing the World with Community Investing

By Jean Pogge

{Editor's Note: This is the fifth in a weekly series of articles by experts in sustainable business originally published in the "GreenMoney Journal."}

CHICAGO, Illinois, August 27, 2007 (ENS) - In 1973, ShoreBank pioneered the concept that a bank focused on lending in underinvested minority communities could help reinvigorate local economies, making a profit while creating a better future for the neighborhoods it serves. Thirty-four years later, the practice of community development banking has come of age.

Jean Pogge is an executive vice president of ShoreBank (Photo courtesy ShoreBank)
ShoreBank now invests more than $1 million each day in community development and conservation loans. In addition, 62 community development banks across the country now work toward the same goals. Like ShoreBank, these institutions engage in the practice of community development banking, providing residents and businesses in communities often ignored by traditional banks with access to fairly priced, equitably underwritten credit products.

The socially responsible investment community is a critical resource of capital for community investing. In response to the Social Investment Forum's challenge to socially responsible investors to place one percent of SRI assets in community investing, investments at Community Development Financial Institutions (CDFIs) have nearly quintupled from the $4 billion identified by the Social Investment Forum a decade ago.

Between 2003 and 2005, investment in CFDIs grew by 40 percent to $19.6 billion, according to the Social Investment Forum's 2005 Report on Socially Responsible Investing Trends in the United States.

The Challenges Facing CDFIs Today

As we look forward to the next 15 years, the widening gap between America's rich and poor means that community development banking will face new challenges, even as the need for financial services in low-wealth communities increases.

The FDIC estimates that more than 10 million American households are unbanked or underbanked; among immigrant workers, this percentage is estimated to be much higher. Individuals without access to the banking system pay excessive fees for basic financial services and are a prime market for predatory lenders.

To address these and other issues facing low-wealth communities, community development bankers will be asked to innovate with new products for residents and local businesses. Creativity will be needed to develop products that can connect unbanked individuals to the mainstream economy.

This challenge is further complicated by the lack of trust in traditional financial institutions demonstrated by many of the unbanked. The ability to offer fairly priced and equitably underwritten products will be key to rebuilding a covenant between communities and their banks.

Community development banks will need to look different, be located in new and more accessible places, and offer convenient technology as well as access to employees who are trusted members of the communities they service.

The Role of Socially Responsible Investors

One of the prime tasks that community development banks perform is to import capital into underserved communities by gathering deposits in the mainstream national marketplace and deploying them as loans in the communities they serve.

The socially responsible investment community has become more aware that it needs to be a source for these deposits if community development banks are to meet the growing need for credit in underinvested communities. As a result, deposit levels at community development banks have grown significantly.

To take this growth to the next level, the investment community and community development banks will need to continue working together to create products that meet the needs of larger investors, expand the ability of financial professionals to assist their clients in supporting community development banks, and find distribution channels that can leverage more retail deposits.

The first steps have been taken. Domini Social Investment showed thoughtful leadership in 1994 when they established the Domini Money Market Account at ShoreBank; this account deploys millions of dollars in deposits into community investing.

The creation of the CDARs program, which offers up to $30 million of FDIC insurance to a single customer, has been a tremendous leap forward for larger investors. Calvert Foundation's Community Investment (CI) Notes is the first product that can leverage the large mainstream broker network to gather retail investments.

These efforts, however, are only first steps toward meeting the needs of the diverse SRI investor community. Collaboration must continue in order to create the rich product line needed to ensure that community development banks have the funds available to meet growing loan demand.

The Future of Community Banking: New Problems, New Solutions

One of the most significant developments in banking today is the growing popularity of the high-yield savings account introduced by ING Direct. This product has redefined consumer convenience and recalibrated savings account interest rates. Community development banks may find this an opportunity to collect more deposits from the national marketplace. As high-priced savings accounts become standard product offerings, however, the banks will also have to find ways to cope with their impact on profit margins.

Community development bankers can best respond to shrinking profit margins by embracing technology that improves operational efficiency. This change will help reduce the cost of administration and overhead.

Equally important, however, is the improvement to customer service that it will provide. The overall impact should be to give smaller community development banks access to the national mainstream marketplace, a new resource for the capital needed to fund loans.

Finally, community development banks must address the new set of issues presented to low-wealth communities by global warming. The cost of energy for heating and air conditioning will increase just as the climate change predicted by scientists is causing new and more severe weather patterns.

As we saw with Katrina, the impact of climate change is likely to fall disproportionally on low income and minority communities.

Community development bankers will be called on both to educate their customers about the need for energy conservation and to finance conservation loans that can help lower energy usage and make buildings more affordable.

The community development bank of the future will value its conservation lending as much as its double bottom line of community development lending and profitability.

So, what will the community development bank of 2022 look like? We can imagine a community where individuals walk or bike to a local kiosk to make deposits, apply for loans, or just talk with a banker about their financial needs. The kiosk will probably be driven entirely by technology, but the ability to talk face-to-face with a trusted banker will be just a phone call away.

Because currency usage will be rare in the U.S., underinvested communities will have a greater need for community development banks to connect them to the mainstream economy with online checking accounts, debit cards, credit cards and fairly priced loans. Local businesses will rely on the community development bank to finance their expansion, help manage their cash flow, and provide the loans needed for new building.

The community development bank will require all property loans to include energy-conservation features, and will provide the information customers need to make wise decisions about energy-efficient upgrades.

A much larger number of the working poor will be older as the baby boomers begin to enter their 70s. Community development bankers will adapt customer service practices and loan products to the needs of low income seniors that face difficult health care decisions, reduced housing choices and the need to continue working well into their late 70s.

Community development banks will be numerous and located in most cities. Underinvested communities will become hubs of economic activity and the location of new business start ups.

Investment dollars will flow in to community development banks as savers from all over the U.S. use the convenience of online banking to act on their preference to bank with a community development bank, because they will want to be sure their savings are being used to create economic development and a healthy environment.

{Jean Pogge is executive vice president of ShoreBank, America's first community development and environmental bank, responsible for a broad range of ShoreBank's operations and finance as well as its national sales effort, Mission Based Deposits. For more information on ShoreBank go to}

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