As demand for Native CDFIs surges, their capacity lags

Community Development Financial Institutions (CDFIs) were created to provide financial services to individuals and small businesses that have been underserved by the traditional banking system. The Center for Indian Country Development (CICD) has demonstrated how Native CDFIs empower Native American communities by tailoring products such as loans and financial education to the unique needs of these communities. A new analysis from CICD uses survey data to examine how Native CDFIs view their demand and financial capacity compared to non-Native CDFIs.¹ This comparative analysis, which is grounded in CICD’s mission to conduct research to better understand Native economic prosperity, sheds light on the unique features of the Native CDFI lending market.

Using data from the most recent round of the Federal Reserve’s biennial CDFI Survey, we find that in 2023, Native CDFIs were 25 percentage points more likely than non-Native CDFIs to report that demand for their financial services increased over the past 12 months. Native CDFIs were also 19 percentage points more likely than non-Native CDFIs to expect an increase in demand over the next 12 months. Yet, Native CDFIs were 12 percentage points less likely to fully meet this demand.

We also find that when asked to identify significant factors that keep them from meeting client demand, Native CDFIs are more likely to list every factor available in the survey instrument, such as insufficient lending capital, insufficient operational funding, and staffing issues. Thus, Native CDFI capacity building is a multifaceted issue.

Demand for Native CDFIs’ services is growing faster than demand for non-Native CDFIs’ services

For our analysis, we used a sample of 22 Native CDFIs and 210 non-Native CDFIs. (See our “About the Federal Reserve’s CDFI Survey” appendix to learn more about the survey participants and our methodology.) We first compared the demand for Native CDFIs’ services to that for non-Native CDFIs’ services. Figure 1 indicates that all Native CDFIs in our sample reported an increase in overall demand for their services over the past 12 months, whereas only three-quarters of non-Native CDFIs experienced a similar rise. Figure 1 also reveals that nearly all Native CDFIs anticipate an increase in overall demand for their services over the next 12 months, compared to just over three-quarters of non-Native CDFIs.

Why is the demand for Native CDFIs’ services increasing at a faster pace than that for non-Native CDFIs’ services? While there may be many reasons, we posit three potential explanations here. First, for many American Indian reservations, Native CDFIs play a critical role in addressing banking deserts and providing affordable credit to Native borrowers. Second, long-standing economic disparities in Native American communities were exacerbated by events like the COVID-19 pandemic, which may have generated a greater demand for Native CDFIs’ financial services.

We can glean a third potential reason from one-on-one interviews CICD conducted in 2022 with leaders from 46 Native CDFI loan funds. One of the overarching themes that emerged from these interviews is that the mission of Native CDFIs is to “leave no client behind.” To that end, one Native CDFI leader stated that their organization empowers individuals with “a better financial life by advancing individual self-determination and self-sufficiency for every community member. That includes everybody. ... That includes our neighbors.” This comprehensive approach of including all community members in the potential client pool could generate persistently high demand for Native CDFIs’ services.

Native CDFIs struggle to meet the rising demand

Since Native CDFIs are experiencing rising demand for their services compared to that for non-Native CDFIs, we next looked at whether Native CDFIs are just as likely as non-Native CDFIs to meet the demand. Figure 1 illustrates that only 23 percent of Native CDFIs were able to fully meet client demand during the past year, compared to 35 percent of non-Native CDFIs. When we relax this definition to include CDFIs that were “mostly able” to meet demand, we find that 50 percent of Native CDFIs were able to either mostly or fully meet demand, compared to 71 percent of non-Native CDFIs. Thus, while all types of CDFIs struggle to meet demand for their services, Native CDFIs encounter relatively greater difficulties.

We can corroborate this finding with qualitative data from our interviews with Native CDFI leaders. During those interviews, one Native CDFI leader lamented that “in a household survey in our target market, we had over 600 people looking for homes, but we can only serve 25 a year.” Another Native CDFI leader indicated that their organization is well-capitalized for a microloan program, but limited staff capacity prevents it from meeting all the financial needs of its community: “We don’t have staff with the necessary skills to offer the types of loan products people need. [For example], we have a lot of people coming in with debt-consolidation-loan requests and line-of-credit needs for their businesses.”

Native CDFIs identify array of factors that limit their capacity to meet clients’ needs

The 2023 CDFI Survey asked respondents to indicate the degree to which six broad categories of factors prevent them from fully meeting client demand: staffing, operational funding, lending capital, technology, borrower qualifications, and “other.”² We computed the shares of Native and non-Native CDFIs that listed each of these categories as a “significant factor” that affected their ability to fully meet client demand.³

Figure 2 reveals that, compared to non-Native CDFIs, Native CDFIs were more likely to list every category as a significant factor deterring them from fully meeting demand. Across all Native CDFIs, lending capital was the most commonly cited factor. In particular, among those that could not fully meet demand, 65 percent of Native CDFIs cited insufficient lending capital, compared to 48 percent of non-Native CDFIs. As one Native CDFI interviewee stressed, “Our organization is not capitalized to lend more than $100,000 for our small business loan program. We do participate in deals with other Native CDFIs, but we definitely need to increase our lending capacity.”

Roughly 41 percent of Native CDFIs that could not fully meet the needs of their clients cited insufficient operational funding as a significant factor, as opposed to 29 percent of non-Native CDFIs. Since Native CDFI operational funding mostly comes from the CDFI Fund and nonregulated financial institutions⁴ such as Oweesta and Northwest Area Foundation, this finding suggests Native CDFIs must rely on additional funders to help meet this need.

Native CDFIs listed staffing, their third-most commonly identified barrier to fully meeting client demand, 29 percent of the time, while non-Native CDFIs listed it 23 percent of the time. Native CDFI leaders have repeatedly mentioned that getting the right number of skilled staff members in place to deliver culturally tailored financial services can be challenging.

Of the remaining responses the survey instrument offered as reasons for not fully meeting client demand, Native CDFIs listed technology—such as having the appropriate computer hardware and software programs to serve customers and manage loans—as a significant reason 24 percent of the time, and listed borrower qualifications and “other” 12 percent of the time apiece. Given that members of Native American communities are commonly unbanked, the relatively small impact of borrower qualifications on the ability to meet client demand may seem surprising. However, prior CICD research has shown that many Native American borrowers who had recently applied for home loans on reservations had prime and super-prime credit scores.

Survey data provide additional insights into each factor

The CDFI Survey directed respondents to specific follow-up questions based on whether they identified one of the six broad factors mentioned above. We used these narrowly defined questions to dig deeper into the reasons why certain Native and non-Native CDFIs struggled to fully meet client demand. For this analysis, we focused on the three categories Native CDFIs most commonly identified, as shown in Figure 2: lending capital, operational funding, and staffing.⁵

Lending capital

Figure 3 shows that when asked to select among several reasons why lending capital is a factor in not fully meeting client demand, 80 percent of Native CDFIs and 66 percent of non-Native CDFIs listed insufficient equity and debt capital. Non-Native CDFIs listed the cost of capital 72 percent of the time, somewhat more frequently than Native CDFIs, which listed it 67 percent of the time. Both Native and non-Native CDFIs cited a lack of funding options more than half the time.⁶ Both types of CDFIs listed other reasons such as restricted funding, reporting requirements (including the expectations of funders), and the timing of funding cycles less frequently, though Native CDFIs listed them relatively often.

Operational funding

Figure 4 reveals that among CDFIs that listed insufficient operational funding as a significant factor, both Native and non-Native CDFIs most frequently listed lack of funders as a reason, at 75 and 85 percent of the time, respectively. Both types of CDFIs also commonly listed restricted funding and reporting requirements. The biggest gap in these findings pertained to funding cycles, which Native CDFIs cited 42 percent of the time as a reason that limited their ability to serve clients, while non-Native CDFIs only cited it 20 percent of the time.

Prior CICD research and our Native CDFI leader interviews revealed that the CDFI Fund constitutes the most significant source of operating funds for Native CDFIs. In particular, the Native American CDFI Assistance (NACA) Program is the main program the CDFI Fund uses to provide Native CDFIs with financial awards, which are used to build lending capital; and technical assistance awards, which are used to build organizational capacity. When Native CDFIs claim that funding cycles affect their ability to meet the demand for their services, they are likely referring to the NACA Program. For example, during fiscal year 2022, applications for NACA Program awards closed in April 2022, but awards were not announced until five months later.⁷ In addition, NACA Program funding for both fiscal years 2023 and 2024 was not distributed to Native CDFI awardees until September 2024.

Staffing

Last, Figure 5 shows that 82 percent of Native CDFIs and 75 percent of non-Native CDFIs identified limited internal resources, such as the inability to offer competitive wages and flexible work arrangements, as the main reason staffing was a factor in preventing them from fully meeting client demand. Both Native and non-Native CDFIs listed limited time to train new workers and build the necessary skills of experienced employees at about an equal rate. However, Native CDFIs were slightly more likely to list a lack of qualified candidates—for example, candidates with strong ties to their community—while job turnover was a larger reason among non-Native CDFIs.

Next steps

Our analysis identifies ways in which Native CDFIs are similar to or different from non-Native CDFIs. On one hand, Native CDFIs are more likely to observe rising demand for their services while simultaneously being less likely to fully meet this demand. On the other hand, among those CDFIs that struggle to meet demand, Native CDFIs and non-Native CDFIs reported similar reasons why.

These survey results highlight the opportunities for strengthening the impact of Native CDFIs across the country. With respondent Native CDFIs reporting such strong and growing demand for their services, it’s evident that addressing Native CDFIs’ operational and capital access challenges could increase their impact in Native communities.

Appendix: About the Federal Reserve’s CDFI Survey

Our analysis uses data from the 2023 round of the Federal Reserve’s CDFI Survey. This survey, which is managed by the Federal Reserve Bank of Richmond, has been fielded nationally every other year since 2019 (except for a special COVID-19 survey in 2020). It is a convenience sample, which means the research participants were selected through their accessibility to the researchers instead of through a randomized process. The survey’s respondents include any CDFIs from across the nation, regardless of certification status. The Federal Reserve partnered with external organizations, such as the CDFI Fund, Oweesta Corporation, and the Native CDFI Network, to distribute the survey. These partnerships help to reach potential respondents that are certified CDFIs and Native CDFIs, not-yet-certified emerging CDFIs, or institutions that have chosen not to pursue certification.

The 2021 survey revealed that only 65 percent of Native CDFIs felt financially strong, versus 83 percent of non-Native CDFIs. The 2023 survey, which was open from April 24 to June 2, asked more questions about specific challenges CDFIs are facing, and this article aims to investigate if the type of disparity found in 2021 persists between Native CDFI and non-Native CDFI experiences.

The 2023 survey collected 453 total responses, which represented nearly a third of total certified CDFIs at that time. Asked to identify their business type, roughly 48 percent of respondents self-identified as loan funds, a larger share than the 39 percent of certified institutions overall that self-identified as loan funds. Respondents also indicated if their institutions identified as Native CDFIs. From this information, we determined our sample for analysis. We decided to focus on loan funds, the biggest category of Native CDFIs, in order to keep our comparisons between Native and non-Native CDFIs more consistent.

A total of 26 Native CDFIs, or roughly 40 percent of the total number of certified Native CDFIs in 2023, participated in the survey. For our analysis, we dropped three Native CDFIs that are credit unions and one that is a community development bank. We ended up with 22 Native CDFIs that identified as loan funds, compared to 210 non-Native CDFI loan funds. Native CDFI loan funds are mission-driven non-depository financial institutions. They primarily provide financing and development services to businesses, organizations, and individuals in Native communities. They tend to be nonprofit organizations and are governed by boards of directors with community representation. Throughout this article, we refer to Native CDFI loan funds as simply “Native CDFIs” and non-Native CDFI loan funds as “non-Native CDFIs.”

Endnotes

1 The CDFI Fund, an initiative of the U.S. Department of the Treasury, certifies and provides financial awards for CDFIs. It also provides specialized funding and training programs to Native CDFIs to help increase access to credit in Native populations throughout the nation. For some of these programs, the CDFI Fund defines a Native CDFI as a certified CDFI that directs at least 50 percent of its activities toward serving Native Americans, Alaska Natives, and Native Hawaiian communities. The survey discussed in this article asked respondents to self-identify as a Native CDFI (without providing a definition). For the purpose of our analysis, we used survey responses to identify Native CDFIs, but the CDFI Fund’s definition helps contextualize the service and scope of Native CDFIs.

2 These categories were chosen considering Federal Reserve staff’s outreach and conversations with CDFIs. Staffing refers to staff turnover, number or skills of staff, etc. Operational funding was listed separately from lending capital due to some CDFIs reporting an inability to cross these funding streams (i.e., lending capital is often restricted from being used to fund operations).

3 Respondents could indicate whether each factor was a “Significant factor limiting ability to meet demand,” “Somewhat of a factor limiting ability to meet demand,” or “Not a factor limiting ability to meet demand.”

4 In a previous CICD survey of Native CDFIs, 63 percent of respondents selected the CDFI Fund as one of the top three sources of operational funds, whereas 30 percent selected nonregulated financial institutions.

5 For this part of our analysis, we included responses indicating that the factor was “somewhat” of a reason, in addition to those indicating that the factor was a significant reason. By doing so, we included all the respondents that answered these questions. Given that Native CDFIs represent a small share of survey respondents, we wanted to include as many Native CDFIs as possible in our analysis of these three factors.

6 Here, lack of funding options is a combination of two answer options from the survey: “Access to secondary markets” and “Not enough lenders/investors in my area.”

7 We heard anecdotally that the delay may be partly due to CDFI Fund staff having to work diligently to launch COVID-19-related funding programs such as the Rapid Response Program and the Equitable Recovery Program.