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What Is a Community Development Bank?

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  • Written By: John Lister
  • Edited By: O. Wallace
  • Last Modified Date: 21 November 2016
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A community development bank is a type of bank that operates as a business, but also has the goal of promoting economic development in less wealthy areas. Internationally such banks often offer microfinance services aimed at helping people start businesses. Within the US, a community development bank is one that is certified by a specific Treasury-backed scheme.

The main aim of a community development bank is to provide services in areas where banking is otherwise limited. This is usually because such areas are home to people on lower incomes who are not seen as attractive to major banks. This tends to be a comparative rather than absolute measure of wealth. For example, areas in major developed nations that are served by community development banks may be considerably better off than areas in poorer nations, but residents may be comparatively poor and un-served by banks.

The profitability of a community development bank can vary widely. In some cases the bank remains a commercial operation aiming to make a profit. In other cases the aim is to make little profit or simply break even, making financial services more affordable. For example, in some set-ups the bank can get away with offering cheap loans by paying low rates or even no rates to savers. This is because such savers often couldn't even get an account elsewhere, or are prepared to accept low interest in order to be able to access the borrowing facilities when needed.

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Within the United States, a community development bank is formally classed as a community development financial institution. As such it must be certified by the Community Development Financial Institutions Fund, which is part of the US Treasury. The fund provides both financial assistance and information and advice to the banks.

Internationally, the concept of a community development bank often exists under different names and set-ups. For example, in developing nations such services are often known as microfinance establishments as they offer very small business loans that wouldn't be seen as worthwhile for a major bank. In developed nations, there is a variant known as a credit union which offers savings accounts and affordable loans to people on lower incomes. Technically a credit union isn't a bank as it is legally owned by the people who use the services. The legal regulation of community development banks and similar institutions can vary widely from country to country.

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