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Cascade: No. 67, Winter 2008

Spotlight on Research: How Can Community Development Financial Institutions Measure Economic and Social Impact?

Prior to 1970, many low-income consumers felt their credit needs were largely ignored by conventional financial institutions. In the 1970s, this situation was addressed, in part, by the establishment of new types of financial entities — community development banks and community development credit unions. Today, these and other financial institutions are known as community development financial institutions (CDFIs).1 CDFIs meet the financial needs of their customers while also supporting community development initiatives that promote social goals.

By most accounts, CDFIs have been a valued addition to the financial industry. However, past assessments of the performance of CDFIs have focused mainly on their outputs, such as the number of clients served, number of loans made, and the dollar value of the loans. Less attention has been paid to measuring the outcomes of CDFIs, especially those that involve an impact on their customers. Jane Kolodinsky, Caryl Stewart, and Antonia Bullard look at whether community development financial institutions “provide a measurable level of social benefit to [their] members?” 2 The following is a summary of their analysis.


Until the 1970s, traditional nonprofit organizations used grant-funded programs to combat poverty. These organizations focused on individuals who lacked accumulated wealth, education, and access to traditional financial services. Such individuals, along with their families and communities, face persistent poverty. The authors note that starting in the 1970s, ShoreBank in Chicago, Self-Help in North Carolina, and others pioneered a new type of anti-poverty strategy: the CDFI. CDFIs are financial intermediaries that rely on funds from a variety of sources to pursue community development.3 They have challenged the notion that lowincome communities are poor credit risks. CDFIs have shown that “it is possible to serve the underserved in a way that [is] financially self-sustaining.”

The future of CDFIs was bolstered by the creation of the CDFI Fund. Administered by the U.S. Department of the Treasury, the fund serves to “stimulate the creation and expansion of CDFIs, including banks, credit unions, revolving loan funds, and venture capital funds.” The authors report that as of 2003 the fund had expanded the capacity of the nation’s over 675 CDFIs with the investment of over $600 million.4


The CDFIs that hold customer deposits are regulated, while nondepository CDFIs may require some state registration or control.5 Although the latter are not strictly regulated, they have “developed relatively standardized reporting that provides numerous measures of financial efficiency to investors and funders.” However, measuring the social impact of CDFIs is more difficult to accomplish. The majority of previous studies “assume, implicitly or explicitly, that economic measures are good proxies for impacts on individuals and families, and thus communities.” Few studies have measured the impacts of CDFIs beyond those related to economic measures.

To overcome the difficulty in assessing the social benefits that accrue to the members of a CDFI, the authors use both qualitative and quantitative measures. They adopt an eclectic approach that draws on methods used in several disciplines – organization theory, family life management, and evaluation theory. They augment the basic model that considers inputs (capacity), throughputs (activities), and outputs (counts) with impacts related to the user of services as opposed to the provider.6 The authors further separate these impacts into three levels: “First level effects are impacts whose causation can arguably be linked to credit union membership. Second and third level effects are impacts of broader economic and social gains, respectively.”

The authors used data from one CDFI, the Vermont Development Credit Union (VDCU), to examine the social benefits provided to its members. 7 They used two focus groups to assist in formulating hypotheses that could be examined using regression analysis. The focus group results and a review of the literature led to the development of a questionnaire used for data collection. The authors used a specially designed software package to group the responses into three levels of impacts. In addition to the focus group results, survey data were collected from a sample of 244 credit union members (out of a total membership of 6000). The data included demographic characteristics of the sample members, the range of services they used, and the most important services used.


First the authors examined the qualitative responses from the focus groups and then used regression techniques to analyze the survey data. Responses to questions about whether or not a specific type of impact had occurred were arranged into the three levels of impacts along with the degree to which VDCU contributed to each specific type of impact on a scale of 0-10. They also employed a specialized Likert scale commonly used with questionnaire items of this nature to calculate a score that summarized the percentage of members surveyed who had impacts at each of the three levels and the corresponding degree of VDCU’s contribution. Results for the first level impacts are shown in the table below.

Results for First Level Impacts

The corresponding results for the second (with six impacts) and third (with four impacts) level impacts were 72 percent and 21.96 out of 60 and 67 percent and 19.18 out of 40, respectively. The authors suggest that these results demonstrate that credit union membership does appear to have a positive impact on members’ lives.

Next, the authors used multivariate techniques and the survey data to further quantify the influence of membership in the credit union. This was accomplished by estimating two regressions. First, they estimated the probability of receiving an impact from credit union membership and, second, the level of that benefit. In general, the authors found that:

  • the probability of having an impact at all three levels increases with an increase in the use of credit union services;
  • the greater the number of services used, the greater the members’ perceived degree of impact at all levels; and
  • impact is influenced by members’ goals, most important services, and demographic characteristics.

Further analysis revealed that the probability of the occurrence of a first level impact was greater for women, those of lower income levels, and those under the age of 25.

The authors point out that their analysis validates an assumption in previous research that “output measures such as services used are measures of well-being.” Their overall conclusion is that “getting one’s financial house in order through membership and use of services from a CDFI does change lives for the better.”

  • 1 Other CDFIs include community development loan funds, community development venture capital funds, and microenterprise development loan funds.
  • 2 Jane Kolodinsky, Caryl Stewart, and Antonia Bullard, “Measuring Economic and Social Impacts of Membership in a Community Development Financial Institution,” Journal of Family and Economic Issues, 27, 1 (Spring 2006), pp. 27-47.
  • 3 CDFIs draw funds from public, philanthropic, and private capital and loans as well as investments.
  • 4 The fund has made awards of $820 million. In addition, it has awarded allocations of new markets tax credits that will attract private-sector investments of $12.1 billion.
  • 5 Community development banks are regulated by the Office of the Comptroller of the Currency, while community development credit unions are regulated by the National Credit Union Administration.
  • 6 “Inputs/capacity include the characteristics, resources, and goals that members of a credit union bring into the picture,” as well as characteristics of the credit union. Throughputs/activities consist of the services offered by a credit union and those services actually used by members. Outputs/counts comprise an accounting of the number of loans made and members served. Impacts involve the “effects of using credit union services on the individual member.”
  • 7 The Vermont Development Credit Union recently changed its name to Opportunities Credit Union.