Community finance leaders from across Canada will be gathering next week in Saskatoon to connect, share and build knowledge, develop sector priorities, and showcase examples of their work in practice at the Catalyst: Community Finance Summit. One of the key topics will be to explore and establish policy priorities. As we continue to explore innovative ways to bolster community finance in Canada, we can certainly learn from proven examples within our own country.
However, we can (and must) look at innovative policy ideas from other countries and regions that offer promising blueprints. Here, we look at four such policies: the Community Reinvestment Act (CRA), the Community Development Financial Institutions (CDFI) Fund, the New Markets Tax Credit Program (NMTC), and the Community Investment Tax Relief (CITR) from the UK. Each of these policies has shown success in fostering economic growth and equity in their respective jurisdictions. They offer valuable lessons for Canada.
1. Community Reinvestment Act (CRA)
Description: The Community Reinvestment Act (CRA), enacted in 1977, is a United States federal law designed to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income (LMI) neighbourhoods ([FFIEC](https://www.ffiec.gov/)).
Purpose: The CRA aims to reduce discriminatory credit practices known as redlining and to promote access to financial services for all community members.
Specific Policy/Regulation: Under the CRA, banks are periodically evaluated based on their performance in serving the credit needs of their entire communities, particularly LMI areas. These evaluations consider the bank’s lending, investment, and service activities.
How it Works:
- Regular Evaluations: Banks receive ratings that can affect their ability to expand or merge. These evaluations are conducted by regulatory agencies such as the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC).
- Transparency: Evaluations and ratings are made public, promoting accountability and encouraging banks to improve their performance.
- Community Needs: Banks must demonstrate efforts to meet the needs of their local communities by providing loans, investments, and services.
- Support for CDFIs: The CRA encourages banks to support Community Development Financial Institutions (CDFIs) by providing capital, which strengthens the ability of CDFIs to serve underserved communities.
Impact: The CRA has significantly increased access to credit and financial services in underserved areas, contributing to community development and economic growth. According to the National Community Reinvestment Coalition (NCRC), the CRA has leveraged trillions of dollars in loans, investments, and services for LMI communities since its enactment. In 2019 alone, CRA-covered institutions made $209 billion in community development loans ([NCRC](https://ncrc.org/)). Additionally, the CRA has facilitated the capitalization of CDFIs, enabling them to expand their reach and impact in underserved areas.
Potential Benefits and Impacts in Canada: Implementing a CRA-like framework in Canada could enhance financial inclusion and stimulate economic growth in underserved communities. By ensuring that banks meet the credit needs of all regions, particularly those with lower incomes, Canada could see improved access to capital for small businesses, increased home ownership rates, and overall community revitalization. This policy could be managed by the Office of the Superintendent of Financial Institutions (OSFI), promoting transparency and accountability in the banking sector.
Implementation in Canada: Canada could adopt a CRA-like policy that mandates regular evaluations of financial institutions based on their service to underserved communities. By publicly disclosing these evaluations, Canada could ensure that banks remain accountable for their community investment activities. Additionally, encouraging banks to support local CDFIs could help capitalize these institutions, allowing them to better serve low-income areas.
2. CDFI Fund
Description: Established in 1994, the Community Development Financial Institutions (CDFI) Fund is a program of the U.S. Department of the Treasury that supports financial institutions dedicated to providing credit and financial services to underserved populations ([CDFI Fund](https://www.cdfifund.gov/)).
Purpose: The CDFI Fund aims to expand economic opportunity for disadvantaged people and communities by supporting the growth and capacity of CDFIs.
Specific Policy/Regulation: The fund provides Financial Assistance (FA) and Technical Assistance (TA) to CDFIs. FA awards help institutions build their financial strength and capacity, while TA grants support capacity-building efforts.
How it Works:
- Financial Assistance: Direct financial support to enhance lending and investment activities of CDFIs. In FY 2020, the CDFI Fund awarded $204.1 million in FA and TA awards to 357 organizations ([CDFI Fund Statistics](https://www.cdfifund.gov/research-data)).
- Technical Assistance: Grants for operational improvements and capacity building, helping CDFIs to improve their services and reach.
- Certification: CDFIs must meet certain criteria to be certified and eligible for funding. This includes providing at least 60% of their financial products to low-income communities or individuals.
Impact: The CDFI Fund has directed billions of dollars into distressed communities, creating jobs, financing small businesses, and supporting affordable housing. As of 2019, CDFIs had provided over $42 billion in loans and investments, resulting in the creation of over 1.5 million jobs and the development of nearly two (2) million housing units ([CDFI Fund Impact](https://www.cdfifund.gov/research-data)).
Potential Benefits and Impacts in Canada: Establishing a similar fund in Canada could significantly enhance the capacity of local CDFIs to support underserved communities. By providing both financial and technical assistance, Canada could ensure that CDFIs are well-equipped to offer critical financial services, stimulate small business growth, create jobs, and develop affordable housing. This initiative could be administered through a new federal program or integrated into existing economic development agencies.
Implementation in Canada: Canada could create a national fund dedicated to supporting CDFIs, providing them with the financial and technical assistance needed to expand their reach including operating and investment capital. By certifying and funding CDFIs, the government could ensure that these institutions have the resources to serve low-income communities effectively. This program could be managed by a new federal entity or integrated into existing agencies focused on economic development.
3. New Markets Tax Credit Program (NMTC)
Description: The NMTC Program, established in 2000, provides tax credits to investors for equity investments in Community Development Entities (CDEs), which use the capital to finance projects in low-income communities ([CDFI Fund](https://www.cdfifund.gov/programs-training/Programs/new-markets-tax-credit)).
Purpose: The NMTC aims to stimulate private investment in economically distressed areas to spur economic development and job creation.
Specific Policy/Regulation: Investors receive a tax credit equal to 39% of the investment, claimed over seven years. CDEs use the capital to support businesses, real estate projects, and community facilities.
How it Works:
- Tax Credits: Investors claim tax credits over a period of seven years, incentivizing long-term investment.
- Community Development: Focus on projects that generate significant community benefits, such as affordable housing, community facilities, and commercial real estate.
- Investment Flexibility: Applicable to a range of projects including commercial, industrial, and mixed-use developments.
Impact: The NMTC Program has attracted billions in private investment to low-income communities, supporting thousands of projects that create jobs and provide essential services. Since its inception, the NMTC Program has generated $8 of private investment for every $1 of federal funding, totaling over $60 billion in private investment ([NMTC Program Statistics](https://www.cdfifund.gov/programs-training/Programs/new-markets-tax-credit)).
Potential Benefits and Impacts in Canada: Introducing a similar tax credit program in Canada could attract substantial private investment into economically distressed regions. This would support the development of critical infrastructure, create jobs, and provide essential services in underserved communities. Managed by the Canada Revenue Agency (CRA) in collaboration with regional development agencies, this program could ensure targeted and effective investments.
Implementation in Canada: A tax credit program similar to the NMTC could be introduced to incentivize private investment in underserved areas in Canada. By offering tax credits to investors, Canada could attract significant capital for community development projects. This program could be managed by the CRA and regional development agencies to ensure effective implementation and oversight.
4. Community Investment Tax Relief (CITR) — UK
Description: Introduced in 2002, CITR in the UK provides tax relief to individuals and companies that invest in accredited Community Development Finance Institutions (CDFIs) ([UK Government](https://www.gov.uk/government/publications/community-investment-tax-relief-citr/community-investment-tax-relief-citr)).
Purpose: The aim is to channel private investment into underserved communities, supporting local businesses and community projects.
Specific Policy/Regulation: Investors receive a tax credit worth up to 25% of their investment, spread over five years. This can be claimed against income tax or corporation tax liabilities.
How it Works:
- Tax Relief: Incentivizes investments in CDFIs by offering a tax credit worth 25% of the investment amount, claimed over five years.
- Long-term Support: Encourages sustained investment by spreading tax relief over a period of five years.
- Community Focus: Directs capital to areas and projects that generate social impact, such as small business loans, social enterprises, and affordable housing.
Impact: CITR has successfully mobilized private capital to support community development finance, fostering economic growth and social inclusion in underserved areas. Since its introduction, CITR has facilitated over £100 million in investments into CDFIs, benefiting numerous small businesses and social enterprises ([UK Government CITR](https://www.gov.uk/government/publications/community-investment-tax-relief-citr/community-investment-tax-relief-citr)).
Potential Benefits and Impacts in Canada: A similar tax relief program in Canada could encourage significant investments in local CDFIs, supporting community development and economic growth. By offering tax credits to individuals and businesses investing in local development projects, Canada could stimulate the growth of small businesses, social enterprises, and affordable housing initiatives. This program could be managed by federal and provincial tax authorities to ensure broad participation and effective targeting.
Implementation in Canada: A similar tax relief program could be introduced to encourage investments in Canadian CDFIs. The program could be designed to offer tax credits to individuals and businesses investing in local development projects, managed by federal and provincial tax authorities.
More information can be found on the [UK Government’s CITR page](https://www.gov.uk/government/publications/community-investment-tax-relief-citr/community-investment-tax-relief-citr).
Conclusion
By considering these policy ideas, Canada can enhance its support for community finance and drive impactful investments into underserved regions. Implementing such initiatives would not only promote economic development but also ensure that growth is inclusive and benefits all communities. These policies offer a roadmap for fostering a more equitable and resilient economy, built on the foundation of strong, vibrant communities.
References
- Opportunity Finance Network (OFN): Link
- National Community Reinvestment Coalition (NCRC): Link
- Federal Financial Institutions Examination Council (FFIEC): Link
- U.S. Department of the Treasury, CDFI Fund: Link
- CDFI Fund Impact Statistics: Link
- NMTC Program Statistics: Link
- UK Government’s CITR page: Link
- UK Government CITR information: Link
