GROWTH, EQUITY, AND

INDIVIDUAL WELFARE:
A THEORETICAL FRAMEWORK FOR “MOVING
THE NEEDLE” ON CDFI IMPACT EVALUATION
GROWTH, EQUITY, AND
INDIVIDUAL WELFARE:
A THEORETICAL FRAMEWORK FOR “MOVING THE NEEDLE” ON CDFI IMPACT EVALUATION

Why This Matters. Growth-Equity Spectrum.

Community development financial institutions CDFIs are traditionally assessed by their achieve-
(CDFI) are grassroots entities that guide sustain- ment of growth and/or equity goals. Growth-ori-
able economic growth by prioritizing the needs of ented activities are concerned with driving eco-
marginalized populations. The size of the sector nomic expansion because “a rising tide lifts all
has grown sevenfold between 1997 and 2021, yet boats.” If there are adverse consequences, the
there are few examples of CDFIs using success- growth perspective argues the benefits always
ful impact measurement techniques or program outweigh the cost. Meanwhile, activities that fos-
evaluation initiatives. The industry relies on credit ter equitable development focus on socioeconomic
access and development services as a tool for interventions which foster community-level pros-
community development. However, financing is a perity. Equity-oriented strategies seek to improve
tool that can both uplift and destroy communities. the economic status of those who are farthest
Thus, care must be taken when trying to aid the behind.
constituencies served by the industry.

Growth Goals Equity Goals

What creates the most growth? What creates the most prosperity?
• Posits aggregate growth is always a net • Prioritizes equitable distribution
positive outcome. over economic productivity.

• Discourages redistributive policy as it harms • Encourages redistributive policy to foster

economic efficiencies. economic mobility.

• Uses regulatory incentives to lessen negative • Prefers institutional reforms to directly

growth impacts. reverse inequities.

A Flawed Paradigm. though, the sector is steered toward growth goals

Due to the inherent tensions within these because major funders have a vested interest in
concepts, CDFIs tend to prioritize growth or equity cultivating economic expansion.
and not growth and equity. In part, this is because The long-established CDFI impact framework
their low levels of capacity make it hard to focus centers on filling in financing gaps and providing
on both outcomes simultaneously. Critically, products that “prime the pump” for mainstream

2 | Growth, Equity, and Individual Welfare: A Theoretical Framework

lenders. Accordingly, CDFIs’ default method CDFIs exert a positive influence on an individual’s
of intervention is the provision of credit. Yet welfare is not an easy task. Great care must be
in using this the mode of aid to measure CDFI taken to properly define and operationalize an
effectiveness, the industry’s major stakeholders amorphous concept like “welfare.” And no matter
have defined outcomes by what is in their how CDFIs are evaluated, attributing outcomes to
institutional interests. This can be the same as a particular intervention is always difficult. Despite
what is in the best interest for the individual and such limitations, we believe this type of analysis is
their community. But in many cases, there is a needed to make progress in this area – and offer
vast difference between institutional interests and our proposal as a starting point.
individual welfare.
The Path Forward.
Reframing CDFI Evaluation. For CDFIs and all community development
These issues are the inevitable result of trying organizations, the pervasive nature of the growth-
to utilize the financial and relational resources of equity paradigm has had a lasting influence on
institutions that, directly and indirectly, perpetuate impact measurement and evaluation activities.
the same systemic inequities CDFIs seek to Ultimately, there is a fundamental misalignment
alleviate. The growth-equity spectrum is at least between how CDFIs were designed to function
partially responsible for many of the challenges and how they are incentivized to operate. Absent
the industry faces in impact measurement and significant changes, this lack of congruence will
evaluation. We propose an alternative approach make it difficult to engage in meaningful impact
focused on individual welfare, where “individual” measurement or evaluation.
means all direct and beneficiaries who may When the level of incongruence between policy
experience a change in well-being due to the goals and practice are this large, systems-level
CDFI’s intervention. Importantly, the extent to change is difficult. Nevertheless, we are cognizant
which an intervention results in any change must that incremental policy shifts can snowball in ways
be weighed proportional to the beneficiaries’ that alter otherwise path dependent institutions.
relational position in the community and relative To start that process, one recommendation is
level of economic freedom. updating the Community Reinvestment Act (CRA)
to incentivize support for alternative evaluation
Limitations & Caveats. models. This includes analysis lenses which
Our framework is intended to be theoretical, and consider distributive and procedural justice and/
further iteration will be required to operationalize or those which integrate relative societal position
it into a workable concept. Considering how or if into outcome assessments.

3 | Growth, Equity, and Individual Welfare: A Theoretical Framework

Jamie R. McCall*
Vice President, Economic Development Policy
Carolina Small Business Development Fund
ORCID: 0000-0001-6984-5739

Nora L. Anzawi
Impact Data and Reporting Manager
AltCap
ORCID: 0000-0001-9178-2092

Miles T. Zeller
Policy and Research Associate
AltCap
ORCID: 0000-0001-8294-8804

James R. Onorevole
Program Associate, Economic Development Policy
Carolina Small Business Development Fund
ORCID: 0000-0001-8293-6766

4 | Growth, Equity, and Individual Welfare: A Theoretical Framework

ABOUT THIS REPORT
We believe that CDFIs are powerful and transformative tools for good, and that those who support this
work financially and through other means share that view. This analysis offers a deeply self-reflective
and somewhat critical assessment of the CDFI industry and its stakeholders. The goal of this project
is to identify more effective ways for CDFIs to serve their communities. To uplift and empower the
populations we support; CDFI must engage in meaningful impact measurement and evaluation.

ACKNOWLEDGMENTS
We are grateful to Adams Nager, whose scholarship inspired the framework utilized in this manuscript.
We additionally thank Lance Loethen at Tract Advisors for his thought-provoking feedback and for
providing data on CDFI organizational structures obtained through Freedom of Information Act (FOIA)
requests. The quality of this manuscript was also substantially improved by insights provided by Mike
Eggleston at the Federal Reserve Bank of St. Louis, Lillian Graning at Live Oak Bank, and Megan Crook
at Alt Cap. Our research assistants, Carter Roberson and Jamie Andrews, were outstanding with their
meticulous attention to detail. Finally, we are thankful that the leadership of Carolina Small Business
Development Fund and AltCap deeply value and appreciate the importance of doing this kind
of research.

FOR MORE INFORMATION

Jamie McCall* Nora Azawi
VP, Economic Development Policy Impact Data and Reporting Manager
Carolina Small Business Development Fund AltCap
[email protected]

*Jamie was the VP, Economic Development Policy for Carolina Small Business Development Fund through
January 2023. As of the date of publication, he is the Research and Insights Manager for the Center for Board
Effectiveness, a division of Deloitte US firms. The views and opinions expressed in this report, as well as any
derivate products related to it, are solely his and do not necessarily represent those of his current employer.
For questions about this specific research brief or report, Jamie can be reached at [email protected]. For
general questions about CSBDF’s work, please contact [email protected].

SUGGESTED CITATION
McCall, Jamie R., Anzawi, Nora L., Zeller, Miles T., & James R. Onorevole. 2023. “Growth, Equity, and Individual Welfare: A
Theoretical Framework for ‘Moving the Needle’ on CDFI Impact Evaluation. Carolina Small Business Development Fund and
AltCap. Raleigh, NC and Kansas City, MO. doi: 10.46712/evaluation.frameworks.

5 | Growth, Equity, and Individual Welfare: A Theoretical Framework

EXECUTIVE SUMMARY
Community development financial institutions (CDFI) are grassroots entities that guide sustainable
economic growth by prioritizing the needs of marginalized populations. CDFI intervention methods are
based on the idea that credit access and development services can strengthen and rebuild disinvested
neighborhoods. But since the provision of credit can be either beneficial or destructive, care must be
taken when trying to aid the historically disenfranchised constituencies served by the sector. While
community development lenders have existed for many decades, the CDFI Fund’s enabling legislation
was passed in 1994.1 In the interim period there has been remarkable growth in the number of certified
CDFIs, which increased sevenfold between 1997 and 2021.2

In recent years, CDFIs have worked toward shifting their evaluation focus from outputs to outcomes
while also encouraging funders to support evaluation costs. However, the industry still has few examples
of robust impact measurement techniques or successful program evaluation initiatives. Using the finance
industry as an illustrative case study, our analysis suggests the phenomenon is tied to the ability of
external forces to shape CDFI evaluation practices. Stakeholders have set a framework where CDFI
interventions are measured chiefly by whether they promote growth. In the case of financial institutions,
impact investors, and other providers of capital, this means ensuring provided funds have an acceptable
return on investment. As a result, equity-based goals in community development activities have been
minimized.

To help solve these issues, we offer a starting point by arguing for the need to reimagine the
industry’s evaluation paradigm. Beyond growth and equity, we propose CDFIs consider whether their
activities promote improvements in individual welfare. In our proposed framework, individual welfare
improvements should be weighed proportionally to a CDFI beneficiary’s level of economic autonomy
and relational social position. Admittedly, our proposal is purely theoretical. Additional research is
needed to refine the concept into a more practical and workable model for the CDFI community.

When the level of incongruence between policy goals and practice are this large, systems-level change
is difficult. Despite the challenges, we believe there is a viable path forward because incremental policy
shifts can snowball and alter path dependent institutional forces. For example, regulations could be
updated to incentivize support for evaluation models which consider distributive/procedural justice and/
or those which integrate relative societal position into outcome assessments.

1
Riegle Community Development and Regulatory Improvement Act, 12 U.S.C. 47 § 4701 (1994).
2
Based on estimates compiled by the Opportunity Finance Network (2021) from data posted on the US Department of the Treasury website.

6 | Growth, Equity, and Individual Welfare: A Theoretical Framework

INTRODUCTION
The inability of marginalized communities to access financial products on reasonable terms is an
enduring issue with wide-reaching economic effects. For decades, slow progress in this area has
accelerated patterns of disinvestment and income inequality across the nation (Ergungor, 2010; Lynch
et al., 2021; Taggart & Smith, 1981). CDFIs offer a model of assistance with the potential to reverse this
trend by offering disadvantaged constituencies affordable credit products (Greer & Gonzales, 2016; Park
& Quercia, 2020). However, as the Congressional Research Service has observed, “measuring the extent
that CDFI activities in underserved markets are advancing financial inclusion is challenging” (Getter,
2022, p. 1). While a robust body of theoretical evidence supports the CDFI model of intervention,
attempts to systemically evaluate and measure the industry’s impact have yielded disparate results (J.
McCall & Hoyman, 2021; Theodos & Seidman, 2017).

In this report, we consider the role of the existing CDFI impact measurement and evaluation paradigms
in creating these challenges. Our argument is simple, yet ambitious: to turn the tide of systemic
disinvestment in marginalized communities and neighborhoods, CDFIs must fundamentally rethink
the goal of their activities. And to do that, industry stakeholders must adequately support meaningful
impact measurement practices. The analysis proceeds in two parts. First, to advance beyond the current
slate of issues, we propose a theoretical framework of assessment which emphasizes the role of CDFIs
in promoting individual welfare. Second, we apply literature on path dependency, political regimes,
institutional history, and isomorphic pressures to outline how stakeholders have shaped the use of
impact evaluation by CDFIs.

FROM GROWTH AND EQUITY TO INDIVIDUAL WELFARE

Like other community economic development organizations, CDFIs have traditionally been measured
and evaluated by their ability to meet growth and equity goals (Wardrip et al., 2016). Growth-oriented
goals see development as a process where “a rising tide lifts all boats.” In other words, economic
expansion is a desirable end unto itself. To the extent this causes adverse impacts, the growth
perspective argues the benefits always outweigh the cost (Hines et al., 2001). In contrast, equity-
oriented frameworks view development policy as a tool to create community-level prosperity.3 Equity
strategies have an intentional focus on improving the economic status of those who are most behind
(Furman, 2019; Pike et al., 2007).
For policymakers, growth and equity are often viewed as separate and fundamentally distinct goals
(Okun, 2015). The notion that it is unrealistic to pursue both objectives simultaneously has shaped
decision-making at all levels of government (Harvey, 2009; Kantor, 2016; Slattery & Zidar, 2020; Stiglitz,
2012; Zhang et al., 2017). But if we think of growth and equity goals as a spectrum, most development
policy strategies should fall somewhere between either extreme (Stone, 2011). For instance, as a strategy

3
There is a strong consensus in the literature that equity should be viewed through a socioeconomic lens (Squires & Kubrin, 2006). However, federal
regulations have historically defined the term as applying to financial service gaps only within low- and moderate-income communities (Kilkenny,
2002). Economic disparities have a clear overlap with social forces like institutional racism, and this is widely acknowledged by the CDFI industry.
But such considerations are not yet a formal part of the federal regulatory framework (S. Adams, 2009).

7 | Growth, Equity, and Individual Welfare: A Theoretical Framework

which often causes gentrification (even if often unintended), we might plot place-based development
as growth-leaning (Betancur, 2011; Brazil & Portier, 2022; Layser, 2019). Conversely, given its use of
interpersonal networks as a tool for prosperity and interconnectedness, we could classify social capital
strategies as equity-leaning (Chetty et al., 2022; J. R. McCall et al., 2021; Putnam et al., 1994).

DEVELOPMENT TENSIONS BETWEEN GROWTH & EQUITY

Development Policy Tensions
GROWTH EQUITY

Guiding Policy Question: Guiding Policy Question:

What creates the most total aggregate What creates the most individual
economic growth? prosperity on a relative basis?
• Prioritizes economic growth because • Prioritizes equitable distribution
the aggregate benefit outweighs any of resources over increases in
negative externalities. economic productivity.

• Discourages redistributive policy • Encourages redistributive policy as a

because it may adversely impact tool to increase economic mobility and
economic efficiencies. social cohesion.

• Prefers to lessen negative externalities • Prefers institutional reforms to directly

through indirect means like alter and reverse negative externalities.
regulatory incentives.

We theorize this paradigm is at the heart of the challenges faced by the industry and propose an alter-
native that considers whether an intervention bolsters individual welfare.4 In this context, “individual”
means direct and indirect beneficiaries who may experience a change in well-being due to the CDFI’s
assistance (Rey-Garcia et al., 2017). Direct beneficiaries are those which meet an intervention’s eligibility
criteria and subsequently receive the intervention. Indirect beneficiaries are those who did not receive
the intervention but are affected by it due to their individual and/or institutional relationships (Ange-
lucci & Di Maro, 2016). Importantly, the extent to which an intervention results in any change must be
weighed proportional to the beneficiaries’ relational positions in the community and relative levels of
economic freedom (E. Anderson, 2010; E. S. Anderson, 1999; Heller, 2019; Rawls, 1999; Sen, 2000). As
a starting point for operationalizing this concept, we propose measuring changes through increases in (1)
wealth, (2) real income, and (3) financial capability (Bailey, 2022).5

4
Admittedly, the extent to which development institutions promote individual welfare is rarely considered. The extant scholarship overwhelmingly
focuses on incentives and other traditional development tools (Kil Huh et al., 2017).

8 | Growth, Equity, and Individual Welfare: A Theoretical Framework

Considering how or if CDFIs exert a positive influence on an individual’s welfare is not an easy task (Ad-
ler, 2019). Great care must be taken to precisely define and operationalize an amorphous concept like
“welfare” (Alkire, 2016; Nussbaum, 2013). Additionally, an array of factors makes it hard to know if any
CDFI activity is responsible for observed indicator changes. For these reasons, our framework is theoret-
ical and further iteration will be required to operationalize it into a workable concept. Nevertheless, this
type of analysis is needed to begin “moving the needle” on impact measurement and evaluation.

GUIDING QUESTIONS FOR INDIVIDUAL WELFARE FRAMEWORKS

Individual Welfare Economic Autonomy Individual Welfare

• Is there an observable change • What is the gain in the • Are there improvements in
in well-being for the targeted individual’s level of relationships with community
beneficiaries? economic freedom? institutions?
• How likely is it that any change • Are the observed improvements • Is there an increase
can be attributed to the CDFI’s temporary or permanent? in participation in
activites? heterogeneous social
networks?

GROWTH OR EQUITY? THE EMERGENCE OF THE

CDFI MODEL
The movement of policy along the growth or equity spectrum is mostly incremental, although on
occasion, political actors or governing institutions can cause rapid change (True et al., 2007). The
punctuations are frequently marked by landmark legislative reforms (Baumgartner & Jones, 2009). The
CDFI structure was crafted by during two periods of punctuated equilibrium in the federal policymaking
process (Rast, 2012). In 1977, the Community Reinvestment Act (CRA) created a regulatory framework
which incentivized large financial institutions to support community development activities.6
Subsequently, the Riegle Act of 1994 created the Community Development Financial Institutions Fund
(CDFI Fund) as an agency of the US Department of the Treasury. CDFIs have since become convenient
vehicles for CRA-regulated institutions to meet their community development goals (Marshall, 2004).

5
These dimensions are intended to be guiding principles for individual-level welfare evaluations. Exact metrics will vary based on an entity’s pro-
grammatic activities and targeted populations. For example, under this framework an affordable housing organization might measure the percent
of beneficiaries who are now in stable housing after being evicted. That type of metric would fall under a positive change in financial capability
(Stilz, 2013).
6
Community Reinvestment Act, 42 U.S.C. 69 § 5301 (1977)

9 | Growth, Equity, and Individual Welfare: A Theoretical Framework

At least in theory, CDFI certification signifies an entity’s primary mission is to help people and places
that have been underserved by traditional banking institutions (Patraporn, 2015).7,8 To achieve this
goal, the CDFI model is defined by three quintessential characteristics. First, to ensure responsiveness
to local needs, service areas are intended to have small geographic footprints (Smith et al., 2009).
Second, community members should have input into a CDFI’s operation, which usually comes from
representation on the Board of Directors (Berner et al., 2019). Third, CDFI products and services should
be simple, accessible, and meet basic consumer and/or small business banking needs (Simon, 2002;
Swack et al., 2015; Wallace, 1999).

Beyond these characteristics, CDFIs vary greatly in their organizational structure and activities. For
systematic impact evaluations, this is a challenge as a lack of homogeneity makes it difficult to create
cross-organizational benchmarks (Benjamin et al., 2004). There were about 1,100 certified CDFIs
operating as loan funds, credit unions, banks, holding companies, and venture capital funds as of 2019
(Community Development Financial Institutions Fund, 2020).9 Revolving loan funds represent a slight
majority (528, 51.2%) of the sector by count, though they are dwarfed by CDFI depository institutions in
terms of total assets.

COUNT AND MEAN FINANCIAL CHARACTERISTIC VALUES OF

CERTIFIED CDFIS IN 2019
Count Operating Operating Investment Loan Total
Type # % Revenues Expenses Portfolio Portfolio Assets
Loan Fund 528 51.2% $4.56M $3.58M $6.04M $28.57M $39.21M

Credit Union 273 26.5% $19.10M $16.30M $43.54M $315.22M $400.68M

Bank or Thrift 129 12.5% $20.03M $13.90M $51.75M $285.68M $401.61M

Holding Company 10 87 8.4% $23.42M $15.58M $63.97M $324.33M $460.33M

VC Fund 14 1.4% $5.17M $5.05M $4.51M $16.92M $25.51M

7
CDFIs must demonstrate at least 60% of services are provided to target markets. Target markets can be either (1) economically distressed invest-
ment areas as defined by 12 CFR § 1805.201(b)(3)(ii) and/or (2) a population that lacks access to financial products per 13 CFR § 1805.201(b)(3).
8
The CDFI model offers services that are neither appropriately subsidized by the state (due to their high cost) nor provided by the private sector
(due to their low profit potential). This contributes to their endemic resource constraints and dependency on philanthropy (Haugh & Kitson, 2007).
9
The table includes data for the 1,031 CDFIs who submitted annual compliance reports to the CDFI Fund in 2019. This was most, but not all, of
the certified CDFIs in existence at the time.
10
Holding companies are a complex structure used by large financial institutions to “own” multiple banks (Avraham et al., 2012). In many cases,
CDFI holding companies have multiple constituent CDFI banks, even though the holding company and its banks may not necessarily be distinct
and mutually exclusive. The data do not allow us to distinguish between these types of entities, and thus there may be duplication.

10 | Growth, Equity, and Individual Welfare: A Theoretical Framework

CREDIT AS THE PRESUMPTIVE COMMUNITY
DEVELOPMENT STRATEGY
The CDFI Fund and the CDFI certification process emerged in tandem with an array of policies
designed to help “entrepreneurs identify and capitalize on new markets and business opportunities”
(Atkinson, 2020; Elisinger, 1995, p. 153). The structure was created primarily to provide credit via
subsidized lending to underserved enterprises and individuals (Birkenmaier & Tyuse, 2005; Bradshaw &
Blakely, 1999; Reuben & Queen, 2015).11 At the time, financing was seen as a laudable and innovative
development strategy because loans were not “handouts” to entrepreneurs (N. M. Jensen & Malesky,
2018).12

The use of financing is based on an elegantly simple idea: capital access is critical for growth (Bynum
et al., 2018; Quinn, 2019; Wherry et al., 2019).13 However, the ability of lending to act as a panacea for
the economic ails of underserved communities should be viewed with some skepticism (Dwyer, 2018;
Krippner, 2017; Porter, 2012; Prasad et al., 2012). As one systematic review of small and medium-
sized enterprise (SME) financing noted, “it remains unclear to what extent SME financing contributes
to economic development and poverty reduction” (Kersten et al., 2017, p. 330).14 To be sure, there is
acknowledgment in the CDFI sector that debt capital by itself is insufficient for community prosperity
(Nowak, 2016). Yet it is unclear what other sectors can or should provide complementary interventions
when affordable capital is necessary but not sufficient for equitable development (Rainey et al., 2003).

A “grassroots” approach to wield influence. CDFIs are a creature of federal policy, but their emergence
can be tracked through support for financing interests at lower levels of government via urban regimes
(Fainstein, 2014; Peterson, 1981; Stone, 1993). Regimes advocate for a growth paradigm that views
prosperity as the precursor to a more inclusive economy (Logan & Molotch, 2007). Central to this is
the idea that an improved built environment leads to better economic conditions, which increases the
wellbeing of marginalized populations. In practice, however, this type of development fosters wealth
concentration that benefits elites at the base of a regime’s entrenched power structure. Thus, it is almost
impossible for regimes to carry out equity-oriented redistributive policy (Kelly & Lobao, 2021; Peterson,
1981; Pistor, 2019).

11
This idea was not new – the Small Business Administration (SBA) had existed for decades by the time the CDFI Fund was established. But the
creation of the Fund signaled that providing subsidized financing to underserved areas had reached a critical threshold of political viability in the
policy stream (Kingdon, 2010).
12
For large private enterprises though, direct cash transfers via incentives have long enjoyed bipartisan support at the state and local levels (Love-
ridge, 1996; Lowe & Feldman, 2018). In theory, the economic impacts of larger firms via job creation and capital investment should be far larger
than the cost of any incentive package (Rubin & Rubin, 1987). However, research suggests that incentivized firms do not create more jobs than
matched control groups of firms who did not receive incentives (Donegan et al., 2019).
13
The macroeconomic arguments for the importance of capital are context dependent. For small businesses, one issue is scalability (Wille et al.,
2017). Few small- or medium-sized firms have access to the cash or equity they need to expand, which makes it harder for them to grow
absent financing.
14
A similar cautionary tale is the rise and fall of international microfinance. After an exhaustive review of 2,643 evaluations of microfinance initia-
tives, the UK’s government-funded Evidence for Policy and Practice Coordinating Center found insufficient evidence to support the idea that such
interventions had reduced poverty (Duvendack et al., 2011).

11 | Growth, Equity, and Individual Welfare: A Theoretical Framework

Urban regimes are sustained through alliances between elected leaders and an array of private sector
interests (Austin & McCaffrey, 2002; Mossberger & Stoker, 2001). Lending as a policy tool can be traced
back at least partially to these alliances, which frequently utilized banking interests to grow a regime’s
base of support (Baumol, 1990). An example of this was Philadelphia’s Republican regime, which aligned
itself so closely with banking interests in the 20th century that it birthed the modern financial industry (C.
T. Adams, 1988; McCaffery, 1993). On the other side of the aisle, multiple iterations of the Democrat-
run Chicago political machine consolidated power by forming symbiotic relationships with real estate-
allied banking interests (Rose & Biles, 2020; Stapinski, 2009).

Federal policy aligns with private interests. By the dawning of the 20th century, the banking industry
wielded enormous influence. According to some accounts, the power of financial institutions at the
time dwarfed that of any other sector (White, 1982). Thus as political machine-based regimes waned in
power in the early 20th century, the industry was cementing its alliances at the federal level (Wolfinger,
1972). By the end of the Great Depression, federal policymakers made their first notable foray into
the housing market. Elected leaders began positioning homeownership as the pathway to wealth, an
idea that drew the support of banking entities. This shared interest ultimately enabled redlining, the
practice of using red color codes to identify neighborhoods with high densities of minority residents as
“hazardous” for mortgage lending purposes (Hillier, 2003; Lang & Nakamura, 1993). While many diverse
neighborhoods suffered economic damage from this, majority Black communities were among the most
adversely effected (Robertson et al., 2022; Taylor, 2019).

This behavior was the result of a political and economic alliance between elites so strong that
“fundamentally and intentionally discriminatory in nature, government redlining was private redlining
and vice versa” (Winling & Michney, 2021, p. 44). Though the practice was outlawed in 1968 via the Fair
Housing Act, its effects have cast a long shadow.
Redlined communities still have higher levels of
$200
unemployment, suppressed property values, and White
poor public health outcomes versus non-redlined
$160
communities with similar characteristics (Aalbers,
2012; Aaronson et al., 2021; Li & Yuan, 2022;
Lynch et al., 2021; Zenou & Boccard, 2000).15 $120 All Races

Today, Black and Hispanic households still have

the lowest levels of net worth and homeownership $80
Other Race
rates of any racial demographic (Bhutta et al., 2020;
Turner & Luea, 2009; US Census Bureau, 2022). $40 Hispanic
While other industries now wield influence that Black
rivals the financial lobby, banking interests remain
$0
powerful – as can be seen, for example, through its 40% 45% 50% 55% 60% 65% 70% 75% 80%
contribution to the 2008 financial crisis (Igan et Homeownership Rate (%)
al., 2012).

15
Residents in formerly redlined communities are also more likely to be targeted by payday lenders and similar predatory entities (Hawkins & Pen-
ner, 2021). These types of high interest financial products have many adverse impacts, and using them makes it harder for payday borrowers to
cover everyday expenses over time (Melzer, 2011).

12 | Growth, Equity, and Individual Welfare: A Theoretical Framework

Changing the system from within. CDFIs are tasked with leveraging the financial and relational
resources of institutions that, directly and indirectly, perpetuate the same systemic inequities they seek
to alleviate (Fainstein, 2011; Fitzgerald & Leigh, 2002). This creates an inevitable tension. It can be
challenging for CDFIs to provide affordable financial products while being supported by revenue-driven
institutions that seek to protect and grow their balance sheet. After all, one way CDFI stakeholders
safeguard their portfolio is by rationing credit for risky borrowers (Faleye & Krishnan, 2017).

These institutions are major resource providers for the industry, and that alone allows them to shape
how CDFI activities are measured and evaluated (Cornforth & Edwards, 1999; Meyer & Rowan, 1977;
Suykens et al., 2021). The existing rubric used by financial stakeholders measures CDFI performance by
their ability to fill in financing gaps and provide products that “prime the pump” for mainstream lenders
(Lash, 1998). Accordingly, CDFIs’ default and primary method of intervention is the provision of credit.
Yet in using this lens to measure CDFI effectiveness, the industry’s stakeholders have defined outcomes
by what is in their institutional interests – which may not be what is best for the individual and their
community.16

In many cases, CDFI activities provide alignment between institutional interests and individual welfare.
For example, while the financial sector does indeed view CDFIs as a mechanism to move populations
into mainstream lending, this is not in itself a conflict (Andreoni & Chang, 2019). We agree that providing
credit on reasonable terms to the populations CDFIs serve is congruent with both the spirit and intent of
our proposed framework. When development entities provide equitable access to debt which improves
the net worth of individuals or businesses, the economic spillover effects often promote community-
level prosperity (Kovner & Lerner, 2015).

We also believe there are cases where a model of assistance centered around the provision of credit is
inadequate. In such cases other form may result in better outcomes, for example, providing extensive
technical assistance without any lending or giving grants. At best such alternative strategies are
undervalued by CDFI evaluation processes, and at worst, they are actively discouraged. This has the
effect of dampening innovation in the design and structure of CDFI aid programs (Horton & Mackay,
2003; Szijarto et al., 2018).

External pressures on CDFIs. The mechanisms that have allowed this phenomenon to occur are
complex. We theorize that major industry stakeholders exert isomorphic pressures over CDFIs in ways
that have prioritized growth while concurrently deprioritizing meaningful impact measurement and
evaluation (Williams et al., 2022). As proposed by DiMaggio and Powell (1983), institutional isomorphic
pressures refer to how organizational decision-making is shaped by (1) coercive, (2) mimetic, and (3)
normative forces:

(1) Coercive isomorphism occurs when CDFIs feel they must respond to the impact measurement
and evaluation needs of funding entities, even if doing so is incongruent with their mission (Krause
et al., 2019; Siddiki & Lupton, 2016). Similar to other types of community development nonprofits,

16
CDFIs often focus on organizational growth and scaling to meet expectations around providing more loans. But rapid growth can make it difficult
to maintain a high level of responsiveness to community needs (Nowak, 2016; Swack et al., 2015).

13 | Growth, Equity, and Individual Welfare: A Theoretical Framework

 the CDFI industry’s reliance on external resource providers makes them particularly susceptible to
negative coercive forces (Stoecker, 1997).

(2) Mimetic isomorphism is reflected in the tendency of CDFIs to mimic the impact and evaluation
strategies of other organizations. Organizational activities that are driven by mimetic behaviors can
be positive or negative, depending on the context. For example, there is a tendency to engage in
mimetic isomorphism during periods of high uncertainty, but serendipity often dictates whether
such behaviors result in intended or unintended programmatic outcomes (Hallonsten & Hugander,
2014; Lee & Clerkin, 2017).

(3) Normative isomorphism is the result of standards within organizations being shaped by the forces of
professionalization (AbouAssi & Bies, 2018). The positive or negative nature of this category is
highly context dependent (Becker, 2018; Gugerty, 2009; Prakash & Gugerty, 2010). As an example,
industry pressures to utilize third party ratings are often negative because the process diverts
resources away from internal capacity building (Christensen & Ebrahim, 2006). Conversely, such
pressures can be positive when the accreditation is used to create mission alignment in a manner
that aids strategic decision-making (LeRoux & Wright, 2010).

CONCLUSIONS AND RECOMMENDATIONS

The story of how a singular industry – finance, in the case of CDFIs – becomes intertwined with political
interests at all levels of government is a common tale. Since the Reconstruction era, private and public
sector interests have aligned to perpetuate inequities that have become deeply ingrained into the fabric
of American life (Feagin, 2013; Hacker, 2008). Those inequities are mutually reinforced by private and
public institutions through various mechanisms, including highly effective lobbying campaigns
(Holyoke, 2003).

While the banking sector undoubtedly wields the most influence in shaping CDFI evaluation
frameworks, it is joined by a constellation of other forces (Balboni & Travers, 2017). The CDFI industry’s
growth has attracted a plethora of third-party rating agencies, information technology vendors, and
business consultants – all of whom have a vested interest in shaping the contours of these issues. These
stakeholders shape evaluation processes by both direct control of resources and indirectly by exerting
political influence over regulators (Uddin & Belal, 2019).

For CDFIs and all community development organizations, the pervasive nature of the growth-equity
paradigm has had a lasting influence on impact measurement and evaluation activities. CDFIs tend to
prioritize growth or equity and not growth and equity. In part, this is because their low levels of capacity
make it hard to focus on both outcomes simultaneously. Critically, though, the sector is steered toward
growth goals because major stakeholders have an institutional mandate to promote economic expansion
at all costs (Blackmond-Larnell, 2018; Lewis & Neiman, 2009; Prasad et al., 2012; Sarig, 2015).17

17
Forces which drive CDFIs toward pursuit of economic growth at all costs are not necessarily intentional. CDFIs are providing financing to people
and places that may not have needed their help, if not but for the historical actions of traditional banking institutions (Affleck & Mellor, 2006).

14 | Growth, Equity, and Individual Welfare: A Theoretical Framework

To advance beyond the growth-equity paradigm, we have proposed a re-orientation that emphasizes
individual welfare. Changes in individual welfare should be contextualized by concurrently considering
both relative improvements in economic autonomy and changes in relational status within embedded
power structures. Importantly, our approach starts with improvement in individual welfare, but the goal
is to foster economic and social change at the systems level.

INDIVIDUAL WELFARE LENS FOR CDFI EVALUATION

Welfare Change Contextualized By Measured By

• Wealth
• For direct and indirect beneficiaries. • Relative societal position.
• Real Income
• Positive well-being improvements • Economic freedom changes.
• Financial Capability

It is no easy feat to utilize resources from an industry to try and undo the inequitable system it
perpetuates. But given the incongruence between how CDFIs were designed to function and how they
are incentivized to operate, the confounding results of CDFI impact and evaluation activities are to be
expected. Absent significant changes, CDFIs will continue to face the same set of obstacles in this area.

When the level of incongruence between policy goals and practice are this large, systems-level
change is difficult. As previously noted, there is strong consensus that the policy process is largely
incremental. Periods of punctuation are relatively rare, and when they do happen, they are often caused
by unexpected exogenous events (Pump, 2011). It’s unlikely that that incremental change alone will
incentivize CDFI stakeholders to promote evaluation systems that use an individual welfare lens (Adam
et al., 2022).

Nevertheless, we are cognizant that incremental policy shifts can snowball in ways that alter otherwise
path dependent institutions (C. Jensen, 2009; Mintrom & Norman, 2009). In that spirit, there are
a few ways to begin “moving the needle” toward more meaningful CDFI evaluations. For example,
regulatory changes to the Community Reinvestment Act (CRA) could include directly giving community
development credit to institutions that directly fund alternative evaluation models. Useful analysis
paradigms would include those which consider distributive and procedural justice or otherwise
integrate relative societal position into outcome assessments (Hecht, 2017; Törnblom & Vermunt, 1999;
Vijayendra & Woolcock, 2003).

15 | Growth, Equity, and Individual Welfare: A Theoretical Framework

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