A closer look at rural CDFIs


Nick Haltom, Stephanie Norris

Business district located in a rural American town.

Community development financial institutions (CDFIs) connect low- and moderate-income communities to capital. In rural communities especially, CDFIs can be important resources. They often play leading roles in important economic initiatives. Some of these efforts include recovering from natural disasters, convening collaboration among local stakeholders for development projects, and providing technical assistance to small businesses and entrepreneurs. In some cases, they are the sole providers of capital and banking services in an area. A CDFI’s role is often amplified in a rural community where there are fewer organizations to provide these services.

One area of focus for the 2023 survey was understanding how well CDFIs were able to meet the needs of their communities. Of the 451 CDFIs included in the Federal Reserve’s 2023 CDFI Survey Key Findings Report, 115 respondents (25 percent) reported that their CDFI focuses on serving rural areas. More than half of these CDFIs reported serving rural areas exclusively. Like the CDFIs in the sample overall, most rural CDFIs experienced increased demand for financial products over the past year. Importantly, CDFIs were largely able to meet this increased demand, but some reported significant challenges. While rural CDFIs, like the communities they serve, are diverse, many face common barriers to serving their communities. Here, we take a closer look at what the 2023 CDFI Survey revealed about the challenges rural CDFIs face.

Explore the Findings

2023 CDFI Survey

The Federal Reserve’s Survey of Community Development Financial Institutions (CDFIs) is administered biennially to CDFIs across the country. The 2023 gathered information from 453 CDFI respondents from April 24 to June 2. This article is the first of three follow-up articles to the 2023 CDFI Survey Key Findings Report

Who are the rural CDFIs in the survey?

When asked about the geographic areas their CDFI served, 37 percent of respondents reported serving exclusively, or primarily, urban areas. Twenty-five percent who responded to the survey said their CDFIs served either primarily or exclusively rural areas. The balance of respondents (33 percent) reported serving two or three of these geographies equally. We consider rural CDFIs to include the respondents who reported having an entirely rural service area (64 respondents) as well as respondents who reported devoting most of their resources to rural parts of a mixed geographic service area (51 respondents). These CDFIs reported serving communities in 43 states and Puerto Rico.

Survey respondents represented a range of institution types and business lines. There were slight differences between the types of CDFIs that serve rural areas compared to nonrural areas. Forty-three percent of the rural CDFIs in our survey were loan funds (compared to 50 percent of nonrural CDFIs). Thirty-two percent were credit unions (compared to 36 percent of nonrural CDFIs). Community development banks/thrifts made up 18 percent of rural CDFI respondents but only 7 percent of nonrural CDFI respondents. The remaining 6 percent of rural CDFIs were a mix of holding companies and other institutions. Fourteen of the rural loan funds were also native CDFIs, and 15 of the credit unions were cooperativas serving Puerto Rico.  

Rural and nonrural respondents represented CDFIs of all sizes, though rural CDFIs were more likely to fall into the smaller asset size categories than nonrural CDFIs. Still, there was little difference in the sectors served by rural and nonrural CDFIs. Across geographies, most CDFIs reported either small business lending or consumer finance as their primary business line. Business lines varied by CDFI type, with credit unions predominantly offering consumer finance products, and most loan funds offering financial products to small businesses. (See chart below.)

What kept rural CDFIs from meeting demand?

Like their nonrural counterparts, many rural CDFIs (76 percent) reported increased demand for their financial products over the past year. An additional 19 percent (21 CDFIs) reported steady demand. Rural CDFIs were able to meet much of that demand, although ability varied by CDFI type: Depository institutions (credit unions and banks/thrifts) were more likely than rural loan funds to have met all or most of the steady/increasing demand. (See chart below.)

Rural CDFIs that were unable to fully meet demand for products were hindered by challenges similar to nonrural CDFIs. Lending capital was a priority for loan funds. And staffing was top of mind for credit unions. Among banks/thrifts, borrower qualifications and staffing were top challenges. (See charts below.)

However, rural respondents also shared distinct challenges that reflect the structural characteristics of small towns and rural areas. For example, rural labor markets tend to be smaller than those in metro areas. This may make it difficult for rural organizations to find and hire the talent they need. Outside of lending capital, rural loan funds were more likely than other loan funds to cite staffing as a significant factor affecting their businesses. For rural community development banks/thrifts, borrower qualifications particularly stood out as a significant challenge to meeting demand. Challenges related to borrower qualifications may be amplified in rural areas by the staffing challenges. Eight of the 10 banks/thrifts that cited borrower qualifications as a top challenge also cited that “too few staff” was a challenge to providing development services. This often includes helping borrowers improve their credit worthiness and their ability to take on loans.

In small towns and rural areas where physical distance and travel time can make in-person transactions more challenging, technology that connects CDFIs virtually to their customers/clients can improve access to financial products and services. Among the small number of rural credit unions unable to fully meet demand, 12 of 13 cited technology as a factor. Rural credit unions were also much more likely to cite operational funding challenges than nonrural credit unions. But the absolute numbers are small.

What do these challenges look like for rural CDFIs?

Specific challenges provide insight into the unique environment of rural-serving CDFIs. CDFIs across service areas reported needing access to capital, but communities in rural areas have historically faced underinvestment from both philanthropic and public spending. When it comes to capital for lending and operations, rural CDFIs were more likely to cite a lack of funders in their area than nonrural CDFIs. For example, 65 percent of rural loan funds cited insufficient funders for lending capital and 71 percent said the same for operational funding. This is compared to 32 percent and 35 percent of nonrural loan funds, respectively.  

Insufficient operational funding may make it difficult for CDFIs to retain staff. Twelve of the 13 (92 percent) rural credit unions citing staffing a challenge said that current staff were leaving for higher pay, making it by far the top staffing issue (the share was 61 percent of nonrural credit unions). This is likely connected to the operational funding challenges more likely to face rural credit unions. Rural credit unions also reported a lack of qualified candidates—also a top staffing challenge for rural loan funds.

Regarding technology, nearly all rural credit unions with technology challenges in our sample were concerned about cybersecurity (compared to about two-thirds of nonrural credit unions). Rural credit unions and loan funds were also more likely than their nonrural counterparts to say that their clients/customers lack access to broadband. The inability to access virtual banking can compound rural challenges such as branch closures and inadequate access to reliable transportation. These limit access to all sorts of financial services. Bank branch closures, which accelerated during the pandemic, disproportionately affect rural areas. While broadband access has improved for rural residents, gaps remain, and reliable internet banking remains out of reach.

What would change the game?

Despite challenges, rural CDFIs were able to deploy capital and provide technical assistance to benefit communities. We asked respondents to share innovative products and their proudest accomplishments over the past 2 years. Some respondents reported the important role their CDFI played in supporting and stabilizing consumers, farmers, and small businesses through the pandemic. One respondent noted, “We participated in the PPP program and were able to help a large number of small rural businesses that were not being helped…”

Respondents mentioned creative initiatives to provide alternatives to predatory loans, offer financing for renewable energy products, and support first time home buyers. Several CDFIs played important roles in helping their communities rebuild after natural disasters. CDFIs also reported successful innovative partnerships. These included collaborations with local school districts, community colleges, and universities to provide technical assistance and training. Others reported forming coalitions and participating in loans with other CDFIs.

However, many respondents voiced the desire to do more. When we asked rural CDFIs what would best enable them to serve their communities more fully, the most frequent responses echoed those of nonrural CDFIs: reduced or streamlined regulatory requirements, increased access to low-cost and flexible capital, and stronger operational funding support for staffing and technical assistance (TA).

Some responses reflected challenges that are exacerbated in rural areas where some resources are limited. Respondents frequently cited the need for resources to build operational capacity, including staffing and technology. In the words of one rural loan fund, “[We need] additional operating support to invest in technology and staff/org capacity so we can expand our loan products and TA services efficiently.” Several respondents mentioned that they need more operational funding to be competitive in the hiring market. Others cited the need for training opportunities to help their staff develop necessary skills. Respondents also voiced interest in increased funding for development services and technical assistance programs.

While CDFIs across geographies mentioned the need to access to low-cost capital, some responses reflected the lack of resources in rural areas. An increase in the quantity and diversity of funding options was one possible solution. “Access to a larger pool of financial resources would significantly bolster our ability to provide flexible financing options to a wider range of clients/customers,” offered one rural loan fund respondent. One survey respondent mentioned how difficult is for rural CDFIs to compete on a national stage for resources. The lack of funders in the immediate area was a major impediment. The respondent suggested that better alignment between funders and investors to persistent poverty regions would help.

Rural CDFIs are often geographically isolated relative to their urban peers, which led to several respondents seeking increased collaboration within communities and across the CDFI industry. Respondents noted that industry-level coordination could help with financial education for clients and customers as well as share what CDFIs can offer. “I would like to see a more centralized, national repository to help promote the CDFI mission of providing educational and technical services to individuals in highly rural areas with lack of access and resources to attend in person,” noted one respondent from a rural community development bank. Another respondent desired “better access to the CDFI Fund staff and support,” while other CDFIs prioritized sharing knowledge and learning from each other. Specifically, one respondent mentioned that a peer learning exchange would be valuable to help their CDFI move into new product areas.

What’s the outlook for rural CDFIs?

When asked about future trends, 69 percent of rural CDFI respondents expected to face increased demand for financial products. Respondents shared strategies they planned to leverage to meet rising demand including collaborating with other institutions, selling loans on the secondary market, hiring and upskilling staff, and attracting new sources of capital. Despite challenges, CDFIs in rural and urban areas continue to adapt and innovate to meet the capital needs of their communities.

A version of this article was published in November 2023 on RichmondFed.org. Check back for upcoming articles digging deeper into the results from the 2023 CDFI survey.