By
Department of Geography, King's College London,
Strand Campus, London WC2R 2LS
United Kingdom
The 1990s were a banner period for community development banking. Community Development Financial Institutions (CDFIs) grew in stature, public support, size, and numbers. They have become increasingly seen in American public life as vital actors in the processes of community reinvestment and economic development (see Bentsen, 1993; Brown, 1993; Greider, 1993; Grzywinski, 1991; Lenzi, 1992; Lii, 1997; Litvin, 1993; Mitra, 1993; Purdy and Sexton, 1995). This boom period was highlighted by the creation of the Community Development Financial Institution Fund in 1994 (CDFI News, 1994; Department of the Treasury, 1998). But despite this increased support and attention, basic questions remain about how CDFIs operate and their ability to meet the financial needs, and improve the lives, of their members. It is also unclear what the relationships are between CDFIs and the places they are embedded in, as well as the extent to which they can be effective in promoting the economic development of the places in which they are located.
This article begins by discussing the growth of, and growth in interest in CDFIs, and examines the political and theoretical meanings and implications of this interest. Four themes dominate this introduction. First, do CDFIs fill a need left unmet by the for-profit market? Second, how should we understand the substantial growth of political support for CDFIs? Third, to what extent are CDFIs truly community based institutions? Fourth, how effective are CDFIs in promoting, and participating in, local economic development? The article then very briefly explains the various forms of CDFIs, and describes the history and structure of one particular type of CDFI, the community development credit union (CDCU). In order to assess the potential, and limitations of CDCUs, the article then presents a case study of one CDCU, Bethex Federal Credit Union in the South Bronx. The article concludes by using the case study to return to the issues of CDCUs in place, community and economic development
The economic crises of the 1970s were manifest in particular ways with regards to the financial services sector. The growth of inflation and the collapse of Bretton Woods in the early 1970s meant that the legally-capped interest rates paid for large depositors in banks became no longer acceptable from the point of view of the investor - particularly the large investor. Thus individuals and institutions with significant sums of capital began to invest directly in financial markets. At the same time, the growth in corporate bonds in the 1970s also meant that large borrowers were no longer dependent on banks for access to capital. Together, "the loss of subsidized deposits and captive borrowers forced a strategic shift for large banks: the consolidation of domestic branch operations in response to cost pressures. Increased options for borrowing and saving benefited large sophisticated savers and borrowers. Smaller savers and borrowers involved diseconomies of scale for banks" (Dymski and Veitch, 1996, p 1246). In short, as the traditional sources of bank profit (large borrowers) and bank capital (large savers) increasingly conducted their transactions with non-bank financial institutions, commercial banks had to reorganize their operations to cut costs, and this meant closing branches, particularly in low-income areas.
The 1980s and 1990s also saw a flurry of financial institution mergers and acquisitions, and the bringing down of the legal firewalls that had existed between banks and non-bank financial institutions. As a result, the number of mid- to large-size banks has shrunk dramatically. Together these changes - the limited profitability of commercial retail banking, and the diminished number of commercial banks due to the mergers - have meant that the number of commercial banks serving low-income neighborhoods has plummeted. In their analysis, Avery and his colleagues (Avery R, Bostic R, Calem P, Canner G, 1997) found that the number of bank branches in low-income areas declined by over 20% from 1975 to 1995.
These economic observations aside, it would clearly be inadequate to discuss the distribution of commercial financial services in American cities and not address the issue of race. Along with the industry's restructuring, what makes the 1970s particularly important in the history of banking, are the substantial political and legal victories that were realized by those who struggled (both in the streets and in the courtrooms) against the practices of financial institution redlining(1) and racial discrimination. The efforts of these organizers yielded the 1975 passage of the Federal Home Mortgage Loan Disclosure Act and the 1977 Community Reinvestment Act (CRA) (Squires, 1992). These acts required that keep records of their loan decisions and invest capital back into the places where they obtain capital in the form of deposits, respectively. In the years since 1977, community organizations have been able to use the CRA to extract more than $350 billion in agreements with financial institutions to get capital into low-income neighborhoods when it otherwise would not go there (Immergluck, 1999; Schwartz, 1998; Shlay, 1999). But despite the successes of the CRA, mortgage lending remains a very racialized process, and, according to the banks' own data, blacks are still 60 percent more likely to be denied a mortgage loan than whites - all else being equal (Browne and Tootell, 1995; Munnell, Tootell, Browne and McEneaney, 1996).
But CRA and anti-redlining struggles tend to focus on access to loans - particularly home mortgage loans. While the structured absence of mortgage capital can unquestionably devastate a neighborhood, given that the median total family net worth of non-homeowners in the United States was only $4,200 in 1998 (Kennickell, Starr-McCluer, and Surette, 2000), it is clear that most inner-city renters are not in positions to buy a home. Their needs as consumers of financial services are much more modest than a mortgage loan and include building some personal savings, having a checking account, and borrowing small sums of money for emergencies and vacations. The diminishing number of branches in low-income areas certainly constrain their ability to meet those consumer needs.
Given the vacuum left in low-income, non-white areas by "mainstream" for-profit financial institutions, alternatives have emerged to fill it. These alternatives have taken two different forms. First, there has been the rapid growth of for-profit retail "quasi-financial services" establishments. The most visible of these being check cashing outlets, which more than tripled in number nationwide from the mid 80s to the mid 90s (Milligan, 1996), and that rapid rate of growth has actually accelerated over the last few years (Bowe, 2000). But given the almost usurious interest rates and fees charged by check cashing facilities, if we are concerned with issues of equity and justice in urban life, then check cashing outlets cannot be the answer to problem of financial institution disinvestment.
The second set of alternatives to emerge to fill the gap are community development financial institutions (CDFIs). These institutions have been created to redirect capital back into low-income areas that have suffered from capital flight and structural disinvestment by traditional banks. Generally speaking, there are five principal types of CDFIs currently operating in the United States: Community Development Banks; Community Development Credit Unions; Community Development Loan Funds; Microenterprise Loan Funds; and Community Development Venture Capital funds. These different types of CDFIs perform different kinds of functions, and range in size from small, volunteer-run, and church-based CDCUs to the much larger community development banks -- and the Los Angeles Community Development Bank was created with $435 million from the federal government (Sass Rubin and Stankiewicz, 2000). This is not the place for a summary of the different CDFIs, their history, and how they operate (although see Gunn and Gunn, 1991; Parzen and Kieschnick, 1992; Tholin, 1994, for useful discussions of this). A few key points about CDFIs, however, must be made here. First, they have grown rapidly and dramatically over the last 10 years. A survey of their membership by the National Community Capital Association found that their assets had grown roughly twenty-fold from 1989 to 1999 (National Community Capital Association, 1999). Similarly, as recently as 1993 there were only three full-fledged community development banks operating in the United States (Tholin, 1993). Currently there are between 25 and 30 (National Community Capital Association, n.d.). This growth, as we will see, has been in part driven by growing public sector support for this sector. Second, they all play an intermediary role between outside investors and borrowers in low-income communities. They therefore act to pool "outside" capital, and invest it into communities where it largely would not go otherwise. Third, of these five different CDFIs, only two, community development banks and CDCUs, actually provide retail banking services and act as depository institutions. The remaining three instead act solely as investment vehicles, and thus do not act to fill in the gaps in retail banking and depository services left by branch closures. Given that there are still relatively few community development banks, and that start-up costs for a bank are much greater than for a credit union, it is CDCUs which will be the focus of the discussion here.
The proliferation of CDFIs needs to be seen in two political contexts. First, there has been a major shift in the provision of social services and the meeting of basic human needs in American inner cities. The public sector has, by and large, been in a protracted process of removing itself from the provision of basic services. This began in the late 1970s and early 1980s, and has continued largely uninterrupted in the period since then. This has meant that a whole host of human needs are increasingly being met by public-private partnerships and the not-for-profit sector. This process has been well-documented and much discussed, so it need not be dealt with more here (but see, for instance, Gottleib, 1993; Pierson, 1994; Swanstrom, 1999; Wolch, 1990; 1996). It is important to note, however, that this public sector retreat, and the growth of the not-for-profit sector in public life, has been actively promoted by both the Democratic and Republican parties. And in 1996, while Newt Gingrich wondered aloud about the movie Boys Town and the use of private orphanages as a solution to the problems of children of welfare parents, president Clinton was leading a weekend-long celebration of "volunteerism" in Philadelphia (and both would later embrace welfare reform, and its attendant further non-profitization of social service provision). These events are merely emblematic, and represent the broad, and continuing, rhetorical, and sometimes fiscal, support for not-for-profits by both parties. Notions of "community" have been particularly important in the framework of the "New Democrats" (Rodham-Clinton, 1996) -- and the same is true for "New Labour" in the UK (Levitas, 1997, 2000). Not-for-profits therefore played a central role in the "Third Way" parties that governed in the 1990s, and the parties of the right have similarly embraced these non-public sector solutions to social problems. CDFIs have had a definite role in this process, and when president Clinton was campaigning, he was actively promoting the construction of a nationwide network of community banks (Greider, 1993). While this vision was not fully realized, the Clinton administration did create the Community Development Financial Institution Fund in 1994, which provides capital and technical assistance to support the work and growth of CDFIs.
The second political context in which the growth of CDFIs needs to be understood is very similar to the first, and it is the growing set of literature celebrating a "revolution of the damned." That is, there is a growing volume of literature both in the academic and popular literature that has been promoting a kind of community-scale "boot-strapism" in which low-income communities are able to construct their own process of development -- once they are free from the "shackles" of the public sector (Grogan and Proscio, 2000). While there has often been a celebratory tone to literature on community development, this aspect of the work in the field has grown in recent years. This rhetoric of self-help, I would argue, has grown and flourished because it very neatly and easily fits into the neo-liberal political consensus, and because the community development movement itself has increasingly embraced free market, neo-liberal understandings and, therefore, solutions. A typical comment in the popular press comes from Business Week when it stated that "Change is coming from an approach that rejects both big-government, big-money solutions and the 1980s free-market notion that a rising tide lifts all boats…The people of Washington Park [Chicago] have lost faith in the ability of a financially strapped city to solve their problems. At the same time, black leaders, locally and nationally, are calling for self-direction as the only true rescue" (Stodghill, 1996). Perhaps the most visible expression of the "revolution of the damned" perspective comes from Grogan and Proscio (2000) who argue that community development has flourished now that it has freed itself from the shackles of both its own radical political history and the public sector. This perspective, of community development being a "bottom-up" process based on market principles, is one that is called into question by the case study presented here.
The two political contexts above are based on two inter-related implicit assumptions that are often made, and too infrequently examined - or even acknowledged. The first is that CDFIs are community institutions (thus their place in the "Third Way" agenda of the 1990s). The second is that CDFIs promote economic development (thus their place in the "revolution of the damned" framework). I will briefly discuss these in turn.
The assumption of a community base to CDFIs runs through most of the literature that describes and promotes them. This is true even in the most thoughtful discussions of CDFIs (like Gunn and Gunn, 1991). In the more explicitly promotional literature this assumption is particularly clear, and Grzywinski states, "we see banking as a philosophical return to the days when a bank was the pillar of its community and saw its role as investing in the community's future…because for us, investing in the future also means banking as a force for economic development, banking as a way of restoring community self-confidence" (Grzywinski, 1991, p. 87). And in his speech before the House of Representative's Committee on Banking, Finance and Urban Affairs, Treasury Secretary Lloyd Bentsen stated, "Unlike a traditional lender, the CDFI looks beyond the marginal benefits of discrete transactions to the institution itself. Instead, the CDFI bases its transactions on the collective benefit to be provided to the entire community" (Bentsen, 1993, p. 2, emphasis added). But clearly communities are open-ended and fluid, as well as conflict-laden, constructs, and so any community-based institutions must be understood as such as well. This assumption of community in CDFIs, therefore, needs to be questioned, or at least empirically examined.
The second assumption is that CDFIs play an active role in promoting local and community economic development. To some extent this is a fair assumption, and communities are likely to benefit from the investment of capital into them - especially when it otherwise would go elsewhere. And this is not only true for housing development and mortgage lending, but also, and perhaps more so, for small business development. But this assumption is rarely thoroughly examined in the literature. This gap can partially be explained by methodological difficulties, since most CDFIs do not have a long history of public sector support, which would have required the demonstration of measurable outputs and outcomes. This gap is also partly a function of the work that CDFIs do. All but the largest CDFIs are too small to do enough investing to observe quantifiable outcomes beyond the level of the individual borrowers and their households and/or employees. CDFIs are simply too small to see measurable outcomes at the aggregated scale of the neighborhood or locality. But the bigger problem relates to the aforementioned neo-liberal orientation of much community development work, which seems to assume that individual gains and profits translate into group-level gains and interests. Therefore individual borrowers, and individual access to capital, is assumed to be a good realized by the entire community. But the reality in low-income areas is that all too often "doing well" means moving out, and therefore individual outcomes may, or may not, translate into community-level ones. CDCUs, which are cooperatively-owned and controlled, can theoretically bridge the gap between individuals and communities, but this is an empirical question which will be addressed in the case study below.
History
Community development credit unions are a component of the credit union industry, but are distinguished from the majority of this industry both in the composition of their memberships and their locations. Credit unions have a relatively long history in the United States, and the first credit union was formed in 1908 (Parzen and Kieschnick, 1992). Their creation was influenced both by the emergence of the institutions in Canada, and the proliferation of mutual aid societies that had been constructed in many immigrant communities in the United States.(2) The earliest, and oldest (some are still in existence) community development credit unions were created in segregated black areas in the rural south during the Great Depression, many of these were organized in churches (National Federation of Community Development Credit Unions, n.d.). The number of CDCUs grew dramatically in the 1960s as the Office of Economic Opportunity (OEO) created around 400 between 1964 and 1973 as part of the Great Society set of policies that the OEO was so central in instituting (Robinson and Gilson, 1993). As a reflection of that growth, CDCUs formed their own trade association in 1974, the National Federation of Community Development Credit Unions (NFCDCU). While most of the OEO-created credit unions failed during the 1970s and 1980s, the CDCU movement was continuously being reborn, first by groups organizing around redlining issues in the 1970s and then, in the 1980s, as responses to the withdrawal of federal support from low-income cities and neighborhoods, and the closing of bank branches described above.
The 1990s was a period of substantial growth for CDCUs. They benefited from increased public support both from the National Credit Union Administration (which is the federal agency responsible for regulating and insuring credit unions), as it established the Office of Community Development Credit Unions in 1993, and from the 1994 creation of the National CDFI fund. The number of Low-Income Credit Unions (LICUs),(3) grew from 244 in 1990 to 356 in 1996, and that growth primarily occurred between 1994 and 1996, perhaps an indication that increased public support and recognition of CDCUs had already yielded results. Along with the increase in the total number of LICUs, individual LICUs have also grown, and the average number of members per LICU rose from 1,407 in 1990 to 2,381 in 1996 (Williams, 1998). The NFCDCU has similarly watched its membership grow, and there are currently about 150 member CDCUs in the United States. About two-thirds of these are urban, with the remaining third being rural or reservation-based. It has also been estimated that there are several hundred other CDCUs currently operating, but they are too small to be members of the Federation (National Federation of Community Development Credit Unions, n.d.).
Structure and Capitalization
CDCUs are member-owned and, theoretically at least, member-controlled not-for-profit financial institutions. Like other credit unions, they are federally or state chartered, regulated and insured. CDCUs serve two primary purposes: to provide financial (depository) services, like savings and checking accounts to people and areas that are under-served by traditional commercial financial institutions; and to provide loans that promote the economic development of their members and the places in which their members live and, sometimes, work.
Most traditional credit unions define a "field of membership" (FOM) and provide access to membership only to people who are within this defined field (usually a workplace, union local, etc.). CDCUs, and LICUs, are able to define FOMs that are more loosely structured, as long as more than half of their members earn less than 80% of the area's median income. CDCU membership is thus much more open than most credit unions', and this is done without threatening the tax-exempt status of the CDCUs. Their members, as low-income people, very often lack access to any other financial institution.
CDCUs tend to be small-scale institutions, many with less than $1,000,000 in total assets, with their median size slightly larger than $1,000,000 (Williams, 1998). But CDCUs can also range in size to over $40,000,000 (National Federation of Community Development Credit Unions, 1999). CDCUs get their capital from three sources: members' deposits (both individual and organizational members), capital grants (which can come from the state, commercial financial institutions, or foundations), and non-member deposits (which come primarily from foundations and commercial financial institutions). While most CDCUs obtain the majority of their capital from individual members' deposits, nonmember deposits are essential to the growth, and often the survival of, CDCUs, and this is especially true of very small institutions (those with less than $500,000 in assets). Despite the important role played by non-member deposits, Low-Income Credit Unions still receive only between 5 and 13 percent of their assets in this form (Williams, 1998).
While credit unions need little start up or overhead capital, there are higher costs associated with serving low-income communities (smaller accounts, more frequent transactions, smaller loans, financial advising, etc.), compared to more affluent ones. The ability of the smaller CDCUs to survive despite their limited assets often comes from the role of sponsoring organizations (often churches) in absorbing operating costs (like providing a staff) and providing reserves to cover losses realized from bad loans. But for many CDCUs the sponsoring organizations don't have the capital to cover these costs, and so they rely on member volunteers to staff the credit unions. While this can be a powerful vehicle for building a sense of community, it can also limit the potential of the credit unions to provide enough loans and services to attract more members. The cycle can be a difficult one to break. Assets are needed to employ a staff to provide services, but assets can be accumulated only if there is a staff in place to attract enough members and their deposits. Outside infusions of capital, in either grant or non-member deposit forms, often provide the means to break out of the cycle.
Governance and decision-making in CDCUs are organized in a fairly straightforward manner. The credit unions' members own the credit union by virtue of their membership. Control is structured in a one-person, one-vote formula, and so one's ability to influence credit union policy is not determined by the size of one's account. But the membership's voting rights are usually limited to electing the board of directors, and members often do not participate in decision-making on a daily basis (although this depends on the size of the CDCU, as smaller ones are more likely to rely on more active participation from their members than larger, more professionalized ones). So the membership of a CDCU controls the institution, but it is usually an indirect form of control, exerted through the election of the board.
Loan Portfolios
Like all credit unions, CDCUs can make loans only to their members. Although CDCUs are nominally focused on loans that promote "economic development" in their communities, their loans tend to be small in size and geared towards the consumer needs of the membership (like automobile loans - Williams, 1998), although CDCUs do some lending for business and microenterprise development. The amount of "development" lending (like loans for affordable housing construction) is fairly limited, due to both the large size of these loans, which usually surpass what CDCUs can provide, and the legal constraints on CDCUs that limit their abilities to lend to "non-natural people," that is, corporations of any kind (Berkowitz, 1997). Because of the small size of most credit unions, their loan portfolios, and their individual loans, it is extremely difficult to estimate the aggregate economic impact of the lending activity of CDCUs in the United States. We do know a few things about the loan portfolios of CDCUs, which have grown substantially in the 1990s. The total amount of loans for LICUs in 1996 was over $1.6 billion - this is up dramatically from the roughly $400 million in 1990 (Williams, 1998). The mean loan portfolio size was about $4.5 million, but the median was much smaller, only $785,000. Somewhat smaller numbers were reported by the NFCDCU, which claims that its membership has an average loan portfolio of about $1.5 million (National Federation of Community Development Credit Unions, n.d.). The delinquency rates of CDCU loans hover between 4 and 5 percent from year to year.
The credit union model thus has a fairly lengthy set of experiences, demonstrating that despite severe limitations, it is a viable framework that has been adopted and used in hundreds of places throughout the United States. But their ability to survive and grow does not necessarily mean that they have improved the lives of their members, that they are "community based," or that they can promote local economic development. To address these issues, I conducted a case study of the Bethex Federal Credit Union in the South Bronx.
The South Bronx
The story of the South Bronx is familiar to many people. Much of the area was literally burned out during the 1970s. The suburban exodus of whites that was such a dominant feature of the American urban landscape in the 1960s and 1970s was more conspicuous here than in perhaps any other neighborhood or city in the country. The total population of the six Community Boards that make up the South Bronx fell from 764,400 in the 1970 Census to 453,796 in 1980 - a plummet of more than 40% in a mere ten years. In sections such as Hunt's Point and Morrisiana, it fell by more than 60%. The decline in population was matched by the unprecedented destruction of the housing stock, as much of the area was burned down by arsonists - often working for landlords who felt they could get the best return on their investment by collecting the insurance money a fire would bring. This is the story of the South Bronx that has been so vividly etched into the consciousness of the American public, by President Carter's visit in 1977, by Reagan's use of the government's failure to improve the area as part of his 1980 campaign, and by movies like Fort Apache: The Bronx, and books like Bonfire of the Vanities.
But the story continues, and by the late 1980s and early 1990s, the South Bronx had begun a process of redevelopment, as houses started going up in large numbers and commercial activities began to reappear (Grogan and Proscio, 2000; Hall, 1999; Horowitz, 1994; José Vergara, 1989; Mittelbach, 1993; McKee, 1995; Planning, 1996). In the period from the late 1980s to 1998, 57,000 new units of affordable housing were built or rehabbed in the Bronx - with the vast majority of this construction occurring in the South Bronx (Ferrer, 1998). The economic recovery of the South Bronx was driven largely by a set of public investments in housing - in the various forms of public housing, HUD-subsidized housing, and partnerships between the city government and the dense network of CDCs that emerged in the 1970s and 1980s (and even earlier). And while there are still the basic problems of persistently high unemployment (DeFilippis, 1998), poverty among those who work (Ferrer, 1998), a continued shortage of affordable housing (Schill, 1999), and massive environmental and health concerns (Kozol, 1995), the South Bronx is certainly not burning anymore. Just as the death of the Bronx in the 1970s was made nationally visible by the visits of Carter and Reagan, its rebirth in the 1990s has been marked by visits from President Clinton in both 1997 and 1999. Therefore, just as the South Bronx was the national poster child for "urban decay" in the 1970s and early 1980s, so too has it become the celebrated icon of "the revolution of the damned," community self-help, and community boot-strapism.
Finally, despite the economic recovery that the Bronx has realized in the last 10 years, financial institutions have continued to relate to it, at best, at arms length. As of 1999 substantial parts of the borough did not contain a single bank branch. And overall the South Bronx averages about 23,885 people per commercial or savings bank branch (author's calculations from data from Census of Population and Housing, 1990, and Federal Deposit Insurance Corporation, 1999), which is the equivalent of .42 bank branches per 10,000 people. That is about one-eighth the density of bank branches per 10,000 people nationwide (Avery, Bostic, Calem, and Canner, 1997). It is in this context, of a place dying and reborn (with substantial public support but little attention from banks), that Bethex both emerged and now has flourished.
History
The Bethex Federal Credit Union was founded in 1970 by several women on welfare associated with both the Bethany Church(4) and a Board of Education-sponsored school for welfare recipients. The initial goals of the credit union were fairly small-scale, and focused on allowing the women on welfare to establish small savings accounts and borrow money for emergencies. The credit union went through a very difficult period in the 1970s and 1980s. The church, which formally sponsored the credit union, asked it to leave under the pretense that the credit union's members were not joining the congregation. It has always been suspected within the credit union, however, that the reason for the ejection was that the church was a Caribbean black congregation, and the credit union's membership consisted (at that point) almost entirely of American blacks. After its ejection, the credit union successively occupied many different homes, including (among other places), Joy Cousminer's apartment (one of the founders and its current Manager and Treasurer), a Medicaid clinic's basement, a burned out building on Willis Avenue, another church, and the basement of a Manufacturers Hanover bank. This mobility was such a dominant feature of those years that Bethex was jokingly referred to by one former board member as, "a gypsy credit union" (Groarke, 1999). The credit union's existence was thus extremely precarious in this period, and the context of the credit union struggling to survive in the midst of the abandonment of the South Bronx in the 1970s needs to be reasserted. But the credit union continued operating and never closed it doors (even when it didn't have any).
Conditions at the credit union began to improve in the late 1980s and early 1990s. The organization moved into its current location, in the basement of a housing development of the Mount Hope CDC, 1993. The CU's membership began to grow steadily at this point, as it was able to realize an operational stability that had not been possible before, and Bethex is currently fairly large by CDCU standards.
Along with this now fixed location, Bethex's growth in the 1990s was driven by relationships that the credit union began to establish with a variety of other institutions, both locally and extra-locally. Co-operative Home Health Care Employees, a worker-owned company of home health care service providers, established a relationship with Bethex that made membership in the credit union attractive to its worker-owners. Also, when the Northwest Bronx Community and Clergy Coalition's credit union failed in 1993, Bethex was offered their members by the NCUA. Bethex has also come to act as the credit union for several other small churches, which do not have the population or the capacity to establish their own CDCUs. Bethex is thus a bit unusual for a CDCU in that it has a multiple group FOM that extends beyond its immediately local area. The credit union has also established relationships with several public elementary schools in the area, allowing their students to begin savings accounts, and, perhaps most importantly, teaching them how to manage their money and how to interact with a financial institution. This program alone has generated around 1,500 student-members of the credit union, as well as enhanced the visibility of the credit union in the Bronx.
These linkages aside, the most important relationships that Bethex has been able to establish have been with the state. This began in 1989 with a grant of $100,000 from New York State, earmarked to do business loans. This was followed up by a few small annual grants from the state used for loan-loss, operating costs, and, in the last few years, an Individual Development Account (IDA) program. The larger grants, however, have come from Washington, not Albany, and since the creation of the federal CDFI Fund, Bethex has received two grants from this fund. The first, was awarded in 1996 for $100,000. The second grant, which Bethex received in 1998 for $460,000 was for the explicit goal of opening a branch in Mott Haven.
All of this has meant that Bethex's membership has grown dramatically in the last decade. There are currently about 5,000 members of the credit union (if you include the school children), and approximately 100 new members join the credit union each month. This growth has both been facilitated by, and constitutive of, an increasing professionalization of the board and staff of the credit union. But this has also raised substantial issues about the governance of the credit union.
Governance
As in most corporations, there are distinctions between the role of the board and the role of the staff in the running of the credit union. But this has not always been the case. Until the 1990s, there was no staff at Bethex, and all the operational work was done by the board and by other member-volunteers. Through the course of the last six or seven years, a staff has grown steadily. With the growth in the staff has come a transformation of the board of directors, which has changed from an operational board to a board that is concerned with longer-term sets of issues and problems, and which has the ability to leave day-to-day operations to the staff and Manager. This transformation, however, has affected not only the roles that the board needs to play but also the composition of the board members. The board increasingly has become divided between the long-term members and newer community development professionals. The two board members who mediate this division are the current board president, Elly Spangenberg, and the credit union manager and board treasurer, Joy Cousminer. Both are founding members of the credit union, and well-educated white women, and so they therefore seem to have legitimacy in both camps on the board. The other founding members on the board are all African-American women, and the newer professionals on the board are all white or Asian-American. The African-American women sit in almost complete silence during the board meetings, as the meeting takes place around them. In practice, therefore, the board is controlled not by the credit union's members, but by its staff (as embodied in Ms. Cousminer) and the professional developers who have recently joined it.
The failure of the credit union's members to control the board is a reflection of the overall lack of member control of the credit union. Despite their technical ownership, and the authority that is structurally supposed to correspond with that ownership, the members of the Bethex credit union appear to exhibit relatively little control over the institution. Theoretically, the board is elected by will of the membership at the annual meetings. The annual meetings, however, are much more social than democratic gatherings. The election process is largely a formality, as anyone who is interested in becoming involved in the credit union's governance is able to do so. At the same time, however, nominations to the board are not accepted from the floor at the meeting. Board membership is also not open to any member. Instead it is required that anyone interested in becoming a board member must first serve on a committee for some, unspecified, period of time. The board members whose three-year terms were up at the annual meeting I attended were re-elected without debate or formal discussion. The members that attended did not do so to control the credit union but to participate in an afternoon with people from around the South Bronx, many of whom have been members of the credit union for years. The annual meeting, which is the members' principal opportunity to exercise their formal control over the credit union, was, in short, a process of community construction. It was not an exercise in participatory democracy or cooperative control.
As part of this case study I conducted a mail survey of the membership of Bethex. Among the respondents to the survey(5), who are probably more interested in the credit union than non-responding members, there is little member participation in meetings and little sense of member control. More than 74% of the surveyed members said they did not attend any Bethex meetings. Accordingly, members didn't even seem to know whether or not they have any control over the decisions made at the credit union (Table 1). This may reflect a passive contentment about Bethex on the part of its membership, rather than their complete estrangement and alienation from the credit union (and the results below suggest as much). And while the former is preferable to the latter, this is still not a model of member participation and community control.
Table 1: Members' Sense of Their Influence Over Decisions Made at Bethex
|
Responses |
Percent |
| Don't Know | 57.1% |
| Hardly Any Influence | 6.5% |
| A little Influence | 3.9% |
| Some Influence | 19.5% |
| A lot of Influence | 13% |
Capitalization
For most of its history, Bethex was capitalized entirely by its members' deposits. It received no non-member deposits or grants for the first 18 years of its existence, although it did receive equipment and supplies as donations from time to time. The first non-member deposit came from St. James Episcopal Church, for $20,000 in 1988, which enabled Bethex to buy and maintain a computer. In the years since then, the size and role of non-member deposits have grown significantly, and this increase has allowed the credit union to have a paid staff and to provide a much greater array of services to its membership. This has also meant that a decreasing portion of Bethex's assets come from its membership base, although it is still majority member capitalized. Currently, of the $3.5 million of Bethex's total deposits, about $2 million comes from its membership, with the remaining $1.5 million coming from non-member deposits. Most of the largest (around $100,000) of these come from various banks and a few come from other credit unions. When the non-member deposits are combined with the almost $500,000 in capital grants the credit union has received in recent years, member deposits only make up slightly more than 50% of Bethex's total assets.
Membership
Bethex's membership is not limited to the South Bronx but is spread throughout the borough. The distribution within the South Bronx is also far from uniform, and the membership is, as would be expected, most concentrated in the Mount Hope area where Bethex has been housed since 1993.
Outside of the Bronx there are substantial pockets in northern Manhattan (Harlem, East Harlem and Washington Heights), and central Queens. Bethex also has members scattered throughout the rest of the country since, in the course of its 30 years in operation, many members have moved away but have not cancelled their membership. Four percent of its membership lives outside the five boroughs, and 18 percent lives outside of the Bronx, in the rest of New York City. Despite the growth in membership over the last ten years, the membership still seems to come to the credit union through rather informal social networks and channels. According to my survey, almost 65% of the credit union's members came to Bethex because a friend, family-member, or co-worker was already a member.
Loan Portfolio
Bethex's aggregate loan portfolio is relatively large by CDCU standards, hovering around $1,500,000 in total outstanding loans. Individual loans are typically modest in size and impact. The credit union currently has around 500 personal loans outstanding, with a mean loan size of $3,294, and a median loan size of $2,053. The median figure, as is often the case, is a truer representation of the CU loan portfolio, which is dominated by small scale loans that are rarely for more than $3,000. This is reinforced by Bethex's policy that first-time borrowers cannot receive a loan for more than $3,000.
Figure 1: Distribution of Bethex's Personal Loans by Size
The loans tend to be consumer loans that allow borrowers the opportunity to buy household goods, repay debts (either to credit cards, family members or loan sharks - and several loan applications listed the purpose of the loan as, "repay loan shark"!), or invest in their countries of origin (Table 2). Thus the lending is individual, largely consumer-based in character. Christmas loans, by far the most frequent type, are annual loans ranging from $700 to $800 made in November and December, with a fixed annual interest rate of 15% that is paid back over 12 months. The rest of the loans vary in size and terms, depending on the particulars of the member. The lending process at Bethex, as it is for most CDFIs, is a time consuming and labor intensive process, since many of the borrowers need to be educated about the basic processes of a loan transaction. Also, this means that loans need to be structured towards the needs of individual borrowers, and therefore the cost-savings that can be realized by the routinization of transactions occurs only with Christmas loans.
Table 2: Distribution of Bethex's Loans by Type
| Purpose | Percent |
| Christmas | 24.2 |
| Furniture/Refurnish home | 12.4 |
| Pay Bills/Debt/Credit Cards/Rent/Income Taxes | 11.7 |
| Debt consolidation/Build Credit/Build Savings | 9.7 |
| Home Purchase/Repairs/Improvement/Moving | 9.3 |
| Buy/Repair Car | 8.4 |
| Travel/vacation/recreation | 7.4 |
| Send money to country of origin | 5.1 |
| Personal (unspecified) | 4.4 |
| Education | 3.6 |
| Business | 2.9 |
| Health Problem/Death in Family | 2.3 |
| For family celebrations/holidays | 1.4 |
| Legal expenses/recover vehicles from pound | 0.8 |
| Help friends/family | 0.6 |
| To exhume a body | 0.2 |
Figure 2: Number of Loans by Borrowers' Incomes, 1999
Since the membership of Bethex is spread throughout much of the Bronx, to some of the other boroughs, and outside New York, it would make sense for its loan portfolio to reflect that dispersed geography, and this is clearly the case. Similar to the distribution of its membership, the largest concentration of loans is located in the Mount Hope area, although this concentration is much more pronounced for loan locations than for membership distribution. Individual borrowers, however, may or may not be investing the capital back into the Mount Hope area or even the South Bronx (Table 2).
Finally, the credit union also has a business loan portfolio, although, as is true for most CDCUs, it is much smaller than the personal loan portfolio. Bethex did not begin to make any business loans until 1989 - and then it only did so because it was being pushed to by the NFCDCU and the requirements of a State grant. Business loans tend to be larger in size and riskier than consumer loans, and, therefore, are much more time and labor consuming transactions. The business loan portfolio includes only about 45 loans. The mean loan size is $11,983, and the median is $11,239. Bethex often works to help borrowers bundle different sources of capital together in order to meet their business's capital needs, which usually exceed the limited size of only $11,000. These loans go to start up, expand, or acquire, various types of businesses, including self-employmen, retail businesses, and services. The default rate on business loans is very low and almost all of the businesses repay their debts (although often not on time), and this is attributable, in part, to the thorough business planning that the credit union does with the borrowers before the loans are made.
Members' Satisfaction
The members of Bethex who responded to the survey were generally satisfied with the credit union. But the survey also reveals some of the problems with Bethex and with the credit union model as a whole. Members were asked to rate their level of satisfaction with the credit union, and over 50% stated they were "completely satisfied" with the credit union, while only a combined 13% said they were "somewhat dissatisfied" or "completely dissatisfied." This measure may be biased, however, if those who responded to the survey were more likely to be happy with the credit union than the members who did not respond. A stronger measure of satisfaction, therefore, assesses how Bethex compares to the members' previous financial institution. When compared to prior financial institutions, the membership also rated Bethex favorably (Table 3). While this data suggests that the membership is happier with Bethex than with their prior financial institution, perhaps the most important finding here is that almost 30% of the credit union's membership hadn't banked anywhere else ever before. To some extent, the members are satisfied because they have not had any other options, and of the members who reported never having banked anywhere else before, over 80% stated they were "completed satisfied" with Bethex.
Table 3: Members' Satisfaction with Bethex Compared to Prior Institution
| Responses | Percent |
| No previous financial institution | 28.9 |
| It's worse | 12.1 |
| About the same | 22.9 |
| It's better | 36.1 |
Members' Sense of Community
In a conversation about notions of community, Bethex board member Peter Bray stated: "credit unions don't think as much about community or geography - they think of people and members" (Bray, 1999). With this observation, he was recognizing one of the primary problems with CDCUS in general, and Bethex in particular: they are self-defined as community institutions and yet they operate at the level of the individual. Accordingly, there is little sense among the membership or the board that Bethex is a community. This is especially true among the newer members and board members (Peter Bray is a 1990s addition to the board). Joy Cousminer and Elly Spangenberg both remember a strong sense of community when the credit union was connected to the Bethany church and to the school for welfare recipients, but both acknowledge that the newer members do not share that history and the credit union has not been able to connect them as community members. Spangenberg, observed, "when I'm at the annual meeting, I get to see the members' children that have grown up with the credit union, and are now members themselves" (Spangenberg, 1999). And former board member Margaret Groarke stated at length, "I don't know how much I would [call Bethex's membership a community]. Every annual meeting I feel like it's a community, but that's what, 1/30th of our membership? That's pretty small. Being a member of Bethex is a link for some, and there are pockets with the membership like employees and long-term members. We are part of many communities but not one community. The long-term members are very much part of the credit union. The thing is, how big a community can you sustain? That group had to grow beyond its original base" (Groarke, 1999). The members themselves expressed a rather mixed sense of community, and when asked if they agree with the idea that being a member of Bethex made them part of a community, only 52% said they thought it did. The remaining 48% was fairly evenly split between those who did not think credit union membership meant belonging to a community, and those who had no opinion. Several members went on to ask, "What does Bethex have to do with the community?"
Several conclusions can be drawn from this case study, and they return us to the issues raised at the start of this project. First, while the community development credit union model is a viable form of consumer finance in the American economy, there are significant limitations on that model, and these largely stem from the lack of capital among the membership in the places where they have been, and are being, organized. The CDCU model is rooted in the history of capital disinvestment by financial institutions. These roots, which mobilize people to create alternatives, also severely constrain the prospects of those alternatives. This leaves CDCUs in the position of dependence on non-member deposits and larger organizational member deposits to provide the assets necessary to run a financial institution. Bethex was able to survive for almost 20 years solely on the capital owned by its members, but that survival was always very tenuous, and the organization was not able to provide those members with anything more than a very limited set of financial services.
Second, while their viability requires outside support or subsidization, this can be politically and normatively justified because CDCUs certainly improve the lives of their members. The members of Bethex reported being very satisfied with the credit union, and most stated it was an improvement over commercial banks. This form of cooperative ownership of capital is able to serve a necessary purpose that would otherwise go unprovided by the structures and operations of the market. The evidence is fairly clear that Bethex serves a place, and a membership, that for-profit banks have largely forsaken. Not only were almost 30% of Bethex's members completely unbanked before their membership, but the kinds of loans provided by the credit union are usually not going to be made at commercial and savings banks. The loans are too small and the borrowers are nominally too risky for commercial or savings banks to provide these services. So Bethex's "competition" for members and borrowers is not with banks, but with the check cashing outlets (and less formally, illegal loan sharks) that have emerged in the context of banks' absence.
Third, while credit unions can be important institutions in improving the lives of their members, they are limited in their ability to improve the conditions of non-members in the places in which they are located. The loans are very small and consumer-based and therefore they are not able to dramatically transform places. Credit unions do bring capital into communities where it otherwise might not go (through non-member deposits), and while they potentially keep capital in the community by lending only to their members, the problem of scale is ever-present. As one board member observed, "It's true of all low-income credit unions. On the one hand they're great, and do great things, but on the other hand they stink and it's because they think small" (Bray, 1999). They do very little housing and mortgage lending (because of the size of those loans) and the business lending tends to promote microenterprise or very small business forms of self-employment. These kinds of businesses do not generate much employment for anyone other than the loan recipient herself. It is, therefore, unclear how much "local" development is stimulated by this model. Also, Bethex, like most CDFIs does not operate with the goal of market efficiency. Instead there is a "double bottom line" (Sass Rubin, 2001), and economic concerns are constantly weighed against other, more community based goals and objectives. This, ironically, further limits their abilities to function as the engines of community economic growth. In the case of the South Bronx, its recovery was not simply driven by self-help, and not just a result of development "from the bottom up" (Grogan and Proscio, 2000). Like Bethex, many of the community organizations now being heralded had already been created when president Carter visited in 1977. What changed in the years since then was that the public sector, mostly the local government, devoted a great deal of time and resources to the area's development. This was "big government" (Worth, 1999) working with the community organizations that brought about the evident changes in the South Bronx. Bethex, and its history, is emblematic of that process.
Fourth, the connections between CDCUs and the places they are in can be very thin. CDCUs might possess the word "community" in their name, but it is a community whose links to space are complex, but not necessarily strong or binding. There are three sets of relationships that determine the connections between CDCUs and the places they are within. First are the relationships between the credit union and the sponsoring organization (in this case, Bethany Church), and between the sponsoring organization and the other actors that constitute that place. Bethex was a credit union that, because it was kicked out by its sponsoring organization, manifested the mobility that is theoretically possible within this model. This mobility, admittedly was very localized, and at no point would, or could, the credit union leave the South Bronx, but it was mobile nonetheless. Simply put, while there remained some degree of local dependence (Cox, 1993, 1995; Cox and Mair, 1988), Bethex demonstrates the fluidity that partially constitutes any locality. Second, the membership of credit unions is not place-bound, but membership is permanent (unless a member chooses to formally withdraw from the credit union). So as a credit union ages, its membership may, or may not, remain in the same place as the credit union. This is especially true for credit unions located in urban areas with high turnovers of residents and/or large immigrant populations, which can be very mobile. Third, cooperative ownership does not necessarily yield capital immobility or place dependence, as the loan portfolio of credit unions also does not need to be place-bound. Loans are made to members who have already relocated geographically, and members can use their loans for individual investments in places far removed from the credit union (e.g. to buy or repair a house in the Dominican Republic). Granted this is a form of capital mobility that operates under a different imperative than "the spatial fix" of for-profit investment capital, but it remains a form of capital mobility nonetheless.
Fifth, this situation is further compounded by the individualized character of credit unions. The focus of a credit union is its membership, not its locality, and although these are intimately connected, they are clearly not synonymous (and would not be even if every resident in a locality was a member). Credit unions are peculiar cooperatives in that there is almost no involuntary interaction between members, and so a sense of shared experience or common identity is not necessarily constructed. In fact, credit unions legally have a difficult time lending to "non-natural" people, and so connections between CDCUs and other local organizations, like not-for-profit community development corporations, are often difficult to realize. If the common sense of localities is constructed through a layering of sets of experiences and relationships, then this layering is perhaps more difficult for credit unions than other kinds of organizations. That is not to say that Bethex has not constructed some of these layering relationships, and the linkage to the public schools is a powerful one indeed. But the experience with Bethany church also highlights how tenuous these linkages can be.
Finally, the linkages between the place and the credit union are further weakened by the lack of participatory democracy in the governance of the institution. This is not to say that Bethex, or any other credit union, is oppressive in its decision-making processes. But it is to say that control over Bethex is not distributed to a large number of actors in the South Bronx. It is, in fact, a closely-held set of controls, and the staff and board, while not inaccessible to the membership, make the decisions. Bethex is open, and the quarterly newsletters and the annual meetings can remind the membership of their participation in something other than a bank, but the openness consistently remains at the level of informing the members, or at best, consulting with them (to borrow from Arnstein's, 1969, famous ladder of citizen participation).
While for-profit financial institutions have become increasingly disconnected from the spaces where people, especially low-income and non-white ones, live and work, there has emerged a set of alternative, not-for-profit corporations that have been attempting to fill in the spaces left behind. To some extent these institutions have been successful in creating new forms of financial institutions that operate with a different set of logics than "traditional" financial institutions, and provide useful and needed services. But these alternatives might not be the strongest vehicle for local economic development, nor are they necessarily meaningfully community based. These incipient institutions need public support in order to grow and reach more people, but they also need realistic expectations from the public about what they can, and cannot, do. Hopefully this article will contribute to both.
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2. In many ways the early credit unions (and credit unions today) perform the same function as the old immigrant mutual savings and loan associations, which were different from most savings and loans in that they were owned by their depositors and borrowers (most S&Ls are owned by shareholders) - and the images of George Bailey in It's A Wonderful Life reflect the importance of these institutions to immigrants like Frank Capra (Mangione and Morreale, 1993)
3. Low Income Credit Unions (LICU) are designated by the NCUA based on the incomes of their members, and while LICUs are not synonymous with CDCUs, the vast majority of LICUs are also CDCUs (Williams, 1998)
4. The name Bethex comes from the Bethany Church, but since the organizers had grand ambitions for the credit union they called it "Bethex" because "all the big companies like Amex and FedEx end in 'ex.'" (Cousminer, 1998-9)
5. I sent survey instruments in Spanish and English to a randomly-selected 20% of the credit union's members (570 members), and I received back a total of 92 completed questionnaires, yielding a response rate of 16.14%. While this was a worse response rate than I had hoped for, and the members had been notified in advance about the survey in Bethex's newsletter, this fairly low response rate is suggestive of the limited relationship most members have with the credit union.
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