Financing the Development of Urban Minority Communities: Lessons of History

Abstract

Government intervention in financial markets seeks to alter capital availability patterns that disadvantage minorities and low-income people. The desire to increase access to credit for these underserved groups motivated President Clinton to launch the Community Development Financial Institution (CDFI) program. In fact, CDFI-like institutions proliferated in the late 1960s, and many of them still exist. The Minority Enterprise Small Business Investment Company (MESBIC) program, started in 1969, created several hundred privately owned firms that finance inner city-situated and/or minority-owned small businesses. This study uses U.S. Small Business Administration records to analyze the impacts of actual MESBIC investments in small businesses. Strategies used by MESBICs that actively financed minority business enterprises are identified, and the traits of effective MESBICs are contrasted to traits of those that have shut down. Nearly 100 MESBICs remain active today, and the track record of the program over the past 30 years offers a wealth of insights to present-day proponents of CDFIs.