Community Development Financial Institutions: Board Size and Diversity asGovernance Mechanisms

CDFIs serve an important social function because they provide access to financial services to underserved low-income individuals and households. Understanding which governance mechanisms promote efficient use of scarce resources that these organizations control is important because only sustainable institutions have the potential to revitalize low-income communities and change low-income individuals’ lives in the long-term. The focus of this paper is on evaluating the impact of board size and diversity on the performance of two types of CDFIs: Community Development Credit Unions and Community Development Loan Funds. The results show that CD Credit Unions with larger boards are more efficient in delivering outreach, but board size is not related to CD Loan Funds’ performance. There is some evidence that CDCUs with boards dominated by women are more efficient in fulfilling their outreach missions but CDLFs with more gender and racially diverse boards achieve worse financial results suggesting that group cohesion may be important in organizations with multiple, especially non-complementary, objectives (such as outreach and financial self-sufficiency). The results also suggest that there is room for direct involvement of banks in community development activities rather than relying only on investment and lending to intermediaries such as CDFIs. The author gratefully acknowledges financial support for this research form the Center for Financial Research at the Federal Deposit Insurance Corporation. All errors and omissions are the author’s only. 1 Community Development Financial Institutions: Board Size and Diversity as Governance Mechanisms