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Are CDFIs the Key to Bolstering Economic Opportunity in Puerto Rico?

A movement of CDFI certification for “cooperativas” is bringing much-needed funding opportunities—and climate resilience initiatives—to the island.

By Christopher Williams

Hurricane Maria slammed Puerto Rico in 2017, causing $139 billion in damages and killing almost 3,000, making it the worst storm the U.S. commonwealth experienced. Six years later, the island is still rebuilding its devasted homes and properties. Notably, a flourishing CDFI sector is rising from the ashes of the disaster.

In the aftermath of Maria, the number of CDFIs in Puerto Rico has increased significantly to 95—from only eight before the storm. Much of that is due to investments into Puerto Rican financial cooperatives, or cooperativas, in large part facilitated by Inclusiv. The New York City CDFI began working with financial cooperativas on the island in 2018 to provide technical assistance with obtaining CDFI certification and applying for grants from the Treasury Department.

The cooperativas, part of Puerto Rico’s network of credit unions, are insured and regulated by the Puerto Rican government. They are generally nonprofit organizations owned by members that provide services and food to each other, as well as aim to generate jobs and reduce poverty. Many already met the requirements to be a certified CDFI, but getting official certification opens up new funding opportunities, including receiving New Market Tax Credits.

Increased financial support was in dire need even before Maria struck the U.S. Territory. Forty-four percent of the Puerto Rican population lives in poverty, well above the overall 11.6 percent U.S. poverty rate. Inclusiv was among the first U.S. investors to prioritize investing money into Puerto Rico’s cooperativas to pump up its financial system, develop underserved communities and bolster climate resiliency initiatives on the island. The organization made an initial investment of $1 million in December 2022 in partnership with Deutsche Bank Americas Foundation into Cooperativa de Ahorro y Credito Jesus Obrero, the third largest financial conglomerate on the island, serving more than 1.2 million member-owners.

And many of the newly minted CDFIs were credit unions that proved their critical importance during the hurricane, helping keep many cash-strapped Puerto Ricans afloat when more traditional financial sources such as banks were temporarily unavailable.

“Most of them were not CDFIs during the crisis,” says Rene Vargas Martinez, who serves as the director of the Puerto Rico Network for Inclusiv. “But they were CDFIs in spirit.” In other words, they had the requirements to become CDFI,s but lacked the process.

The only time Martinez lived outside of Puerto Rico was when he joined Inclusiv in 2018 to work in the New York City office for three years. He returned home to expand Inclusiv’s effort to connect with cooperativas, regulators and communities in Puerto Rico.

“I’m primarily the point of contact for everything that we do as a network on the island,” Martinez says.

About 98% of Puerto Rico is categorized as CDFI investment areas, as defined by the CDFI Fund (the rest of the U.S. and territories is categorized by the Treasury). One of Martinez’s main responsibilities is to help credit unions and cooperativas apply for CDFI status and for Treasury grants—a job he’s evidently performed to positive effect: Inclusiv has helped newly minted CDFIs on the island access more than $76 million in CDFI grants.

The 37-year-old native Puerto Rican has experienced his share of storms. As Maria approached, he sensibly moved from his high-rise apartment in the capital city of San Juan to his friend’s house 10 minutes away on lower ground. The category-5 storm knocked out power across the whole island, temporarily disrupting the financial system and closing many bank branches for months.

Into the breach came credit unions, providing much-needed funds even to citizens who might not have accounts with that particular credit union, explained Martinez. Businesses that were open only accepted cash

“Credit unions or cooperatives have really grown after Hurricane Maria, and people have come to see them as vital financial institutions, especially in times of crisis,” says Martinez, who himself was without power for months after the storm.

“Many were unaware that they could even qualify to become a CDFI and then access different funds and resources,” says Cathi Kim, director of Inclusiv Capital.

Inclusiv, founded in 1974, funnels funds and other services to member community development credit unions (CDCU) and Minority Depository Institutions (MDI). Their network in Puerto Rico comprises 106 CDFI-eligible cooperativas serving 1.1 million member-owners and $11 billion in assets in community assets, which increased from $8.7 billion in 2018.

Puerto Rico, which sits 1,000 miles off the coast of Florida, has suffered more than 20 hurricanes and storms of various intensities since 2000. A number of local organizations are trying to bolster the island’s ability to prepare for and respond to disastrous events related to climate change, and the boom in CDFIs could make a big difference.

That’s because the Inflation Reduction Act, passed last year, set aside $27 billion under the Greenhouse Gas Reduction Act to advance climate resiliency in low-wealth communities—in part through funneling money through credit unions, CDFIs and other mission-driven lenders.

“We cannot ignore the fact that climate change has a disproportionate impact on communities of color and low-wealth communities,” Kim says.

Jesus Obrero, a CDFI and the recipient of the first Inclusiv-Deutsche investment post Maria, has been lending to residents in Puerto Rico to finance solar power kits for more than five years.  They created the first solar lending guidelines on the island, according to Aurelio Arroyo Gonzalez, executive president of Jesus Obrero, which is based in Guaynabo.

While Kim, Martinez and Arroyo are optimistic about the progress the Inclusiv-led initiative has made, they face a significant long-term challenge: population decline on the island.

Arroyo says the migration of Puerto Ricans, especially younger residents, to the mainland accelerated after Hurricane Maria. According to the Center for Puerto Rican Studies, nearly 160,000 Puerto Rican residents left for the United States one year after Maria, which was as high as the net migration in the previous two years. The result, in effect, is that the island’s financial system will have fewer potential clients to avail themselves of their services.

“It’s an external threat,” Arroyo says. “It’s difficult to get them back because Puerto Rico (needs) sustained economic development.”

In the meantime, though, investors beyond Deutsche are interested in Puerto Rico. Arroyo says he’s talking to some “responsible investment investors” that are considering funding Jesus Obrero’s expansion of its solar lending program. He’s optimistic about connecting with them, though he declined to identify their names. 

Kim says Inclusiv has also received “several statements of interest” and is talking with three institutional investors interested in investing in cooperativas and helping communities in Puerto Rico become more prepared to deal with natural disasters. “One of the goals for this partnership (with Deutsche) was to establish a proof of concept,” she says, “so other investors and partners can develop their own models and bring in additional capital.”

Inclusiv and Jesus Obrero, indeed, are betting that closing these deals with potential investors will continue to strengthen Puerto Rico’s economic infrastructure, enabling the storm-battered island to weather future crises—both economic and environmental.

This story is part of our series, CDFI Futures, which explores the community development finance industry through the lenses of equity, public policy and inclusive community development. The series is developed in partnership with Next City.