The Impact of Serving Low Income Communities on Credit Union Efficiency

Do mission-driven financial institutions accept efficiency tradeoffs to bank underserved communities, and if so, to what extent? We examine this question using the Low-Income Designation (LID) program for U.S. credit unions, which provides regulatory benefits in exchange for serving majority low-income membership. Using a two-stage data envelopment analysis (DEA) approach with bias-corrected efficiency scores for a balanced panel of 2,067 federally insured credit unions from 2015-2024, we find LID institutions operate with 1.03 percentage points lower efficiency scores (p<0.01) compared to non-LID institutions. This efficiency penalty persists after controlling for size, credit quality, growth, and state/time fixed effects. Mechanism analysis reveals the penalty operates primarily through higher operating costs rather than inefficient capital allocation. Despite lower efficiency, LID institutions experience positive member deposit growth, suggesting stakeholders accept operational costs in exchange for intangible social mission objectives. We find larger efficiency penalties for Minority Depository Institutions (-2.56 percentage points, p<0.01), confirming that broader social mission commitments involve efficiency tradeoffs. Our findings contribute to the stakeholder theory and financial inclusion literature, demonstrating that institutions serving underserved markets face real resource costs that their stakeholders willingly bear.