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Redlining

The systematic denial of services to residents of certain neighborhoods or communities associated with a certain racial or ethnic group

What is Redlining?

In the United States and Canada, redlining is the discriminatory and unethical practice of systematic denial of providing services, particularly financial services, to residents of certain neighborhoods or communities associated with a certain racial or ethnic group. The denial of services can be accomplished directly (e.g., prohibiting the grant of loans to a certain racial group) or indirectly (e.g., imposing higher interest rates for the borrowers from a certain racial group).

 

Redlining
Figure 1. Redlining neighborhoods in Philadelphia, 1937 (Source: Wikimedia Commons)

 

Redlining is typically associated with the denial to provide various financial services such as banking or insurance. However, there are other examples of such unethical practices associated with other services, including healthcare and retail.

 

History of Redlining

The term “redlining” was introduced by American sociologist J. McKnight in the 1960s. Using the term, McKnight described the discriminatory practice employed by banks when investments in certain neighborhoods were banned based solely on the demographics of the area.

In his study, McKnight identified that certain banks denied various financial services (mortgages, student loans, credit cards) to people living in areas predominantly populated by African Americans.

 

Redlining and the Law

The discriminatory nature of redlining makes the practice illegal. Businesses are prohibited by law to deny providing services to customers based on the latter’s race or ethnicity. For example, the Fair Housing Act in the United States protects housing buyers and renters from discriminatory practices that could be employed by sellers or landlords. Additionally, the Community Reinvestment Act bans all redlining practices in lending.

 

Effects of Redlining

Redlining adversely affects both the economic and social conditions in an urbanized area. The practice hinders the economic development in neighborhoods populated by ethical minorities since it paralyzes the housing market in the affected areas and limits the inflow of investments. As a result, the redlined areas become underdeveloped while their residents become poorer.

In addition, redlining fosters the so-called hood culture in the affected areas. The urban population becomes more segregated because residents of redlined neighborhoods tend to bond together and oppose other communities in order to overcome the harmful impact of the practice.  Eventually, the practice results in the destabilization of the urban community.

 

Related Readings

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Corporate Social Responsibility (CSR)
  • Diversity Management
  • Moral Hazard
  • Screening

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