A Community Centered Approach to Closing Credit Access Gaps: Native CDFIs
Above: A scene from Mazaska Owecaso Otipi Financial, a Native CDFI in Pine Ridge, S.D. Mazaska was one of 11 Native CDFI loan funds to provide data for a CICD study of Native CDFI lending outcomes. Jeffries Design/Image courtesy of Mazaska Owecaso Otipi Financial
Imagine financial institutions across Indian Country focusing on goals rooted in social impact investing. Their missions might include fostering financial inclusion, providing culturally informed services and improving access to capital and credit in low- and moderate-income communities.
These institutions exist, yet many people remain unfamiliar with them. Historically, economic data gaps have masked economic conditions and opportunities in Native communities. The Center for Indian Country Development, a research and policy institute based at the Federal Reserve Bank of Minneapolis, is working to change that.
CICD advances the economic self-determination and prosperity of Native nations and Indigenous communities through actionable data and research that inform public policy. As part of our portfolio, we’ve worked with a team of researchers (Valentina Dimitrova-Grajzl, Peter Grajzl, Joseph Guse, Michou Kokodoko, and Laurel Wheeler) to conduct a series of studies on the unique role of Native Community Development Financial Institutions (CDFIs) in addressing capital and credit gaps in Indian Country. Those looking to engage in economic well-being in Indian Country may be interested in four key themes that have emerged in our research.
One important finding is that proximity to community improves credit outcomes. CICD’s research has found that establishing Native CDFIs on or near federally recognized American Indian reservations can improve credit outcomes. In a study of areas lying in or within a few miles of a federally recognized reservation, our researchers looked at the impact of CDFI activity on client credit performance during the post-financial-crisis years (2013–2017). Using loan volume and staffing levels as indicators of activity, researchers found that adding one Native CDFI staff member per 1,000 residents associated with, on average, a 45-point increase in Equifax risk score for individuals without established credit. For investors, this finding underscores the potential for Native CDFIs to mitigate systemic barriers and deliver measurable results. Native CDFIs’ proximity to the communities they serve allows them to offer tailored solutions that resonate deeply with Indigenous values and needs.
Our research also found that Native CDFIs’ knowledge and understanding of their clients can reduce uncertainty in lending outcomes. Many Native CDFIs have expanded the measures they use to predict loan risk beyond conventional lending criteria such as credit score and income. These Native CDFIs employ what’s known in the financial industry as “character-based lending” practices, bringing in loan officers’ assessments of prospective borrowers based on their community knowledge and the professional relationships they build with their clients.
In a working paper, we presented analysis of loan data from 11 Native CDFI loan funds that showed these character-based approaches to assessing credit risk can reduce uncertainty in lending outcomes. Looking at consumer, home, and business loans, our researchers found that a loan was less likely to be delinquent when the loan officer perceived the borrower as at least “somewhat engaged” in the borrowing process. For business loans, our researchers found that a loan officer’s knowledge of the borrower’s community reputation and business qualifications were key predictors of loan delinquency. In these ways, character-based criteria emerged as important predictors of risk, in addition to traditional measures such as client credit scores. In the case of business loans in our analysis, character-based measures predicted delinquency even better than credit scores.
Another theme from our research is that financial counseling can help borrowers meet loan obligations. In addition to holistic lending practices, some Native CDFIs also mitigate lending risk by providing clients with free financial counseling. They may offer this service via group training or individual coaching sessions. Lesson topics may include budgeting, credit scores, taxes, and goal setting. To investigate the impact of this lending practice on loan performance, CICD’s research team obtained detailed loan data from one Native CDFI. Findings from this analysis may not be representative of the industry as a whole, but the research provides evidence-based insights into the role of developmental services that Native CDFIs offer their clients.
In our analysis, free financial counseling was associated with a 12.2 percent lower probability of bad debt when the borrower lacked a credit score profile and when at least a half hour of counseling was provided. That is, the benefits of counseling appeared to be most pronounced for those without established credit.
Finally, our research has found that Native CDFIs face resource and capacity challenges. Financial counseling and relationship-based lending models can be staff-intensive. As a result, some Native CDFIs operate with capacity constraints and relatively limited resources, making it difficult to assess their impact and grow their operations. Financial and technical assistance awards to expand the capacity of Native CDFIs are available but limited.
Native CDFI leaders and partners have explored potential solutions to address resource and capacity challenges. Proposed solutions include identifying resources to build the capacity of small Native CDFIs, fostering collaborations between Native CDFIs and traditional banks, pursuing more private-sector investment, and positioning Native CDFIs to leverage the Community Reinvestment Act to secure capital.
Native CDFIs offer a pathway for community-centered economic transformation aligned with Indigenous values, yet their role has not been well documented. CICD’s research is changing that—and providing new insights for stakeholders interested in understanding opportunities to strengthen Native economies.
Article by Casey Lozar, vice president at the Federal Reserve Bank of Minneapolis and director of the Center for Indian Country Development (CICD). Before assuming leadership of CICD, Casey was assistant vice president/outreach executive in the Bank’s department of Public Affairs, and the leader of the Bank’s Helena Branch. Prior to joining the Minneapolis Fed in 2018, Casey served in economic development and higher education roles for the State of Montana. Additionally, he held executive leadership positions in national Native American nonprofits, including the American Indian College Fund and the Notah Begay III Foundation. Casey received degrees from Dartmouth College and Harvard University and an MBA from the University of Colorado-Denver. He serves on the Montana Board of Regents of Higher Education (past chair). Casey is the 2021 recipient of the Janet L. Yellen Award for Excellence in Community Development and a 2022 recipient of the Honorary Leadership Award from the Native American Finance Officers Association. A Montana native, Casey was raised on the Flathead Indian Reservation and is an enrolled member of the Confederated Salish and Kootenai Tribes.