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Minority-Owned Depository Institutions: A Market Overview

The Milken Institute and the US Small Business Administration formed an initiative to develop actionable solutions to the challenges limiting minority-owned small businesses’ access to capital. The Partnership for Lending in Underserved Markets (PLUM), a two-year pilot program, was launched to this effect in September 2016 and has since completed its research. Building on the initial findings of PLUM, the Milken Institute has committed to exploring market-based solutions that specifically address the identified shortcomings in this space. This paper deals with the potential opportunities afforded by minority-owned depository institutions (MDIs), in particular, to fuel small business lending in low- to moderate-income communities.

The primary source of startup and acquisition funding for all small businesses is savings and equity investments from personal networks and, secondarily, bank loans. However, for minority-owned businesses, the second most prevalent source of funding is credit cards, which are typically higher-cost products designed to fund short-term liquidity, not catalyze long-term growth. This places minority-owned businesses at a disadvantage and potentially stymies job creation. Increasing access to traditional bank lending is an important component of improving the potential for both growth of minority-owned small businesses and associated employment gains in the communities in which they operate.

Unfortunately, there is some evidence that minority-owned small businesses may have restricted financing choices. According to the findings of an article published in the Journal of Consumer Research, minority business owners are presented with more loan requirements and offered less help to fulfill them during their pre-application (loan inquiry) interactions with banks. These challenges could make them less likely to continue their financing application due to a negative perception of the process and its outcome. Furthermore, an average of 72 percent of minorities does not have a bank branch in their neighborhood. Given the challenges faced by small businesses, especially minority-owned small businesses, it is imperative to assess which type of banks are best placed to provide access to capital for minority communities.