David Fettig - Vice President of Public Affairs
Arthur J. Rolnick - Senior Vice President and Director of Research, 1985-2010
Published August 1, 2003 | August 2003 issue
This article is a condensed version of an essay that appears in the Federal Reserve Bank of Minneapolis 2002 Annual Report. It is based on a paper titled "Credit Availability in the Minneapolis-St. Paul Hmong Community," by Maude Toussaint-Comeau and Robin Newberger of the Federal Reserve Bank of Chicago and Arthur J. Rolnick, Jason Schmidt and Ron Feldman of the Federal Reserve Bank of Minneapolis.
When Congress passed the Community Reinvestment Act (CRA) in 1977, it had a specific outcome in mind: to encourage depository institutions to help meet the credit needs of the local communities in which they operate, including low- and moderate-income neighborhoods. As one of the federal regulators authorized to implement the law, the Federal Reserve has a supervisory process in place to measure whether banks are meeting such credit needs. However, there is a broader goal implicit in the CRA, and that is to broaden our understanding of how credit markets operate. Why? Because the well-being of communities can suffer when households and firms cannot effectively access funding; when credit markets do not work well, standards of living can fall.
The issues surrounding credit markets are many, and they include questions about credit availability within certain subsets of a city or a neighborhood. For example, have lending groups formed within certain low- and moderate-income communities, or within certain minority groups? Are there gaps—real or perceived—between banks and those ethnic communities? These are important questions, and they are difficult to answer in broad terms. Reviewing results from CRA exams offers some insights, but such data are naturally limited. These issues are best examined at a micro level, through a research program designed to ascertain how households and firms fund themselves.
One such research program began in the mid-1990s when the Federal Reserve Bank of Chicago and the University of Chicago joined together to survey the credit markets of two Chicago neighborhoods, one black and the other Hispanic. These surveys revealed the importance of informal credit for businesses (for example, from family members, suppliers and so on), and showed that the degree and type of informal lending varied between the two neighborhoods. To advance this research, the Federal Reserve Bank of Minneapolis joined with the Chicago Fed to survey the credit experience of a growing minority group in Minneapolis-St. Paul: the Hmong, who are refugees from Southeast Asia.
The survey of Minneapolis-St. Paul's Hmong business community addressed the question of how a refugee group with cultural and economic disadvantages would cope in a localized credit market. The Hmong arrived in the United States with little or no understanding of English, let alone of Western business and financial markets. How would they fare in a society—and more specifically, in an economy—that thrives on forms, business plans, acronyms, laws and regulations? Would Hmong entrepreneurs have access to credit from banks?
In the end, the answer is that the Hmong entrepreneurs have done surprisingly well, at least those who have opted to form businesses in Minneapolis-St. Paul. According to the survey, it appears that Hmong business owners use bank financing as much as their neighbors do at startup. Also, it appears that an engaged banking community is important to Hmong entrepreneurial success.
This article addresses four main questions related to the survey results:
Before addressing the above questions in greater detail, we will first provide a description of the Hmong in Minneapolis-St. Paul and of how the survey was conducted. At the conclusion of this article, we will consider avenues of further research and analysis.
The Hmong are immigrants from Laos and other Southeast Asian countries who settled in the United States as political refugees after the Vietnam War (for more information on Hmong history, see the sidebar below). The 2000 census puts the total Hmong population in the United States at roughly 169,000. About one-fourth of that total, or 41,800 Hmong people, live in Minnesota. St. Paul, with a Hmong population of 24,389, is home to more than half of all Hmong in the state. Minneapolis has the next largest population, with 9,595 Hmong residents, followed by two northern suburbs of Minneapolis, Brooklyn Center with 1,346 and Brooklyn Park with 1,226. Indeed, the Minneapolis-St. Paul area boasts the largest Hmong community in the world outside Asia.
The Hmong have little tradition in formal business ownership. Their historical economic experience consists primarily of subsistence farming. Once in the United States, many of the Hmong began agriculture-based businesses to capitalize on these traditional skills. As they increasingly congregated in urban areas, they naturally have shifted their business focus.
The largest concentrations of Hmong households and businesses are located in the Payne-Phalen and Thomas-Dale neighborhoods in St. Paul and along the Penn Avenue North corridor in Minneapolis. These neighborhoods are in the core cities and are characterized by well-established commercial strips composed of aging commercial, industrial and mixed-use buildings surrounded by older housing stock. The types of businesses located in these neighborhoods range from small service-oriented businesses, restaurants and retail establishments to large industrial and manufacturing operations.
From this description, at least some of the reasons why the Federal Reserve Bank of Minneapolis chose to study the Hmong may be apparent. Research suggests that immigrant groups, in general, lack capital and sufficient credit history to borrow from banks and financial institutions. 1/
Because the Hmong population's roots are in an underdeveloped area of Asia, they had limited experience with a well-developed capitalist system. This fact, coupled with their relatively recent migration to the United States as political refugees, suggests that the Hmong faced cultural and knowledge challenges in accessing credit from commercial banks and other formal financial institutions.
Second, despite the obstacles, the Hmong community located in Minneapolis-St. Paul has developed a distinct, recognized and viable small business sector. This raises the question of how those businesses were financed and makes it possible to study their access to and usage of formal credit.
Third, the presence of immigrant/refugee small business sectors is an integral and growing aspect of the vitality of urban neighborhoods throughout the United States. Diminished access to formal credit may impede economic activities in these neighborhoods, reduce the optimal size of immigrant-owned businesses and delay or deter entry into self-employment by immigrant entrepreneurs.
Hmong history in brief
Although nearly all of the Hmong refugees in the U.S. came from Laos, their history can be traced to central China, where their ancestors farmed the plains along the Yellow River.
Around 2700 B.C., local authorities tried to make the Hmong accept Chinese rule. Instead of submitting, they resisted. The Chinese responded with greater pressure and the Hmong resisted more staunchly, beginning a cycle that was repeated for thousands of years. The Hmong were gradually pushed out of their homeland and into mountainous areas of southern and western China. Pressure from Chinese rulers intensified a few centuries ago, and in the early 1800s, half a million Hmong fled south and east into what is now Laos, Thailand and Vietnam.
The Hmong settled in the region's highest elevations, where they lived in relative peace for more than a century. They practiced slash-and-burn, or "swidden," agriculture, periodically relocating their villages as they cleared new patches of forest to use as cropland. They maintained their culture and traditions, which were passed down orally from their ancestors through a rich store of history and legends. As it does to this day, their culture centered on the clan, or extended family group, as the most important unit in society and involved reverence for nature, ancestors and the elderly.
The peace ended in the late 1950s and early 1960s, when communist and noncommunist forces began struggling for control of the region. In Laos, the Pathet Lao movement, backed by Ho Chi Minh's communist Vietminh forces of North Vietnam, attempted to overthrow the Royal Lao government. Fearing that the country would fall to the communists, the U.S. sent CIA agents to Laos, where they recruited and trained an army of Hmong soldiers to fight a secret war against the Pathet Lao. The Hmong, who feared that a communist victory would bring an end to their way of life, fought bravely in support of the U.S. cause throughout the 1960s and early 1970s. Tens of thousands of Hmong soldiers and civilians were killed during the struggle.
In the spring of 1975, not long after Vietnam and Cambodia fell to the communists, Pathet Lao forces entered Hmong-held territory in Laos. Facing brutal reprisals, 150,000 Hmong people—about half the total Hmong population in Laos—fled to Thailand. For many, the journey was horrific; thousands died along the way. Some were shot by pursuing Pathet Lao troops, and others collapsed from exhaustion in the forest or drowned while attempting to cross the Mekong River to safety.
The survivors gathered in huge refugee camps in northern Thailand. Small groups began emigrating from Thailand to other countries soon after their arrival in the camps. The flow of Hmong refugees into the U.S. began with a few families in 1975 and swelled to thousands of individuals by 1980.
The U.S. Immigration and Naturalization Service split the refugees into small groups, regardless of their clan membership, and dispersed them to dozens of cities throughout the country. After their initial settlement in the U.S., many Hmong people relocated to join clan members in other states, congregating in large numbers in California, Minnesota and Wisconsin.
Today, there are approximately 12 million Hmong people in the world, according to the Hmong Cultural Center in St. Paul. Most, about 8 million, live in the mountainous provinces of southern China. Significant but smaller Hmong populations remain in the highlands of Vietnam, Laos and Thailand. In addition to the Hmong community in the U.S., Hmong refugees from Southeast Asia can be found in France, Canada, Australia and several other countries.
Sources: The Hmong Cultural Center and The Spirit Catches You and You Fall Down by Anne Fadiman.
As noted earlier, the survey for this project was based on a questionnaire developed by the University of Chicago and the Federal Reserve Bank of Chicago. This original survey was edited to focus on questions pertaining to small business development and to account for Hmong cultural differences. The Wilder Research Center in St. Paul, a division of the Amherst H. Wilder Foundation, was retained to manage the implementation of the survey, including translation, sample selection and survey interviews. During the translation process, language barriers proved challenging; for example, there are no Hmong words for "access" and "credit," which form the very basis of the survey. For these words and many others, a large number of Hmong words were needed to describe an English term. (For more information on language and cultural differences related to the survey, see the sidebar below). Even in its abbreviated form, the survey took from three to four hours to complete, compared to about two hours for the original Chicago survey.
An extensive effort was undertaken to compile a listing of all known Hmong businesses in the greater Minneapolis-St. Paul area, most of which were located along two primary commercial strips in St. Paul. This process identified 170 Hmong businesses. Of these, 121 (71 percent) completed surveys, 36 refused, and 13 could not complete the survey within the study period (owners were surveyed from November 2000 through April 2001).
Next, we identified a control, or comparison, group of non-Hmong business owners by obtaining a list of businesses whose ZIP codes matched those in the Hmong sample. Of the 220 existing, for-profit enterprises from this list, 131 completed the survey (60 percent), 41 refused and 48 could not complete it within the study period.
Given our interest in studying the relative ability of Hmong small business owners to access credit from formal financial institutions, we further limited the comparison group to 93 owners who identified themselves as "white" or "Caucasian," in the belief that this group would have a highly developed level of access to credit that would serve as a useful benchmark.
Minding the language and culture gaps
A good translation rarely corresponds word-for-word with the original. However, a fundamental rule of survey research is to make sure that all participants answer identical questions, even when a survey is conducted in more than one language. In designing the Hmong version of the Federal Reserve survey, the Wilder Research Center (Wilder) encountered special challenges that arose from the nature of the Hmong language and the financial topics covered in the survey. The research team took great pains to minimize the inevitable translation and culture gaps.
First, an introduction to the Hmong language. Hmong is closely related to a number of other Asian languages, sharing characteristics with Lao, Thai and Chinese. Most Hmong words have one syllable, made up of an initial consonant followed by a vowel sound. The vowel sound is voiced in one of eight tones, ranging from "high" to "low falling." In Hmong, a word's tone, placement and context determine its meaning.
There was no widely accepted written form of Hmong until the 1950s, when two missionary linguists in Laos developed the Romanized Practical Alphabet, or RPA. In the RPA, most Hmong words have three components: a consonant or consonant cluster, representing the initial sound of the word; a vowel or vowel cluster, representing a single vowel sound and a final, unvoiced consonant representing the vowel's tone. For example, the words paj(flower) and pam(blanket) share the initial consonant "p" and the vowel "a" (pronounced "ah"), but the "j" in paj indicates a high falling tone for the "ah" sound, while the "m" in pamindicates a low falling tone.
Hmong has two mutually intelligible dialects—White and Green—that are analogous to the American and British forms of English. The writing system is based on White Hmong pronunciations, making White Hmong the preferred dialect for written communications—including the Hmong version of the survey instrument used in the Federal Reserve study.
For an initial translation of the Fed survey, Wilder contracted with the University of Minnesota Translation Laboratory. Once the initial translation was completed, Lue Thao, a Wilder survey project coordinator and native Hmong speaker, reviewed and fine-tuned the questions. He conducted read-throughs and mock interviews with the Hmong interviewers who later conducted the survey. An advisory group of Hmong business and community leaders then reviewed the draft for cultural appropriateness.
As our cover story indicates, translating the survey instrument was a challenge. Hmong is the expression of an ancient culture with close ties to nature; it has no words for many of the credit- and business-related English words in the survey. Long strings of Hmong words were required to convey certain concepts. "Bank" became txais hauv chaw cia nyiaj, or "house that keeps money," and "mortgage" became txais cov niaj yuav tsev,or "to borrow or lend money to buy a house." The Hmong equivalent of "employee benefits" required nine words that translate roughly as "paying for the expense of an employee who gets sick." The survey's key word—"credit"—was translated into a phrase meaning "something you have to pay back."
The survey was conducted by telephone or in person, with interviewers reading the survey instrument aloud and writing down the responses. Hmong respondents had the option of being interviewed in Hmong or English, depending on their comfort level with each language. The interview was then conducted entirely in the chosen language to maintain consistency.
In the Hmong version, some English words appeared in parentheses near their Hmong translations. If the respondent found the Hmong equivalent of an English term confusing, interviewers could explain the term, in Hmong, using the meaning of the original English word as a guide. However, the interviewers were trained to stick closely to the script and avoid excessive explanation in order to keep the interviews consistent.
Wherever possible, translators and reviewers carefully modified the survey to eliminate questions or phrases that might be offensive in traditional Hmong culture. But due to the nature of the study, some questions about business income and financing had to be asked. According to Thao, such questions can make Hmong individuals uncomfortable due to a fear of appearing boastful if the income is large or unsuccessful if the income is small.
"I have a feeling that for some of the dollar amounts, we may not have the exact answers from many of the Hmong respondents," says Thao. But he emphasizes that any discrepancies in these dollar figures would have little effect on the study's main findings, which focus more on credit access and sources than on income figures.
Information on the Hmong language is from Handbook for Teaching Hmong-Speaking Students, published by the Southeast Asia Community Resource Center and California's Folsom Cordova Unified School District.
A brief comparison of business and owner characteristics suggests two main findings. First, although the control group was selected solely on the basis of co-location with Hmong businesses, this group appears quite similar to the Hmong owners in several other ways; for example, both groups are in the same types of business (mostly retail and personal services), both depend on neighborhood income for profitability and both groups are comparably educated.
Second, most of the noticeable differences between the Hmong and control group owners would appear to disfavor access to credit for the Hmong. For example, the Hmong business owners were roughly 10 years younger than their control counterparts. To the extent that age is a proxy for credit history and creditworthiness, the substantially younger ages of the Hmong owners could be an indicator of greater potential risk to lenders, resulting in diminished access to credit.
Before we proceed to a review of the survey results, it is important to recognize the limitations of this survey. First, the survey was originally designed to capture the use of informal lending sources and, likewise, may not provide a thorough examination about access to all credit. Following that, it is difficult to get accurate readings on whether credit applicants were discouraged from applying for loans, and discouragement is an important consideration when making assessments about credit access. Also, small sample sizes mean that results can be affected by changes in the way answers are recorded. And finally, the information below that was gleaned from focus groups—which included a relatively small number of participants—is, of course, more qualitative than quantitative.
Once again, our primary interest in this research project was to determine whether Hmong small business owners had access to credit that was comparable to that of white business owners. Specifically, were Hmong business owners able to utilize credit from formal financial institutions at the same level as their white counterparts?
We found that the Hmong owners utilized formal bank financing to the same extent as the control group when the business was started, but at slightly lower rates thereafter. With respect to credit access as a self-identified problem, we did not find substantial differences between the Hmong and white owners.
For a closer look at the results, let us now address the four questions introduced at the beginning of this article.
How available is startup financing for Hmong small businesses in Minneapolis-St. Paul?
Overall, the Hmong businesses appeared quite similar to the control group in terms of total startup funds, the sources of startup financing and the relative shares provided by each source. One difference between the two groups involved the use of informal funding sources. While both the white and Hmong owners made extensive use of such funds, Hmong owners utilized personal savings at higher rates and levels than their white counterparts.
Hmong owners who acquired preexisting businesses reported marginally lower startup capital amounts than the white owners ($111,618 as opposed to $134,172), but the survey responses indicated virtually no differences in the amount of funds used for initial startups, with both groups using roughly $22,000 for such businesses.
What sources of credit are actually used?
Of course, the fact that the Hmong owners used roughly the same amount of funds as white owners to start their businesses does not necessarily imply that the Hmong had the same access to credit from formal financial institutions. To more fully address the question of access to credit, we next explored the various sources of startup capital that were employed, based on the following three broad categories: internal sources, or any funds provided by the owner, including the use of personal credit cards and home equity loans; formal external sources, or loans from formal lenders and government programs; and informal external sources, or loans, gifts and investments from relatives and other personal contacts.
A key finding is the sizable number of owners who were able to obtain external funding from a formal source. Over 30 percent of both groups made use of such financing, with small business loans from banks accounting for most of the responses in each group. One quarter of the Hmong owners reported that they received a loan from a bank (or other formal lender), compared to 30 percent of the control.
Hmong owners differed from the control group with respect to their utilization of personal savings. While the vast majority in each group relied on internal sources to finance their establishments, white owners were not as likely to directly invest their savings into the business. Nearly 90 percent of the Hmong owners reported using personal savings during the period of business formation, compared to less than 70 percent of the control group. The average share of total startup financing provided by internal sources also differed slightly between the two groups, accounting for nearly 60 percent of the typical Hmong owner's startup funds vs. roughly 50 percent for the average white owner.
Do Hmong entrepreneurs report substantial barriers in their attempts to obtain credit?
We searched for evidence of unequal access in a series of questions that were designed to allow owners to directly identify credit access as a problem or barrier. If the Hmong owners were systematically receiving less access to credit than their white counterparts, their responses would, most likely, indicate that problem.
However, we found that where a problem was identified, it was not unique to Hmong businesses. In cases when a loan was not sought, both groups reported similar reasons for not seeking it. For example, a loan may have been unnecessary, the owner may have preferred not to use credit or there was a lack of knowledge about the credit process. While both groups reported little existence of bank-related financial barriers at startup, credit access appears to be an obstacle to the subsequent growth of small businesses in general. This was particularly true for the Hmong businesses. However, this reflects the fact that their businesses had fewer years in operation.
In summary, the Hmong business owners were no more likely to report discrimination in the credit market than were their white counterparts.
Lastly, we searched for signs that owners were operating under financial constraints. Business owners were asked how they would utilize a $20,000 windfall. Nearly 75 percent of the Hmong owners stated that they would invest the funds in a new or existing business, compared to only 20 percent of the white control. This is consistent with the relative newness of the Hmong businesses; the white owners, with longer-established businesses, would experience fewer financing constraints.
Financial constraints can also be indicated by the response of owners to bad times. Hmong- and white-owned businesses that were in existence for at least three years and experienced a period of near failure were questioned about the strategies they used to survive the downturn in business. While both groups of owners were most likely to increase their own work hours or reduce input expenses in reaction to bad times, strategies involving credit use differed markedly. Roughly 40 percent to 50 percent of the white owners reported using a credit-related response—either borrowing more, obtaining suppliers' credit, increasing credit card balances or failing to pay debts—while only 6 percent to 11 percent of the Hmong owners cited such strategies.
Are there unique characteristics about the Hmong community or the local banking environment that have affected the access to credit of small business owners?
The Hmong entrepreneurs have high educational attainment, show a willingness to invest large sums of money in their businesses and are open to leveraging their personal savings. These traits provide positive signals about the viability of Hmong businesses, which may partially explain the Hmong success in accessing credit. But it is difficult to draw definitive conclusions from these results.
To augment the data collected from the survey and to further explore this question, we conducted interviews with two focus groups, one consisting of representatives of several banks in the area of St. Paul that was surveyed and a second consisting of Hmong community leaders. Focus group participants were also asked to respond to a summary of our preliminary analyses, as a check on the accuracy of the survey and the conclusions we drew from it.
The Hmong focus group generally agreed with the survey's findings that qualified Hmong business owners were likely to have adequate access to bank financing. In response to our question about the local financial environment, both focus groups described similar themes that were necessary to ensure proper access to credit: cultural understanding, willingness to educate and flexibility in lending programs.
Cultural understanding. On the first point, the Hmong focus group said that the banking sector needed to be sufficiently knowledgeable about Hmong culture and its emphasis on relationships. For example, a Hmong grocery store owner who happened to be located on a block with similar businesses might appear to be a high-risk borrower, given the level of competition the store faced. Such a concern, however, might be mitigated by the knowledge that each store primarily served a specific subset of the Hmong community's clan structure, thus assuring profitability.
The bankers sounded a similar note: Establishing a personal relationship between the bank and the community was seen as paramount, the bankers maintained, given the high priority that is placed on relationships within Hmong culture. Examples included conducting outreach programs, participating in community organizations and sponsoring neighborhood events and festivals.
Education. Secondly, a willingness to educate Hmong borrowers and potential borrowers was viewed as very important by the Hmong focus group. Rather than simply denying requests from potential borrowers because they lacked technical documents (business plans, cash-flow analyses, etc.), loan officers needed to explain what documentation was required and assist the business owners in producing it, or redirect them to an organization that could perform these tasks.
On this point, the bankers spoke with a clear view: An effective way to educate the Hmong about the financial process was to hire Hmong employees. Hiring Hmong personnel was viewed as a critical component of a successful Hmong lending program, both in terms of being able to relate to applicants and helping to educate them on issues such as saving, applying for a loan and documenting business performance.
Flexibility. Several Hmong participants also stressed the importance of flexibility and the willingness of banks to deviate from traditional loan analysis procedures where appropriate, such as using alternative sources to vouch for the creditworthiness of a potential borrower. Here again, a crucial factor under such arrangements was the employment of Hmong loan officers and/or loan analysts, since these individuals could advocate for a loan on the basis of the borrower's character.
Flexibility was also a major theme of the banking focus group. For example, the bank might consider measuring the income of the business owner's entire family, as opposed to only using the direct earnings of the owner, for calculating loan-to-income ratios. Lending to Hmong-owned businesses was viewed quite favorably by all of the banking focus group participants. Specific mention was made of the entrepreneurial disposition of the Hmong, their ability to leverage resources from multiple sources and their willingness to repay loans.
Finally, although Hmong representatives felt that banks were successful in meeting the community's credit needs, they indicated that more could be done to improve overall access to credit. While few participants believed that Hmong individuals were subject to systematic discrimination from the banking sector, the general consensus was that many business owners felt that bank loan requests would be rejected because of limited credit histories and the inability to produce required documentation—factors that could be mitigated by more education.
When exploring issues related to credit markets, some researchers focus on the bank as the unit of analysis; that is, they review bank lending data and draw inferences about whether local communities were adequately served by analyzing such data. With the work in Chicago and, especially, with this latest study in Minneapolis-St. Paul that includes a comparison group, we can begin to view these credit markets from the "inside out" and gain deeper insight into how they operate.
However, any survey is a snapshot of a particular community at a particular time; as such, it cannot provide a clear picture from every possible angle. Our survey of Hmong business owners answers some important questions, but it raises other issues. For example, how do other ethnic groups manage in Minneapolis-St. Paul? How do credit markets operate in other cities? Have the Hmong had a similar experience in other areas where they have settled? Can we transfer successful business practices—from both the lending side and the consumer side—from one city or neighborhood to the next?
Questions persist, but this is only the beginning of our research efforts in this area. In the coming years, the Minneapolis Fed, in partnership with other Federal Reserve banks, plans to extend this research to communities in cities throughout the country and to revisit neighborhoods that have been previously surveyed. Taken together with the earlier work in Chicago, and with the addition of more research in the future, this snapshot will expand into a more complete picture of how credit markets work.
David Fettig is vice president of public affairs at the Federal Reserve Bank of Minneapolis, and Arthur J. Rolnick serves as senior vice president and director of research.
For the complete research paper on the Hmong small business survey, including data, visit minneapolisfed.org/research/studies/hmong. From there you may link to other research on this subject, including the previous work by the Federal Reserve Bank of Chicago on Hispanic and black neighborhoods in Chicago.
Wing Young Huie is an award-winning photographer who has exhibited locally and nationally. In 2000, the Minneapolis StarTribune named him Artist of the Year. His photographs are in the permanent collections of the Walker Art Center, the Minneapolis Institute of Arts, the Minnesota Historical Society and the Museum of Fine Arts, Houston.
The images accompanying this article are from a collection of photographs that were taken for the Federal Reserve Bank of Minneapolis 2002 Annual Report. To view a selection of the images that appear in the report, visit the report site and click on "Photo essay."