Roughly 8 percent of the 917 community development financial institutions (CDFIs) in the U.S. are categorized as Native CDFIs (NCDFIs), which means they serve primarily American Indian, Alaska Native, or Native Hawaiian communities. Due to a mixture of historical, political, and geographical factors, these communities tend to face profound challenges: high rates of poverty and unemployment; lack of physical, legal, and telecommunications infrastructure; and limited access to affordable financial products and services, to name a few. NCDFIs are working to change the landscape by filling credit and capital gaps and providing Native consumers, entrepreneurs, and potential homebuyers with needed information and training to access traditional lenders.
According to a new Federal Reserve Bank of Minneapolis Community Development Report titled Growth and Performance of the Native CDFI Loan Fund Sector, 2001–2012, the NCDFI industry is growing rapidly and, on the whole, performs fairly well financially, but could benefit from expanding its sources of capital.
For insights into strengthening the role of NCDFIs, Community Dividend spoke with Gerald Sherman, interim CEO of a national NCDFI membership organization called the Native CDFI Network (NCN). Sherman has been involved in developing financial products to assist Native entrepreneurs and communities since the mid-1980s, when he served as the founding board chair and executive director of The Lakota Fund, an early NCDFI located on the Pine Ridge Indian Reservation in South Dakota. He went on to become the founding CEO of Indian Land Capital Company, a Montana-based national lender to tribes. In his current role with NCN, Sherman leads efforts to maximize member NCDFIs’ impact through capitalization and policy advocacy.
Community Dividend: Let’s start by taking a look back. For the past 30 years, you’ve worked in community development finance in Indian Country. How has the industry changed in that time?
Gerald Sherman: There’s been tremendous growth, but it’s mostly been recent. When we started The Lakota Fund in the 1980s, there were only a couple of players in the market. We had several conversations and meetings to get the other tribes to start CDFIs, but it’s only in the last ten years or so that things have picked up. Why is that? It could just be that there are now more Native people trained and available to provide help in finance and small business development, so the learning curve has shortened quite a bit. Or it could be that Oweesta Corporation [a well-established NCDFI intermediary based in Colorado] helped to capitalize NCDFIs. A lot of groups started to organize as a consequence and things became a lot more sophisticated fairly quickly. Whatever the reason, I think it’s about time. Tribal economic development practitioners are finally starting to see NCDFIs as credible financing institutions.
CD: In your view, what are the biggest barriers to financial access and economic growth in the communities NCDFIs serve?
GS: Indian Country is diverse and some places are easier to develop than others. But in general, two things come to mind that these places have in common: tribal sovereignty and a culture of poverty. There’s a market for banks to tap into in Indian Country. For instance, there are about 5,000 people living on the Pine Ridge reservation. But there’s no bank on the reservation, and there are reasons for that. Some financial institutions don’t like to invest in Indian Country because of fear of entering into a sovereign territory where the rules aren’t clear to them. Tribal governments have to learn to use their sovereignty effectively to help grow their economies. And we need to shift people out of a poverty mindset and start teaching them about entrepreneurship, banking, wealth creation, and asset development. We don’t need to look to the federal government or anybody else for an answer. We have the capability to solve it ourselves. That’s why I got into this field.
CD: What are some appropriate ways that tribes can promote or assist CDFIs?
GS: Some of it goes back to sovereignty. Tribes can pass laws like collection codes and uniform commercial codes to provide a consistent legal environment for lending and business. For instance, they can adopt the model tribal code that the Federal Reserve Bank of Minneapolis helped develop.[*] Another thing they can do is to separate their court system from their governing council, in order to keep judges independent and get rid of the politics. They can also help to capitalize or fund NCDFIs or provide office space to them at reduced cost. Finally, one big thing they should do is stay out of the operations and decision making of NCDFIs.
CD: How can NCDFIs work together with banks, credit unions, and other financial institutions?
GS: The best way is for banks and credit unions to provide low-cost capital to NCDFIs. Banks do that already for CDFIs in other settings but it doesn’t seem to prevail in Indian Country. Banks could provide leadership in board positions or serve in an advisory capacity. They could also participate in loans with NCDFIs, thereby allowing banks to take on greater risk than they otherwise would. And finally, they can always provide grants to NCDFIs.
CD: What do you predict for the future of NCDFIs? Will their numbers continue to grow, for example?
GS: A number of reservations throughout the United States are showing interest in starting CDFIs to serve their communities, so I think we’ll continue to see growth in the sector. More tribes are recognizing that CDFIs are the appropriate financial institutions for their communities because they’re concerned with cultural values as well as financing. While traditional financial institutions focus more on the financial bottom line, CDFIs have a business model that can allow for double or triple bottom lines where people and the environment are important. So I expect the growth will continue, and I think the field will continue to become much more sophisticated. The Native CDFI Network will really help by collecting data and showing impact to raise the profiles of NCDFIs on a national scale. The future will remain bright for NCDFIs as more young people continue to join the industry. This is an exciting time.
What is a CDFI?
Community development financial institutions (CDFIs) are specialized entities that provide financial products and services, such as small business loans and technical assistance, in markets not fully served by traditional financial institutions. CDFIs can include banks, thrifts, bank holding companies, credit unions, loan funds, and venture capital funds. The CDFI Fund, a program of the U.S. Department of the Treasury, certifies and provides financial support for CDFIs. For more on CDFIs, visit the Minneapolis Fed’s CDFI Resources web page at www.minneapolisfed.org/community/cdfi-resources.
[*] Sherman is referring to the Model Tribal Secured Transactions Act (MTSTA), a model law that tribes can adopt to support an important type of commercial lending. The Minneapolis Fed’s Community Development Department helped draft the model code and has provided technical assistance to several tribes that have adopted it. For more on the MTSTA and the Minneapolis Fed’s other work in helping tribes build sound legal environments to support economic development, visit www.minneapolisfed.org/community/indian-country.