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Beyond Conventional Models: Lending by Native Community Development Financial Institutions

CICD Working Papers 2022-02 | Published November 29, 2022

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Authors

Valentina Dimitrova-Grajzl Virginia Military Institute
Peter Grajzl Washington and Lee University
Joseph Guse Washington and Lee University
Michou Kokodoko Project Director, Community Development and Engagement
Laurel Wheeler Economist, Community Development and Engagement
Beyond Conventional Models: Lending by Native Community Development Financial Institutions

Abstract

Native community development financial institutions (Native CDFIs) have become an increasingly important source of credit and financial services in Indian Country. This paper provides the first systematic quantitative analysis of lending in the Native CDFI industry. Using loan-level data from 11 Native CDFI loan funds, we first document the characteristics of Native CDFI loans and clients. We then investigate the determinants of loan delinquency. Native CDFIs on average give out small loans but support borrowers in varied circumstances with diverse loan products. Important predictors of delinquency include both conventional industry measures of client risk and alternative community-informed and character-based measures. Indeed, evidence on performance of business loans suggests that a character-based measure of client risk dominates the credit score as a predictor of delinquency. These findings lend support to using holistic approaches for assessing client creditworthiness that have already been adopted by some Native CDFIs. More generally, our analysis contributes new insights into the operations of an industry that plays an instrumental role in removing barriers to socioeconomic development in Indian Country.