Several years ago, I led the development of a federal-chartered community development financial institution. The process is beyond this article but required a number of project responsibilities. Writing the business plan to gain regulatory approval. Developing of financial policies to raise capital. Site presentation and hiring. Establishing the computer systems and network engineering. Working with regulatory during quarterly audits. And a host of task. On one evening, I slept in the vault, too exhausted to make it home. That experience revealed a host of insights about the industry, community development, and consumer behavior.
GETTING BOFI HISTORY RIGHT AND WHAT THIS MEANS TO BLACKS TODAY …
The idea of supporting black owned financial institutions [BOFIs] cannot escape myths, perceptions, and other sentiments that arise out of the history. Historically, African Americans often link the start of BOFIs to the Freedman’s Bureau, established by Congress and signed by President Lincoln on March 3, 1965. The Freedman’s Savings and Trust Company [FSTC], also known as Freedman’s Saving Bank, was not a government initiative, per se. And our misunderstanding has attributed government with efforts on the part of self-determined African Americans. While Congress passed legislation to assist former slaves, banking was an unfunded mandate.
Private citizens looked to FSTC to solve two transitional needs. First, the Civil War ended with $200,000 in unclaimed funds deposited in The Free Labor Bank by African American soldiers. Second, the measure was as a part of broad-based initiatives to facilitate economic development for newly-freed former slaves following the Civil War. FSTC operated until 1874, having reached a high point of 61,131 African American depositors and $2.9 million in deposits. It’s closure devastated the black community and was a source of distrust in American institutions.
The U.S. National Archives and Records Administration maintains an extensive collection of multimedia records about Freedman’s Savings & Trust Company. Click here.
Perceptions of financial institutions are linked to slavery where black merchants financed their slavery enterprises through the support of American institutions. And it is not uncommon for African Americans to view history through the lens of failures than the more compelling story of extraordinary efforts through incredible odds. Long are we on stories that demoralize our people. And we are short on stories that reflect hope and trust. FSTC began in a difficult social climate and was instrumental during its years of operation.
It is likewise necessary that the black experience not be limited to Reconstruction. Indeed, a more inspiring look at BOFIs today connects the potential for fostering wealth that defined ancient Kemet, along the Nile Valley 5000 years ago. Great 15th centuries kingdoms of Mali and Ehtiopia in the west and east, respectively. Managing large resources of capital for people of African descent to assert themselves on the national and international stage literally is not a new phenomenon; and we must recapture that cultural understanding to grow communities today.
CHALLENGES THAT BOFI FACE …
BOFIs have served a vital need of financial products and services in under-resourced communities. And yet, according to the Federal Deposit Insurance Corporation [FDIC], the number of back owned federally chartered institutions has declined 54 percent from 2001 to 2016. Another source, the HBCU Money, reports black owned institutions have combined of $4.7 billion in assets.
Part of what happened was that they were kind of victimized by their own success, in the sense that the reason the Wells Fargos of the world started targeting the black community is because they finally woke up and discovered what these small black-owned banks had known forever: that there was money there. — William Michael Cunningham, the CEO of Creative Investment Research, Inc
Quite possibly, the dwindling number reflects the latest wave of consumer integration sentiments that has led some to question the relevance of black owned and operated institutions from HBCUs to funeral homes, beauty products suppliers to neighborhood convenient stores. Recent events around the nation have reignited the African American community to take ownership over growing black-owned businesses.
Walking into one’s local bank or credit union does not make the consideration challenges they face readily apparent. Without that sensitivity and understanding, the community at-large could easily choose to not support as much as possible. And in some cases, the actions we take place these institutions in jeopardy of insolvency. So what are some of these challenges? A full list requires a more extensive writing, but some of these include:
Mission Risks. Mainstream financial institutions mitigate their risk by offering products and services across a broad cross-section of America. Conversely, BOFIs often focus on niche markets that carry with them inherent risks such as relatively higher unemployment.
Regulatory Disparities. The collapse of financial markets in 2008 and Washington’s response has several intended and [possibly] unintended consequences. Federal intervention saved institutions, while allowing others to dissolve. Too big to fail, then, fostered consolidation in the financial sector, making formidable survivors of the collapse even more powerful. The Dodd-Frank Act regularly stiffened underwriting standards. While promoting stability in the markets, this poses great challenges for niche institutions that serve communities that have disproportionately lower capital and credit scores. These standards, while challenging for BOFis in normal economic periods given, are even more complicated given [consumer] markets that are vital to black institutions.
George Andrews, former CEO of Capitol Bank & Trust in Atlanta (that closed in February 2015), observes about the Bush/Obama Troubled Asset Relief Program [TARP]:
“It was very unfortunate that major financial institutions — big banks — received a large portion of the TARP money when institutions like Capitol Bank received none or very little. To add insult to injury, big banks received TARP money after they played a large part in creating the downturn in the economy with the unscrupulous lending practices they engaged in.”
Ironically, black owned financial institution are often overlooked for public economic stimulus investments. Of the $3.5 billion in New Markets Tax Credits [NMTC] enacted by Community Renewal Tax Relief Act of 2000 was designed to incentivize development in under-resourced neighborhoods. Michael Grant, president of National Banker’s Association, reveals that despite the typical BOFI mission to serve these communities, “no [NMTC] funds were awarded to the nation’s minority banks.”
Some argue that regulatory reform favored large financial institutions, while placing undue burden on smaller/independents concerns. Grant notes:
The larger banks created a lot of the problems, but they are not paying for it now…I think it’s an over-reaction to the lax regulations during the previous administration’s reign. Because the regulations were so lax, Wall Street was running amok, and Wall Street execs caused the big bubble to burst. A lot of these smaller banks, that played such a small role in what happened, now are paying a very big price.
Have regulatory reforms chosen winners and losers? This question shrouded federal efforts to address the financial crisis of 2008. Washington rejected this notions, then. However, it is difficult to objectively concluded that consolidation over the past 8 years has occurred independent of government intervention. According to a Harvard Kennedy School study, major financial institutions gained considerable market share after Dodd-Frank Act and other measures:
Our assessment of Federal Deposit Insurance Corporation data finds that community banks service a disproportionately large amount of key segments of the U.S. commercial bank lending market – specifically, agricultural, residential mortgage, and small business loans. However, community banks’ share of U.S. banking assets and lending markets has fallen from over 40 percent in 1994 to around 20 percent today. Interestingly, we find that community banks emerged from the financial crisis with a market share 6 percent lower, but since the second quarter of 2010 – around the time of the passage of the Dodd-Frank Act – their share of U.S. commercial banking assets has declined at a rate almost double that between the second quarters of 2006 and 2010.
Accessibility. The sheer differential in physical plant (e.g., full service branches, ATMs) complicates the task of serving a public with greater demands for convenience. In my home town of Cincinnati, Oh., it would be difficult to imagine a 5-minute drive where one would not see the presence of the three largest banks. Conversely, independent financial institutions might have the capacity to erect two or three facilities and deploy a limited number of ATMs. However, this is not an indicator of lower quality, but rather of comparatively small capital. In-fact, prudent black owned institutions make decisions to be conservative in physical plant deployment that place considerable budgetary demands on the overall operators.
Consumer Perception. Several mis-perceptions in the mind of [potential] customers raise challenges to institutions, including:
Lack of Confidence. Fears of losing money in the event a financial institution were to go insolvent. Consumers must understand that, on the right side of a bank’s balance sheet, both depositors and stockholders have claims to the bank’s assets represented on the left side of the balance sheet. Depositors are protected by insurance, whether federal- or state-chartered, which protect funds placed in accounts. To the extent that a financial institution has investors who own stock in financial institution, yes, there is a risk of loss. However, such is the case for all types of private investments, from personal businesses stocks on Wall Street exchanges. The point here is that investors should investment in black owned banks as they with other investor. And to the larger point, financial institutions carry insurance to protector depositors’ savings and checking accounts within the guidelines of federal or state insurance programs. If a federal bank, look for FDIC insurance. Credit unions are insured by the National Credit Union Administration [NCUA]. Both cover insure deposits up to $250,000. State financial institutions are insured by providers specific to their state of operations.
Privacy. I also observed a dynamic that hinders black owned financial institutions from maximizing their lending potential. In some instance, African Americans are hesitant in submitting loan applications. Black communities are often comprised of intricate people networks including religious organizations, fraternities/sororities, social/civic organizations, athletic associations, and the like. And one of my unexpected learnings is that some, including those who are in the best position to support, harbor concerns that their private information will find its way from a loan officer into these network on the super gossip highway. However, black owned financial institutions are regulated. And regulations agencies take serious the issue of privacy. These institutions face serious fines, criminal prosecution, and being forced out of operations, if found in violation of privacy regulations.
Loan Repayment. Perhaps the most serious challenge is that of consumers paying back loans. While banks follow strict reserve and corporate policies, consumers must understand that defaulting on loans of any nature (home, auto, uncollateralized, etc) stymies an institution’s ability to make a decent profit and extend other loans. And that fact that these institutions happen to be owned and operated by people of African descent does not lessen the need to manage the lending process with rigor.
Centuries of marginalization creates images that African Americans lack certain expertise to win on the big stage of finance. However, the resumes of blacks that manage BOFIs readily refute this myth. Small institutions operate in increasingly challenging environments. For BOFIs, the challenges are exacerbated.
People assume [Black bankers] don’t know what they are doing. Put yourself in these shoes: We are located in communities in which all of the large banks have moved out of because it’s not profitable for them to do business there.” — Alden McDonald, CEO of New Orleans-based Liberty Bank and Trust
WHY SUPPORT BOFIs …
As of this writing, I am working on a book that focuses on the work of Rev. Dr. Martin Luther King, Jr. As our nation moves towards the 50th anniversary of is tragic death, many who walked with him are also passing from this life. And social engineers are busy reshaping Rev. King’s legacy. Arguably, one of the ongoing revisionist efforts involves confining the challenges and implications of Rev. King’s messages to satisfy a sort of utopian dreamer that lacked practical consideration. Prior to closing his final message delivered in Memphis, TN on April 3, 1968, Rev. King admonished:
… we’ve got to strengthen black institutions. I call upon you to take your money out of the banks downtown and deposit your money in Tri-State Bank. We want a “bank-in” movement in Memphis. Go by the savings and loan association. I’m not asking you something that we don’t do ourselves at SCLC. Judge Hooks and others will tell you that we have an account here in the savings and loan association from the Southern Christian Leadership Conference. We are telling you to follow what we are doing. Put your money there. You have six or seven black insurance companies here in the city of Memphis. Take out your insurance there. We want to have an “insurance-in.” Now these are some practical things that we can do. We begin the process of building a greater economic base. And at the same time, we are putting pressure where it really hurts. I ask you to follow through here.
The African Americans community has seen the erosion of black ownership. Often the impact is gradual, but no less important to the well-being of neighboring and distant communities. Black owned institutions share some of these implications as well as others specific to the financial sectors, including:
- Contracting Opportunities. As with other businesses, black financial institutions mean contracts e.g., marketing, security, janitorial, accounting, information technology, construction/contracting, legal, etc.
- Employment. These institutions actively seek opportunities to hire and promote African Americans.
- Financial Literacy. BOFIs can tailor financial literacy programs to the needs of their core customers.
- Targeted Consumer Policies. While BOFIs must observe underwriting and other standards, they do so with a clearer understanding of African Americans and predominantly black communities.
- Community Sustainability. The presence of BOFIs grows business districts and neighborhoods from an asset (vs. deficit) model. That is, they shift the reliance on social service agencies that are sustained, literally, by servicing dysfunction.
- Capacity Building. Black support increases reserves and those reserves expand lending and other services. Further, this becomes an internal drivers for African Americans to build expertise in the financial sector.
- Global Presence. In a dynamic global marketplace, African Americans will needed greater visibility to take on new relationships in Central and South America, Africa, the Middle East, Asia, etc. Even now, opportunities are emerging in Cuba. Through strong BOFIs, the black community (individuals, organizations, businesses) can participate in new ventures in housing, trade, etc.
- Youth Development. We, as adult, sometimes overlook the power our businesses have to shape productive lives of our youth. BOFIs demonstrate that we are concerned about our communities. That solid education does provide opportunities. And BOFIs have the potential to provide, what I refer to as, functional mentorship. That is, mentorship that extends beyond intrinsic benefits to technical. For instance, during one nation meeting of financial institutions, a credit union’s presentation discussed its on-going youth credit union program wherein days were reserved for young people to run the entire operation.
WHAT BOFI SUPPORT LOOKS LIKE …
I am encouraged to see a resurgence in commitment to BOFIs. These organizations lack resources to match regional, national, and international marketing prowess of major institutions. As such, informal campaigns matter!
That said. communities must collectively define support in ways that both it and black owned institutions maximize their relationships. At the core of banking relationships is the deposits. These take the form of savings, checking, and time (e.g., certificates) deposits. Deposits serve of vital role in short-term operations as they allow institutions to participate in arbitrage; profits derived from overnight investments institutions make from a percentage of their deposits. As such, deposits are important.
Institutions gain revenues from fees (e.g., non-sufficient funds), but this is by no means what financial officers rely on to survive and grow. Therefore, service fee does not necessarily help an organization, but often complicates complicates their operations. Further, financial services reforms has reshaped fee assessments. BOFIs must be in a position to plan with a certain ability to forecast. Further, instability could lead to increased fees, higher interest rates, a pull back in community services, and downsizing operations. A healthy attitude about fulfilling consumer commitments, particularly loan repayments, is itself a support that the community can foster in a cultural sense.
Another level of support, then, is lending. Support campaigns must stress the importance of loan (interest) income to black owned banks. And the importance must be understood not only by under-resourced consumers, but also: upwardly mobile African Americans with solid credit scores; business owners; home builders/purchasers; and not-for-profit organizations (e.g., churches). A decision to take one’s lending business to a majority-owned institution literally transfers potential revenue potential from black owned banks and credit unions and, by extension, from the black community.
Support comes in the form of other vital services BOFIs can provide. For instance, if you are an estate executor/administrator or trustee of a family trust, consider doing business with BOFIs. Wills, local rules, and/or other legalities might require that banking services/accounts be managed within a certain geographical boundary. Review laws and key documents, and seek legal counsel, if necessary. Again, it is important to extend to BOFI opportunities for personal, organizational and business relationships.
In addition to various ways in which we can support BOFI internally, added support can come from exercising political influence. For instance:
- Community Forums. Ongoing community meetings where BOFI and the black community can discuss regulatory/policy/program status and challenges. Issues above such as NMTC must be a part of the regular conversations that equip the black community to lobby for BOFI access to government economic stimulus efforts.
- Participation on Funding Committees. African Americans can seek involvement in federal, state, and local committees that review public grants and make awards. Having participated on committees in Washington, DC and locally, African Americans “leave money on the table”, so to speak, for not be in the room when black organizations are submitting applications for competitive grants, loans, tax credits, and other public sector financing.
- Development Projects. Each year in virtually every major city in the nation, projects are launched that require banking services. These present excellent opportunities for BOFIs. These projects range from strip mall development, to housing and brownfield projects, to transportation and other infrastructure. Involvement in these projects as primary and/or syndicated financiers enable BOFIs to capture greater market share and growing their capital reserves. The black community must strengthen relationships with BOFI and local decision-makers to facilitate this growth.
Ultimately, we can reflect on Rev. King’s words as not animus towards the white community, but our charge to pull ourselves up by our own bootstraps and lift not only blacks, but all who are interested in reviving American cities.
FINAL WORDS …
BBC is launching an initiative to strengthen BOFIs. We hope this information helps in addresses issues and motivates your participation. Please circulate and discuss this information with individuals, organizations, and businesses. Also, please join BBC in the LowdCrowd Network for updates on how you can get involved.