MDIs A Market Overview 7.18.18

Minority-Owned Depository Institutions: A Market Overview

Jul 20, 2018

James Barth, Aron Betru, Matthew Brigida, and Christopher Lee

There is evidence that minority-owned small businesses face negative bias in their interactions with financial institutions. The reality is that there are greater opportunities for minority-owned small businesses to secure capital when they can seek funding from local minority-owned depository institutions (MDIs). This is why, building from the initial findings of our two-year pilot program Partnership for Lending in Underserved Markets, the Milken Institute, aims to delve further into considering market-based solutions that address the significant and growing underrepresentation of minority-owned small businesses. 

This report explores the opportunities afforded by MDIs to fuel job growth in low- to moderate-income communities. Our findings illuminate that MDIs are positioned to be key funding sources for minority-owned small businesses, and therefore, important economic development engines. The report further highlights that MDIs allocate a higher proportion of their capital to small-business relative to non-MDI banks with the implication that a potentially effective way to create economic development in minority communities would be to inject more equity capital into MDIs so that they can lend more to small businesses.

Determining the answers to the following questions is imperative in assessing MDIs’ potential:

  • What are the capital constraints of such institutions?
  • How would MDIs react to more equity on their balance sheets?
  • What additional capacity improvements—human and technological—are required for MDIs to increase both their scale and efficiency to ensure prudent activities in their communities?

The Milken Institute plans to explore these questions during the next phase of our program. In doing so, we hypothesize that MDIs will react positively to equity infusions and that they already have market understandings sophisticated enough to responsibly deploy higher levels of equity capital within their communities.