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Addressing debt aversion due to poor relationships between banks and the Black community is good for banks and the city.
The Biennial Black Business Survey, conducted by my company, looked at the issue of debt aversion with Black businesses. This focus was prompted by a previous survey that found nearly 80% of Black business owners have never applied for a loan.
Until recently, Black business formation in Indianapolis was relatively low, with Indianapolis ranking 55th out of 85 metros in business formation. Recently, there has been a substantial increase in Black business formation.
For example, when the survey was distributed to certified Black-owned businesses using the city and state lists in 2021, there were 487 businesses. In this last distribution using the same sources, the list grew to 1,001.
The Black community’s relationship with financial institutions started with the short-lived Freedman’s Bank—an institution that was set up to support newly freed African Americans and help them obtain some level of economic security.
Unfortunately, the bank was an unmitigated disaster, with inattention by Congress, the panic of 1873, and massive theft and mismanagement by trustees. It closed in 1874.
Black financial institutions would experience a brief golden era from 1918 through the 1930s, reaching as high as 130 banks and 50 credit unions by 1934. This period roughly coincided with the golden age in Black business, which was partly driven by segregation and Jim Crow laws that forced dollars to circulate within the Black community due to the limitations imposed on Black customers.
According to Forbes, there are 31 Black banks and 31 Black credit unions in the country—including community-based micro-lender Mount Zion Indianapolis Federal Credit Union.
Mount Zion Indianapolis Federal Credit Union was formed in 1963 when the Rev. R.T. Andrews, then the pastor of one of the largest Black churches in the city, sought a loan and was not only denied but called a racial slur.
Dr. Frank Lloyd would start a Black-led financial institution called Midwest National Bank in 1972, which was eventually purchased by another bank.
But with the surge in Black business creation, are we seeing different attitudes regarding financial institutions?
One-hundred eighty certified Black-owned small businesses responded to a 2023 survey on business lending.
When asked if the respondent had ever pursued a business loan from a bank, slightly more than 60% reported they had not.
But another part of the story is that, when Black businesses did pursue a loan, only 22% received the full requested amount, with 65% receiving less than half or no funding.
When Black businesses were asked why they did not apply for a loan, more than 24% reported they did not think their application would be approved (only 50% of that number cited low credit scores as a reason).
Equity1821, a Black-led loan fund, is responding to this data with the help of a banking partner to try to understand how to improve capitalization of Black businesses.
A promising start is demystifying the underwriting process to help Black businesses.
Between redlining, bank closures in Black neighborhoods, low Black homeownership rates, and high unbanked and underbanked rates in the Black community, there has been a poor relationship between the Black community and banks.
Racial wealth gaps both inform and exacerbate this problem.
But there is a mutually beneficial reason to try to overcome the legacy of distrust between banks and the Black community.
A strong Black business community is not only good for banks, it’s even better for the city.•
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Wolley is president and CEO of Black Onyx Management Inc. Send comments to ibjedit@ibj.com.
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