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If you’ve seen one Native Community Development Financial Institution (Native CDFI), you’ve seen one Native CDFI. They’re unique and diverse.

[This story was reported and published by the Center for Indian Country Development at the Federal Reserve Bank of Minneapolis. Used with permission.]

At the same time, Native CDFIs share practices that—taken together—offer insights for one another, and for other financial institutions in Indian Country and beyond.

These opposing truths were observed by panelist Adrienne Smith, senior vice president for research at Opportunity Finance Network (OFN), during a Center for Indian Country Development (CICD) webinar held on July 11. Co-hosted by OFN and the Native CDFI Network (NCN), the event featured presentations of new CICD research on the unique lending practices of Native CDFIs. Smith and fellow panelists Pete Upton (Ponca Tribe of Nebraska), CEO and chairman of NCN and executive director of the Native360 Loan Fund, and Lakota Vogel (Cheyenne River Sioux Tribe), executive director of Four Bands Community Fund, discussed research implications and next steps.

The panelists expressed a common sentiment: Native CDFIs hold wisdom that’s not yet widely understood outside the industry, and research plays an important role in fostering that broader learning.

Advancing our understanding

Over the past few years, a team of researchers working with CICD has conducted a series of studies on the strategies Native CDFIs use to support their loan applicants and understand their clients’ risk of loan delinquency. These studies have provided quantitative evidence of Native CDFIs’ success with a holistic approach to assessing credit risk—an approach that leverages their professional relationships with clients and knowledge of their clients’ community support networks. Researchers have also explored the impact of Native CDFIs’ financial counseling services on their clients’ loan outcomes.

Working with academic researchers, CICD has conducted studies in close partnership with Native CDFIs willing to share their loan data to advance the research. According to event panelists, how those research partnerships take shape is vital.

“In our community, we were the decision-makers on which data to collect,” said Vogel. Her organization, Four Bands Community Fund, is a Native CDFI on the Cheyenne River Sioux Reservation in South Dakota and has partnered with CICD on a series of studies, including research on the factors influencing client wealth.

That decision-making role includes having a voice in the research questions that are asked. “A lot of the questions we [typically] ask our markets are dominant-society questions that we never think about unpacking,” Vogel said. “Now we can unpack the questions that [will lead to the answers] we want to find.”

To Smith, potential future research questions include deeper exploration of the ways in which financial counseling helps borrowers, the ways holistic lending practices differ among Native CDFIs, and how Native CDFI clients progress in growing their wealth over time.

Upton observed that the role of social determinants—such as borrowers’ medical issues and living conditions—in loan outcomes is another area ripe for research.

“We hope this is just the start,” said CICD Research Fellow Laurel Wheeler. “We’ll continue to grow the research agenda.”

One example of that growth: In a first-of-its-kind research effort, Wheeler and research partners Michou Kokodoko of CICD, Valentina Dimitrova-Grajzl of the Virginia Military Institute, and Peter Grajzl and Joseph Guse of Washington and Lee University recently interviewed 45 Native CDFI leaders across Indian Country to gain insights on how Native CDFIs tailor their products and services, form partnerships, and measure success.

Context matters

Even research done in close partnership with Native CDFIs requires careful attention to the context in which their work takes place—especially when sharing results with audiences that may not have a deep understanding of Indian Country.

For example, research on Native CDFIs’ use of “character” scores—that is, loan officers’ relationship-based assessments of whether clients are risky borrowers—could be misinterpreted without proper context. “That word is dangerous in the hands of the wrong people,” Vogel observed.

Because they’re subjective, relationship-based lending practices require safeguards. But the research points to the value of Native CDFIs’ close knowledge of the communities and clients they serve. “Part of the reason character score is so effective [as a tool for assessing a client’s risk for loan delinquency] is this strong relationship that Native CDFIs have with their clients,” Wheeler said.

Even research on Native CDFIs’ success with traditional measures for assessing loan risk—such as credit scores—requires context. Vogel explained that Four Bands’ experience with credit scores reflects, in part, its work to address a gap in its community by creating a system for its borrowers to report to credit bureaus.

Broadly speaking, research on Indian Country often uses a “lens of deficit,” focusing on gaps that need addressing but not Indian Country’s strengths and economic contributions, Vogel observed. But she said Native CDFIs have a high success rate with loans.

Wheeler agreed: “Native CDFIs in general have very low [loan] delinquency rates. What we’re studying is delinquency within an industry where it’s actually quite rare.”

A changing landscape

As new research sheds light on the Native CDFI industry, the industry itself is undergoing change. Panelists raised policy issues related to the U.S. Department of the Treasury’s CDFI Fund, such as revisions to the CDFI-certification process and changes to the amount of funding allocated to the Native American CDFI Assistance Program. Timely policy questions make it even more important to foster a clear understanding of the practices and impacts of Native CDFIs, and the lessons they hold for the financial industry.

As Vogel said, “Centuries-old financial frameworks just aren’t fitting the rural Native markets that we’re serving.”

A video recording and links to related research are available on the webinar’s event page. The July 11 session marked the second event in CICD’s 2023 webinar series Cultivating Native Economies in the 21st Century. The series launched in June with a conversation on Native federal contracting. Future events will explore tribal broadband and new data tools available to support economic development in Native communities.

Caryn Mohr is the senior writer for the Federal Reserve’s Center for Indian Country Development, where she creates content and communications that support economic development in Native communities and contributes to the team’s research, policy, and engagement work.