'You need to find a way to get capital to Black-owned businesses:' Milken Institute

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Mission-focused banks are often the financial lifeline of economically distressed communities. Aron Betru, director of the Milken Institute Center for Financial Markets, joined Yahoo Finance Live to discuss a new report, "14 Strategies for Partnering With Mission-Focused Banks," which outlines how partnering with mission-focused banks can be a primary weapon to fight against the racial wealth gap.

“You need to find a way to get capital to Black-owned businesses so that they could not only weather the storm of COVID but bounce back in a better way," said Betru, who co-authored the report. 

Betru said that before the COVID-19 pandemic hit, 58% of Black-owned businesses were near financial distress compared to 27% by white-owned businesses. Betru alsonoted that PPP loans had a lower success rate within the Black community. “The PPP package that was supposed to be providing and bridging that relief. You had a success rate for Black-owned businesses, roughly at 29% compared to 60% for white-owned businesses. The net result of it is we had more than 40% of Black owned businesses closing their doors for good.”

Black owned business sign attached on the window
Black owned business sign attached on the window

Betru says that community development financial institutions, particularly minority-owned bans, are the best institutions to identify and provide the financial relief necessary for minority communities.

The strategies detailed in the Milken analysis are broken down into 3 phases: Repair, restore, and reimagine.

The restoration phase focuses on identifying potential best practices to help MDIs and CDFIs banks achieve scale by including Tier 1 capital multiplier strategies ranging from increased loan deployment and diversification into higher-margin products to efficiency and customer acquisition investments digitization.

The restoration phase focuses on restoring access to capital at parity across the nation by considering exemplary business models in the industry.

For the reimagine phase, Milken advocates for bringing together stakeholders with a range of experts and creating a trade association of MDIs, the leadership of MDI and CDFI banks, and numerous national and regional banks, philanthropists, and policymakers. It would be used as a forum to brainstorm and stress-test strategies for MDI and CDFI banks to evaluate how best to position their efforts for the future of banking.

Betru says that it is important to remember that the majority of minority financial institutions that are out there are sub $1 billion in assets, which puts many of these institutions at inefficient operation levels.

“Given the cost of compliance and of serving communities that they’re in, you need to be at scale, you need to be at a level to operate efficiently, especially when you’re providing the type of small dollar loans that regular mom and pop businesses require. And that means having the technology to be able to underwrite small dollar loans,” Betru said.

Technology also plays a huge role in the Milken analysis. Betru noted that a lack of technology within many MDIs and CDFIs can be the difference between success and failure.

“Sometimes you need to provide technical assistance to make sure that these loans are successful in the long run, and that requires an understanding of being able to provide guidance on best business practices. And so in each of those different elements, technology is going to be a critical part of that and making sure that this digitization happens in an efficient way is critical.”

Reggie Wade is a writer for Yahoo Finance. Follow him on Twitter at @ReggieWade.

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