Systemic racial injustice has been brought to the forefront across communities and industries, and it requires our attention. Efforts to promote financial inclusion, whether through private sector programs or driven by legislation, have largely fallen short, and economic development continues to stagnate in many communities in the United States, particularly in communities of color.
There is a powerful yet relatively simple solution: Allow minority depository institutions (MDIs) and community development financial institutions (CDFIs) to qualify for Opportunity Zone–type investments.
MDIs are essentially minority-owned banks, which are designated as such by the Federal Deposit Insurance Corporation. A CDFI is a financial institution, usually though not always a nonprofit, certified by the Treasury Department to provide credit and financial services to underserved markets and populations.
The issue with minority access to capital was summarized cogently by James Barth, Aron Betru, Matthew Brigida, and Christopher Lee in their recent report for the Milken Institute:
“The primary source of startup funding for small businesses is savings and equity investments from personal networks, and secondarily, bank loans. However, for minority-owned businesses, the second most prevalent source of funding is credit cards, which is typically a higher-cost product designed to fund short-term liquidity, not catalyze long-term growth. This places minority-owned businesses at a disadvantage and also potentially stymies local economic development. Increasing access to bank lending is an important component of improving the potential of minority-owned small businesses and the communities in which they operate.”
Opportunity Zones were created by the Tax Cuts and Jobs Act of 2017 to encourage investments in lower income areas through the use of tax incentives. Taxes are deferred on capital gains if the funds are reinvested in Opportunity Zones. Additionally, the investments themselves are eligible for tax-free gains if they’re held for 10 years. This program has the transformative power to make many economically distressed communities much more attractive to investors.
Recently, there has been renewed attention on Opportunity Zones. Last month, acting Comptroller of the Currency Brian Brooks, Sen. Tim Scott (R-S.C.), and Secretary of Housing and Urban Development Ben Carson hosted an event to raise awareness for Opportunity Zones and their power to bring much-needed investment capital to underserved communities.
However, under current legislation, MDIs and CDFIs cannot receive Opportunity Zone investments. This exclusion has had a negative impact on the communities the program was designed to help, since local minority-owned banks are more likely to support diverse businesses in disadvantaged neighborhoods.
My colleague and fellow fintech entrepreneur, Christian Duffus, founder and CEO of Fonbnk, was correct when he told me, “Fair, unfettered and unbiased access to financial opportunities is a civil right in a capitalist society.
“Not only do Black Lives Matter, but we cannot forget Black Financial Lives, meaning that financial security is also of the utmost importance to the development of African-Americans’ welfare,” Duffus continued. “It is critical to rectify generations of financial inequity, which has been as brutal as the police violence enacted upon our communities….The proposal gets at the heart of the matter—ending the cycle—by enabling our communities to democratically access Opportunity Zone investments using state-of-the-art financial technology.”
African-American banking isn’t new; it’s been around in various forms since 1860. But Black-owned banks’ efforts to significantly alter the financial landscape for the communities they serve has been hampered by larger societal forces.
In her landmark book, The Color of Money: Black Banks and the Racial Wealth Gap, Mehrsa Baradaran, a professor of law at the University of California, Irvine, writes, “A history of racism institutionalized through slavery, sharecropping, Jim Crow, white affirmative action, redlining, job discrimination and white flight created self-reinforcing cycles of segregation and poverty. These institutions were often violent, extractive and openly condoned, but their lingering effects are quiet, subtle and hard to detect. They are no less destructive.”
Baradaran goes on to conclude:
“The clear message that emerges from the history of black banks is that relying on these banks to do the work of achieving wealth equality without changing the economic environment in which they operate is unfair, cynical and fruitless. Insofar as there is segregation and widespread poverty in the black community, banks that exclusively serve this community cannot be successful.”
Revising the law governing Opportunity Zones to allow investments in MDIs and CDFIs would absolutely change the economic environment in which these institutions operate. A new generation of MDIs would benefit from an inflow of capital (as a result of the movement surrounding social injustice, as well as the capital incentives outlined above) and democratized distribution enabled by digital banking (fintech), for both deposit taking and asset generation. These banks could serve all communities equally well, and thrive.
The recent movements of funds we’ve seen—for example, $100 million moved by Netflix to African-American-owned banks and $1 billion committed by Bank of Americato Black-owned businesses—indicate there’s a new willingness to take action to address the legacy of financial inequality. Creating a capital structure such as the one I’ve outlined above would create a banking structure for social justice money to flow to.
There are a number of exciting, new, and capable African-American-owned fintech companies, such as Tenth, MoCaFi, Nivelo, GigWage, and Lilium Capital, which could execute on a new form of MDIs. Having Opportunity Zone, tax-advantaged benefits apply to the capital base of MDIs would create a sea change of capital and investments from all sectors of the investment community, as well as CRA and social justice related funds.
To assist struggling communities to develop and prosper economically, it is essential to increase their access to capital. Revising the law governing Opportunity Zones to allow investments in MDIs and CDFIs is a simple, easy-to-implement solution that would have an immediate impact, translating into much-needed financial support for underserved minority communities.
Clay Wilkes is the CEO of Galileo Financial Technologies.