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Equity Investment could bridge gap in Indian country says CDFI Study

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WASHINGTON, D.C. ? Indian country is an equity desert, and bringing in investment can wipe out the gap in income between American Indians and the dominant culture, concludes a long-awaited federal study by the Community Development Financial Institution.

According to the CDFI Fund Native American Lending Study, bridging this enormous gap would translate to 600,000 new jobs (doubling current employment) and increase average income by $10,000 per Indian person. This result would wipe out the current $9,000 per person differential between tribes and the rest of the country.

Currently, there is just $10 billion in equity invested in Native America, the study says ? a shortfall of $44 billion if tribes were to receive the average percentage for the country as a whole.

The study urges the government to form an equity fund to encourage investment in Indian lands and Hawaiian Home Lands. The report suggests 13 key strategies, such as forming a public/private intermediary group or groups to bring in outside equity investors and develop internal ones. Fifteen years may be necessary to bridge the gap, says the report.

Congress called for the study in 1994, and its release was expected before the end of the Clinton Administration.

The CDFI had a mandate to study lending barriers in Indian country and make recommendations to Congress on how to overcome them. But it expanded its scope into the equity field at the behest of attendees of fact-finding workshops it held throughout the country in 1999 and 2000.

"Equity investment is a critical missing ingredient because equity investments often do not require the types of physical assets as collateral that loans or other types of credit financing require," the study notes. "In particular, equity investment does not require using land as security and accordingly, equity investments overcome the obstacles presented by impediments to using trust land as security. Equity investments can thus provide money to businesses that do not qualify for loans but are still good investments."

The study noted a huge mismatch "between most private equity financing and the greatest needs of Indian country."

Therefore, an economic jumpstart would be necessary,

by the government, "angel investors," venture capitalists and social-benefit investors.

Once startups were incubated, private sector equity could fund a second stage of development, if they have had some initial success.

Besides incubator efforts and "angel investors," other successful strategies involve community development venture capital and strategic partnerships with receptive companies in corporate America.

The CDFI Fund itself supports such community development financial institutions. It will run the upcoming New Markets

Tax Credit, designed to steer equity into underserved markets, such as Indian country.

The study noted the CDFI Fund has made grants of about $30 million to more than 30 CDFIs working in Indian country.

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Besides the equity gap, it listed these other examples of "underinvestment" in Indian country based on its surveys and research:

-- 65 percent of respondents reported conventional mortgages difficult or impossible to obtain.

-- Business loans were rated impossible to obtain by 24 percent and difficult by 37 percent.

-- 66 percent said equity investments were difficult or impossible to obtain.

-- Only 14 percent of communities on reservations have a financial institution.

-- Six percent of reservation residents must travel 100 miles

to reach the nearest bank or ATM.

The study listed 17 barriers to capital access, including many familiar ones: absence of proper tribal legal codes; poor understanding of sovereignty by investors and lenders; limited use of trust land as collateral; lack of credit histories for many Natives; lack of financial institutions on or near Native lands, discrimination.

It recommends tribes enhance their legal infrastructures to enable lending, strengthen their courts, and improve planning. It also recommends a strong separation between tribal government and tribal businesses.

It recommends the development of alternative collateral uses for trust land (such as master leases); the development of

new and non-traditional capital mechanisms; increasing the number of financial institutions on or near Indian lands; the development of regional financial institutions; the development of physical infrastructure on Native lands; and flexibility in lending products designed for use by Natives.

Other recommendations include expanded financial literacy education for Natives; entrepreneurial education; lender and investor education; and expanded technical assistance and training for these issues.

The study singled out several current ventures in Indian country as good initiatives, including the Four Bands Community Loan

Fund on the Cheyenne River Sioux reservation in South Dakota; the angel investor group CONAC, that works with the Turtle Mountain Band of Chippewa and the Spirit Lake Sioux; the Hopi Credit Union of Arizona; and regional initiatives such as the Native American Development Corp. of Montana and Wyoming, and the Native American Lending Group of New Mexico.

Rodger Boyd, Navajo, was the program manager for the study. Mr. Boyd is a former director of economic development for the Navajo Nation. Charles Johnson was facilitator for all the study workshops. James Berg, Lakota, was financial and programs analyst.