Why Investing in Women of Colour Through CDFIs is Key to an Inclusive Recovery

by Danielle M. Burns, VP Business Development, CNote

COVID-19 might be referred to as a “novel coronavirus,” but as a Black woman who’s spent my career in the financial sector, the repercussions of the pandemic don’t feel very new. Yes, COVID-19 arrived early in 2020, but the systemic socioeconomic and racial inequalities that the pandemic is illuminating are old and familiar foes. 

The Small Business Administration–backed $669 billion Paycheck Protection Program (PPP) was established to provide relief to small businesses trying to weather the economic upheavals caused by COVID-19. However, the PPP heavily favoured white-owned businesses. According to the Center for Responsible Lending, upwards of 90 percent of businesses owned by people of colour and women have been, or will likely be, shut out of the PPP. As a result, the number of Black-owned businesses declined by 41 percent from February to April 2020. It’s no wonder the Black-white economic divide is as wide as it was in 1968, during the height of the civil rights movement. The finance and investing world must understand our role in perpetuating the wealth gap, starting with who we lend to and invest in. 

Perceived vs. Actual Risk: The Data

Any loan, especially a low-interest, forgivable one, is an opportunity. But when lenders see a woman business owner, red flags go up and the chances of her getting the money she needs to succeed go down. Only $1 in $23 of small business lending goes to women, and despite accounting for almost a third of all American businesses. When you control for credit risk, low-credit risk women-owned businesses were approved for business loans at a rate 10 percent lower than their male-owned peers. Women of colour face even higher barriers to business financing, even though they are the fastest-growing U.S. entrepreneurs, according to the U.S. Senate Committee on Small Business and Entrepreneurship. 

“Only $1 in $23 of small business lending goes to women, and despite accounting for almost a third of all American businesses”

Is it because women and women of colour are riskier loan recipients? According to new research, they’re not. In 2019, my firm launched The Wisdom Fund in collaboration with community development financial institutions (CDFIs) to address the lending gap for women entrepreneurs of colour and gather data on their experience with the loan underwriting process. With grant support from Tarsadia Foundation and in partnership with Oakland-based CDFI ICA, we analysed historical lending data from The Wisdom Fund’s six CDFI collaborators to determine if women of colour borrowers were riskier.

Our preliminary analysis of loan originations by these community lenders produced two key findings:

• First, women of colour are not riskier borrowers than other demographics. We evaluated credit risk based on the probability of default, the probability of delinquency, and expected losses. There was no statistically significant difference between the credit risk among women of colour and other groups of borrowers. 

• Second, women are, on average, a lower credit risk than men. Our data showed that the probability of defaulting on loans was between 2 to 4.5 percentage points lower for women than men. 

In summary, women and women of colour are not a greater credit risk than white men. Because banks can't collect this type of race and gender outcome data, our CDFI research provides a rare glimpse into the objective strength of female borrowers. These findings, the first from a multi-year research program, come at a historical moment that feels different: people are more open to having uncomfortable conversations about race and privilege. They’re educating themselves, and most importantly, they’re listening. The finance and investing world must listen too, as we hold the keys to a societal shift. 

An Inclusive, Successful Recovery

“Now is the time to invest in women and women of colour. And what’s the best way to do that? By funnelling more investment dollars through CDFIs and other innovative lenders that already support them”

As we plot out how to best rebuild our economy in the midst of COVID-19, women of colour are critical to economic recovery. If revenues generated by minority women-owned firms matched those generated by women-owned businesses overall, they would add four million new jobs and $1.2 trillion in revenue that are needed more than ever.

That means that now is the time to invest in women and women of colour. And what’s the best way to do that? By funnelling more investment dollars through CDFIs and other innovative lenders that already support women and women of colour borrowers. 

As we sit down to talk about how to rebuild our economy in a way that ensures that it works for everyone, we need to find ways to redirect the power and influence we’ve placed in the hands of traditional financial institutions that continue to favour white men toward CDFIs that fairly distribute financial opportunities to all borrowers, independent of race and gender.

We can take action today to make our short- and long-term future brighter for ourselves, our children, and our communities. Investing in women and women of colour through CDFI lenders is one of the best things we can do to put biased lending practices behind us—once and for all. 

image credit: CNote Borrower Shavon Marley (Marley Trucking)