Community Dividend

U.S. banks offered historic opportunity in Indian Country

To serve the emerging Indian-owned private enterprise market, bankers should understand the structure of the economies of tribal communities and the size of the potential market.

Patrick Borunda

Published July 1, 1998  | July 1998 issue

Indian tribes and individual Indians across the country are now poised to share in the benefits of the American economic system. In many cases, this is due to direct or indirect benefits from casino revenues, which are infusing money into reservation economies and thereby enabling many tribes and some tribal members to invest in business opportunities.

Participation in the American economic system requires access to capital, usually in the form of credit, as well as a likely source of repayment for that credit. Many tribes and tribal members—especially those located in rural areas—will look to local banks for this capital. And while banks are providing the debt capital, bankers can also serve as an important resource for tribal communities by providing technical expertise and other services that will ensure that borrowers are poised to take full advantage of the opportunities now open.

To serve this emerging market, bankers should understand the structure of the economies of tribal communities and the size of the potential market. Toward that end, this article discusses the structure of the economies in Indian Country before 1988, the effects of gaming on economic development in Indian Country and the emergence of the private sector in Indian Country.

Structure of the economy in Indian Country before 1988

The post-World War II economic structure of Indian Country has had three elements: tribal governments, tribal enterprises and private enterprises.

Tribal governments have tended to be distorted in their economic development functions relative to state governments, to which they are somewhat parallel. This distortion stems from the lack of economic alternatives in reservation communities. For example, control of a tribal government often represented control of the largest source of jobs on a reservation and tribal governments too often became battlegrounds to control this source of jobs. In a state government situation, the majority of jobs are not controlled by the head of government and a state's nongovernment jobs strongly outnumber its government jobs.

To improve their economies, tribal governments often sponsored various enterprises such as manufacturing facilities or businesses that used a tribal resource; for example, timber or mineral deposits. Unfortunately, these enterprises were all too often noncompetitive since their primary purpose was to create employment in a setting where jobs were rare. The lack of competitiveness often disqualified these enterprises as sources of cash to collateralize borrowing. Furthermore, plants and equipment were often not maintained adequately, leading to further loss of competitiveness and credit access. Those few young Native Americans able to acquire higher education were drawn by off-reservation opportunities, resulting in a "brain drain" on reservations. Tribal enterprises may be a legitimate use of tribal assets, but most of these enterprises were unable to stop the downward spiral of reservation communities and their economies.

Just as tribal enterprises were suffering, Indian Country's private sector was anemic. The U.S. Census Bureau counted only 13,600 Indian-owned private businesses in the United States in the 1982 Economic Census. Their total revenues were a mere $495 million. While the number of businesses grew 57 percent to 21,380 as of the 1987 Economic Census, the ownership rates were still very small. In 1987, the per capita ownership rate for Native Americans was approximately 10 percent of the rate of their white fellow citizens, less than 20 percent the rate of Asian-Pacific Islander citizens and far below the rates for black and Latino citizens. The many benefits of business ownership—including job generation, employment training and keeping money on the reservation—were not being enjoyed in Indian Country.

Contributing to the lack of business success was the lack of infrastructure. It is generally recognized that many reservations, particularly those in remote rural areas, do not have the necessary transportation, power and communication infrastructure to support businesses in the 1990s.

Effects of gaming on economic development

In the late 1970s, tribes began generating revenues from various types of gaming activities. In 1987, the Supreme Court confirmed tribes' authority to operate gaming establishments on trust lands independent of state regulation. To resolve outstanding issues among tribes and states, the U.S. Congress passed the Indian Gaming Regulatory Act (IGRA) in 1988. Gaming expanded with breathtaking speed.

Only a few casinos account for most of the gaming revenues, however. The General Accounting Office reported that 184 tribes were operating 281 gaming facilities as of December 31, 1996. The report examined financial statements from 178 facilities owned by 126 tribes. Just eight of the 178 facilities accounted for 40 percent of the total revenues. Furthermore, of the $1.6 billion in net income transferred from these facilities to their tribes in 1995, more than 50 percent went to just 10 tribes. Twenty tribes, 16 percent of the sample, indicated there were no income transfers.

While the profits of Indian-owned gaming facilities are not making Indian people wealthy, Indian-controlled cash flowing into tribal governments has restored options in gridlocked communities and wages from the increased employment have created modest buying power. This new cash flow and buying power can be leveraged into material changes not only for Indian individuals and communities, but for the surrounding non-Indian communities as tribal members become more active in the regional economy.

Tribal governments are challenged to create the tangible and intangible infrastructures that underlie sustainable economic development. Tangible infrastructure comprises roads, water and power systems and schools. Intangible infrastructure consists of uniform commercial codes, court systems and commitments to consistent policy between successive administrations. This infrastructure is necessary to preserve economic gains over time. (For additional discussions on these issues, see our articles by Susan Woodrow and Maylinn Smith in this issue of Community Dividend.)

Emergence of a private sector

Perhaps the single most exciting development in Indian Country is the creation of wealth among tribal members through owning and operating private enterprises. The number of Native American-owned businesses (NAB) increased nearly fourfold between 1987 and 1992, according to the U.S. Census Bureau. In some areas of the country, Native American private enterprise is approaching critical mass; that is, able to sustain a chain reaction of growth.

Revenues from these businesses totaled $8 billion in 1992, which means that Indian-owned small businesses collectively contributed the same amount to the national economy as did individual large companies such as General Mills, Colgate Palmolive, or Time-Warner. Clearly, NABs are making a substantial and growing contribution to the well-being of Indian communities across America.

A business contributes to the economy by purchasing labor and materials and converting them into goods and services. In 1992, Indian-owned private enterprise purchased at least $6 billion worth of materials and paid out $820 million in employee income. Additionally, owners of these businesses drew $732 million for their own income. Contrary to common perception, this income is taxable at the state and federal levels. In many states, these businesses also collect a state sales tax, which benefits the state government.

There is enormous untapped, but measurable, potential for entrepreneurship in Native American communities. My organization, ONABEN-A Native American Business Network [headquartered in Portland], has analyzed business ownership rates per thousand population in Oregon. The Native American rate of business ownership, at less than 15 per thousand in the 1992 Economic Census, is the lowest rate of any cultural community in the state and well short of the white rate of 82-plus per thousand. If Indian people had ownership rates equal to those of whites, there would be an additional 2,800 Indian-owned businesses in Oregon with attendant benefits to the general community through increases in gross state product, taxable wages and taxable business income. This situation is mirrored throughout the Northwest. There is no reason to believe that the situation is much different in other states.

Opportunities for banks

The opportunities for the banking community in the growth of Native American private enterprise are similar to the opportunities associated with all small business lending. These are profitable loans and a source of future customers. To play a role, bankers must tailor their products to the economic realities of these emerging businesses or invest in organizations that can tailor products. For their part, Indian entrepreneurs must be prepared to acquire a full range of business skills. What's more, they must learn what motivates and what frightens bankers. They must strive to minimize the apparent risks bankers try to avoid.

The United States is at a historic moment in the relationship between its First Nations and the rest of the country. The economies of Indian Country were already evolving when IGRA passed. However, passage increased the pace. Tribes and their members are ready to be full economic partners. The banking community can play a significant role as a provider of credit capital and source of financial expertise.

Many non-Indian citizens will benefit from healthy reservation economies. Those living on and near the reservations will benefit from the fact that the reservations are poised to be a regional economic engine. All Americans—regardless of their proximity—will benefit from these durable Indian communities being restored to economic health. These communities are becoming full partners in the economy of the United States, and their potential contributions are enormous.

Patrick Borunda, who wrote and researched this article, is executive director of ONABEN—A Native American Business Network and a member of the board of directors of the Portland, Ore., branch of the Federal Reserve Bank of San Francisco.