Shifting gear: minority banks must retool to meet today's business needs

Entrepreneur, Sept, 1996 by Cynthia E. Griffin

There was a time when minority-owned banks were the only game in town for minority entrepreneurs. Today, that is no longer true. Big banks have begun to target small businesses, and some are catering specifically to minorities. And they can afford to put more resources and flexibility into the effort.

Consequently, some people have begun questioning the effectiveness of and even the need for minority banks.

William Michael Cunningham, whose Creative Investment Research Inc. tracks minority- and women-owned financial institutions, pulls no punches when he says minority hanks must improve. According to Cunningham, at the end of 1994, the commercial and industrial loan portfolio of minority banks totaled $3.X billion; that of minority thrifts, $146 million. "That's lower than what you would find at nonminority banks of similar size," says Cunningham. "And that's because minority banks have been somewhat conservative. They have been burned in the past and are very cautious now."

Despite past problems, Cunningham feels minority institutions still need to focus on small-business lending. But one problem, he notes, is that "their information networks are older--people who are 50, 60, 70 years old. And information networks are important in a bank; they tell you who is starting businesses. When a guy comes into the bank seeking a loan, they'll check with the network. If the network has never heard of him, that's it."

Minority banks do aggressively pursue small business, but they often find it easier to work with local and state economic development programs than with the federal government, contends Louis Prezeau, president of Newark-based City National Bank of New Jersey and chairman of the board of the National Bankers Association, whose membership consists of 56 of the nation's 107 minority- and women-owned banks and thrifts. Consequently. if you look at pure numbers, minority banks are not making as many Small Business Administration loans as other institutions.

And while Prezeau asserts small-business lending is a top priority at minority banks, he also admits that most cannot afford to take chances on small companies with no track record.

If that's the case, then they need to be more creative with their lending programs, asserts Cunningham. "We need them to develop culturally based lending products, using financial practices that have been in the [minority] community for years," he says.

For example, a few Asian and Latino banks have tried to mesh pooled lending with traditional banking. This includes considering the income of all working adults in a family instead of one person for a small-business loan. However, determining who is responsible if there is a problem with the loan is a snag that must be worked out.

Increasing lending capacity is also a key success strategy, points out Prezeau, who says many minority banks have begun to form syndications to handle bigger transactions. At this point, however, the, technique has been used, largely for church financing; it's a tougher sell on the commercial side.

And as bigger banks use state-of-the-art technology to woo customers with added conveniences and innovations, minority banks have no time to lose. The way things stand, technology could soon price them out of business.