Analysis of the portfolio behavior of black-owned commercial banks

Journal of the Academy of Business and Economics, Jan, 2003 by Valentine Okonkwo

ABSTRACT

Several studies have been done and conclusions drawn on the operating efficiency of black-owned banks. This study differs because it did not seek to compare the economic performance of black-owned banks to non-black-owned banks. Rather, the study attempts to explain their asset choice, determinants of bank loans, using the profit maximization versus the loan accommodation principles models. The result suggests that, the management of black-owned commercial banks is straddling between both approaches to asset choice.

1. INTRODUCTION

The economic history of African-Americans reveal that the first financial institution--the first black-owned bank in the United States--was the Capital Savings Bank established in Washington, D.C. October 1888 followed by the Savings Bank of the Grand Fountain, United Order, True Reformers which opened April 1889. Their primary functions were no different from the normal intermediation function of financial institutions, one of which is to help finance the purchase of homes and other related activities.

The inception and growth of black-owned financial institutions grew out of the need for blacks that were denied access to capital by the majority financial institutions to form their own financial institutions. In the particular case of Tide Water Savings and Loan of Virginia, "the freed blacks wanted homes for their families, but found it extremely difficult to get the necessary capital from white lending institutions" (Black Enterprise Magazine [BE], October 1972). The history in the case is not different from most. Even when black have achieved qualified economic status and have good credit rating, they were still denied access to capital. Being a veteran of both World War I & II did not make any difference. "Both servicemen and civilians found to their disappointment and horror that the (White) banks which held their savings did not consider them good credit for loans to purchase homes" (BE October 1972).

Some have argued that the behavior of black-owed banks cannot be completely divorced from its history. During 1888-1934, 134 black-owed banks were formed mostly in the Southern States. The depression of the 1930's led to the closure of most of these banks. By 1969, there were only 22 black-owned banks in the United State. That number grew to 50 banks in 1976 and fell to 29 in 1979. The 1980's were a very terrible decade for the banking industry as a whole. In 1986, 145 banks failed, that number was 203 in 1987 and 221 in 1988. For black-owned banks there were 47 banks in 1983, which declined to 35 banks in 1988. The number of black-owned banks gradually increased during the 90s, picked at 38 in 1991, and since then there has been a gradual decline to where the Black Enterprise Magazine only reports data on 25 banks (financial institutions).

While the number of black-owned banks continues to decline the amount of their total assets grew 13 fold from $324.6 million in 1970 to $4336.97 million in 2001. The growth in total loan was more remarkable; it went from $135.45 million in 1970 to $2562.043 million in 2001, an increase of 19 fold. The amount of total deposits in black-owned commercial grew from $267 million in 1970 to $3556.638 million in 2001. These banks have also been a source of employment. In 1970 there were roughly 834 people employed, that number grew to 1831 in 1979. The 1980s began with an early growth in employees, starting from 1987, that number has declined yearly even into the 90's. The growth in assets despite the decline in the number of banks is one of the motivations for this study.

2. PREVIOUS STUDY

The performance of black banks has been extensively studied. Some of the seminal works include those done by Andrew Brimmer (1971), Edward Irons (1972), Maurice Emeka (1973), William Bradford (1974), John Boorman (1974), Edward irons, Samuel Doctors, and Allan Drebin (1975), Tom Bates and William Bradford (1980), Robert T. Clair (1988), William Scott (1988), Mehdian and Elyasiani (1992), and recent study by Iftekhar and William Hunter (2000).

These studies can be loosely grouped into two types. One group of studies focused on the impact of these banks on the economic development in their service areas. Essentially, did these banks accomplish the twin objectives of black economic development and empowerment? The second group of studies compares the economic efficiency (operating efficiency) and long-term survival prospects of black-owed to non-black owned banks.

The studies by Brimmer (1971), Bates and Bradford (1980), Kwast and Black (1983) which compared the economic performance of black-owned to other nonminority owned banks, found that even when other factors are held constant, black-owned banks have lower returns on assets, higher loan losses, and are less profitable compared to non-minority banks. Some of the reasons offered for this poor performance lie in the nature of the market in which these banks operate. Brimmer (1971) wrote: "the inherent risk of doing business in the urban ghetto, the high unemployment rates, low family incomes, the high failure rates among small businesses (compounded by high crime rates) make the ghetto an extremely risky place for small banks to lend money". The very nature of the market makes it very difficult for black-owned banks to completely achieve the twin objective of economic growth and empowerment within the black community.