Press Release
Indigenous communities need better financing entities. Here are two that could help and would eventually be self-sustaining
A key obstacle to building economic prosperity in Canada’s Indigenous communities is lack of access to the financing needed to invest in public infrastructure, housing and economic development. Indigenous Services Canada and the Assembly of First Nations estimate the infrastructure deficit is on the order of $350 billion. But Indigenous access to market finance is roughly a tenth of what is available in the rest of Canada on a per capita basis.
Despite recent efforts by banks, credit unions and caisses populaires, access remains limited, especially relative to need. A main problem is the perception that lending to Indigenous people, businesses and organizations involves higher risk. In our view, that’s a misperception: Indigenous financial institutions have made billions of dollars of loans to Indigenous borrowers with few, if any, defaults.
These Indigenous-owned or -led financial institutions have developed strong ties to Indigenous communities and have innovated to address these obstacles. Two sets of Indigenous institutions stand out: the four that were established under the First Nations Fiscal Management Act (FNFMA) and the 58 that are members of the National Aboriginal Capital Corporations Association (NACCA).
The FNFMA institutions have worked together to increase First Nations’ own-source revenue and improve their financial management and reporting. So far, the FNFMA has raised $2 billion by issuing debentures to financial markets to fund public infrastructure projects in First Nations. Because there have been no defaults on any of this lending these debentures are highly rated — which means First Nations borrowers actually pay lower rates of interest on their bonds than the average Canadian municipality. These bonds are protected, first, by a debt reserve fund provided by the Indigenous borrowers themselves, and second, by a federal government guarantee, though neither mechanism has been used.
For its part, over the past 30 years the 58-member NACCA network has provided $3 billion in loans to 50,000 small- and medium-sized Indigenous enterprises across Canada. In addition to finance, the member institutions provide business support to Indigenous entrepreneurs, especially at the early stages. This close working relationship allows the financial institutions to assess both the risk associated with the loan and the creditworthiness of the borrower. Consequently, loan losses have been about two per cent, which is on a par with non-Indigenous businesses.
An important factor in the success of these two sets of institutions is that they are Indigenous-owned and -led. Despite their success, however, big financing gaps remain, especially for housing, larger economic development loans and equity participation in major projects. Gaps also reflect the growing “Indigenous intermediation” gap: although the wealth of Indigenous communities has been growing rapidly, in part because of large claims settlements with the federal and provincial governments, very little of this wealth is being recycled back into Indigenous communities, where the need for investment is great. Instead, approximately $20 billion is held in trusts and deposits in large financial institutions and invested around the world at high cost and low return because of the lack of scale.
To help to close these remaining gaps in access to finance, the First Nations Financial Management Board and the National Indigenous Economic Development Board have proposed two new and innovative Indigenous-owned and -led financial institutions: the Indigenous Development Bank (IDB) and the Indigenous Investment Commission (IIC).
The IDB would raise money in global capital markets to fund Indigenous communities’ investments in economic development, including equity investment in major natural resource and energy projects, thus helping to clear roadblocks to projects that are important for all Canadians.
The IIC would attract and invest Indigenous financial wealth, some of which would promote Indigenous economic development, playing a role similar to Quebec’s Caisse de dépôt et placement (CDPQ) which invests roughly 20 per cent of its assets in Quebec enterprises. The IIC would also be Indigenous-owned and -led, as well as independent of political influence, thereby allowing it to make investment decisions in the best interests of Indigenous communities. The IIC could also attract investment from third parties to promote economic development in these communities.
These two institutions would represent the next generation of Indigenous finance. They would aim to achieve the scale necessary to reduce financing costs for medium- to large-scale investments, raise returns, reduce risk and substantially increase investment in Indigenous communities. They would build trust and capacity, lower transaction costs and ultimately drive prosperity.
These institutions would raise Indigenous well-being by creating jobs, raising incomes, and reducing social strife. But the rest of Canada would also benefit. There would be significant positive economic spillovers from Indigenous communities realizing their potential. And although these institutions would require initial funding to cover set-up costs, they would eventually be self-sustaining, thereby greatly reducing Indigenous communities’ dependency on government funding.
Nothing would better encourage reconciliation with Canada’s Indigenous peoples than prosperity and economic self-determination.
Harold Calla is executive chair of the First Nations Financial Management Board. Lawrence Schembri is a former deputy governor of the Bank of Canada.
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